Oxford Industries, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 Jun 2021

[Operator:]

Greetings, and welcome to the Oxford Industries, Inc., First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Anne Shoemaker, Treasurer. Thank you. You may begin.

[Anne Shoemaker:]

Thank you, and good afternoon. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements with the meaning of federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking statements.

[Tom Chubb:]

Thank you, Anne, and thanks to all of you for joining us this afternoon. We are extremely pleased to be reporting an incredibly strong start to fiscal 2021. We took decisive actions at the start of the pandemic to protect our people, our brands and our liquidity, this combined with our focus over the past year on delivering happiness to our customers and investing in enhanced digital marketing and store capabilities as well as in our bars and restaurants, have strengthened our foundation for profitable growth. As consumers have become increasingly more comfortable returning to physical shopping, our overall engagement levels have greatly accelerated, leading to strong momentum across our entire portfolio of brands. Given conditions last year, it is not surprising that we were able to post strong sales gains across all brands and all channels of distribution during the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020. What's much more impressive about our first quarter 2021 performance is how it compares to the first quarter of 2019. We believe that the comparison to 2019 is much more informative for most purposes than comparing to 2020. Accordingly, during our discussion today, we will focus on the positive traction we have made towards returning to and even exceeding our 2019 levels of performance. First quarter sales came in at $266 million compared to $282 million in fiscal 2019 and versus our guidance range of $220 million to $240 million. It is worth noting that $14 million of the $16 million sales decrease from the first quarter of fiscal 2019 is due to lower sales in Lanier Apparel, which, as you know, we are in the process of exiting.

[Scott Grassmyer:]

Thank you, Tom. As Tom just mentioned, fiscal 2021 is off to a great start with record earnings in the start with record earnings in the first quarter. I'll walk you through how we got there. Sales were stronger than expected, and excluding the impact of the exit of the Lanier Apparel business were comparable to 2019 levels. Our full-price e-commerce channel was 55% higher than in 2019, with significant growth over 2019 in all of our branded businesses.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. Our first question is from Edward Yruma of KeyBanc Capital Markets. Please state your question.

[Edward Yruma:]

Hey, good afternoon, guys. Thanks for taking the question. Congrats on a good quarter. I guess, first, I want to click on our gross margin a little bit, obviously, an incredibly powerful performance there. In terms of last year, I know you had inventory that you packed away. Was there a benefit from a cost basis when you kind of brought that inventory back into flow this year? And then as a follow-up, as you think longer-term about the DTC penetration, particularly in the Tommy brand. Do you think you kind of hit a peak? Or do you think that the direct business can continue to grow as a percent of overall sales? Thank you.

[Tom Chubb:]

I'll maybe take the first one, Ed and then flip it to -- or I'll take the second one, excuse me, and then flip it over to Scott to talk about any benefit that we might have had to gross margin. But I do, Ed, believe that DTC as a percentage of the total can continue to grow. Certainly, it will be a larger part this year, I think, than it was in 2019 as wholesale is recovering. I do think our wholesale business is very healthy. We're performing well at all of our key customers, which is great to see. But over the long term, we do expect DTC to be the primary driver of growth. Scott, do you want to talk about the gross margin?

[Scott Grassmyer:]

Yes, there was really no kind of significant cost difference from what we carried over. What has that allowed us to do was really not have a lot of excess inventory last year that we are flooding the market with. And I think it really helped with our brand health. And I think our merchandising team did a great job of really taking what we could merchandise well into that spring line. And it just allowed us not to have to buy a bunch of inventory for early spring we already had it. It also helped with some of the transit delays because that inventory was already here. So, we really had no delays there.

[Edward Yruma:]

Got it. And one other follow-up. I know you guys mentioned you were taking some tactical price increases. I know historically, you've done that as you've introduced new product or roll out some new functionality. Are the price increases on kind of a similar basis as you bring out new product? Or are you taking more kind of wholesale approach to some of the price increases? Thanks

[Tom Chubb:]

It's more selective, Ed, than it is across the board type of pricing increases.

[Scott Grassmyer:]

Yes, also as we get in more performance type products, where new products that we introduce in the performance area tend to have a higher gross margin also.

[Operator:]

Our next question is from Paul Lejuez with Citigroup. Please state your question.

[Tracy Kogan:]

It's Tracy Kogan filling in for Paul. I had two questions. I guess the first is on the supply chain. I'm wondering, if the delays you're seeing there are contributing to what you expect to be having a lack of clearance inventory in third quarter? Is that really just more related to your sell-throughs? And then my second question was I was just wondering in the Tommy business, how much your outlet business was hurt by lack of international tourism. If you could maybe give some color on the difference in performance in your outlets versus your full price stores? Are those in-tourist regions versus those that are not? Thanks a lot.

[Tom Chubb:]

Okay. On the supply chain question and any impact that, that may be having on the Lilly Pulitzer after-party sale later in the year, the way that I would answer that, Tracy, is the primary driver of the root cause, if you will, of not having as much inventory as the higher sell-through that we've had year-to-date. However, the supply chain issues make it harder for us to chase inventory really for full-price business as well as, as for that would ultimately end up leaving us possibly with more inventory for the after-party sale. So, we are having some challenges with delays in shipping as well as some delays in production at the factory end due to the COVID pandemic. As much as possible, we've obviously tried to factor all of that into our forecast and think we've sort of captured that. But the real cause is the higher-than-anticipated full price selling during the early part of the year. And then on the outlet stores?

[Scott Grassmyer:]

Yes. Our outlets are down similar to our total retail. We don't really benefit that much from international travel, not the way some brands might and our outlet stores there. While the sales are down, the gross margins are very healthy in our outlet, so we just have a much leaner in inventory, and the inventory is very good inventory. And we're able to get a little bit better pricing, having to discount a little less than we had to in previous years. So overall, outlet businesses, sales are down, but margins are up. So it's pretty healthy.

[Operator:]

Our next question is from Susan Anderson of B. Riley. Please state your question.

[Susan Anderson:]

Hi, good evening, nice to see the improvement in the quarter. I'm curious, I think you mentioned that you expect the Northern states to pick up as they've started to open. I'm curious if you've seen that penetrate or seeing them start to pick up just yet? And then also, if the South has continued to perform well, and then also curious what you're seeing in Hawaii is that's opened up now?

[Tom Chubb:]

Yes. So as to the Mid-Atlantic, Northeast and Midwest, which were the three sort of lagging regions that we called out, they are improving. If you look at the more recent performance versus the performance earlier in the year, the general trend there is good. And I think it's as you would expect, as people start to get out more or feeling more comfortable as some of the restrictions start to get lifted and more people are vaccinated. People want to be out shopping and buying stuff, and we think that actually plays out for us really well. In those states, summertime is a really good time to have people out shopping for our brands, which are all about warm weather and sunshine and all those types of things. And in the South, I'd say that relative to any other year, the performance continues to be very good. We're pleased with what we're seeing there. I will point out that Florida always slows down for us during the summer time a bit versus other times of the year. And I think you have that. It won't be a relative slowdown as compared to other years, but it will be less of our overall sales picture during the summer months. And then as to Hawaii, it's a bit of a mixed bag there. The places that rely heavily on international tourists, especially people coming in from Japan or Australia, and that would be the island of Oahu because there's still issues would travel from those places. They've not recovered as fast as some of the locations like and the big island that are more driven by U.S. tourists. And there are still restrictions in place, but we are seeing a nice recovery, and I think that will continue as the year progresses. I think all of Hawaii will continue to get better, which is a positive for us. We're thrilled with the results that we saw in the first quarter. But again, that was with certain regions still depressed from where they were in 2019. And as they come back online, we think that bodes well for us.

[Susan Anderson:]

Great. That's very helpful. And then I'm just curious, are you seeing new customers come into all of the brands or the existing customers that are coming back now that maybe shopping the brands pre-COVID, but hadn't shopped them because maybe they hadn't gone indication or something? And now they're coming back or if you're also capturing new customers and if that's in-store or online or both?

[Tom Chubb:]

The answer is yes, yes and yes. We're -- customer counts are building. We're seeing customers that are customers that we've had in the past, and we're adding new customers both online and in-stores, and it's really across all brands. And some of that got a little choppy during the pandemic. Obviously, it was hard to add new customers in stores when the stores were closed. And there was a lot of on there, but all the customer metrics are really looking pretty good through the first quarter of the year, and we think we'll be able to continue that trend. And it's obviously an area of a lot of focus for us as well.

[Operator:]

Your next question is from Dana Telsey of Telsey Advisory Group. Please state your question.

[Dana Telsey:]

Hi, good afternoon and congratulations on the terrific results. As you think about e-commerce, and I believe last year, e-commerce reached nearly 43% of sales, and you had 55% increase in full price now. How are you thinking about percentage of total sales that comes from e-commerce and the margin accretion relative towards that for each of the brands?

[Tom Chubb:]

Yes. So the highest penetration -- or as you know, Lilly has a higher penetration of e-commerce than Tommy does. They both took a big step-up last year. Last year was a very unusual year. As a percentage of the total, it will be a bit smaller this year than it was last year, but it will still, in both brands, be significantly higher than it was in 2019. And overall, total enterprise, I think we're estimating it to be at about 33% for 2021, which will be up pretty significantly over where it was in 2019. I think '22 is probably the first year where you'll really be able to see where that's going to sort of what the new baseline of e-commerce is because you do still have stores in the wholesale still in a bit of a recovery mode this year, Dana. And so 2022, you probably get that baseline. But then from there, I think e-com probably continues to be the fastest-growing part of the business. And we like it. It's very profitable business for us. I'll let Scott maybe elaborate a little more on the margin impact of the e-com business?

[Scott Grassmyer:]

Yes. Yes. Our e-com is a very profitable business. Even though you have some extra cost around it, you do have a high ticket, which is growing. Our average ticket has been growing, and our initial gross margins are higher. So, we are able to easily fund the extra cost with that margin. So we really do like the e-commerce business, and we have been investing in it, and those investments have been paying off, and we'll continue to invest in that business.

[Dana Telsey:]

Got it. And then just two more follow-ups. One of the things that sounded like you had learned coming out of COVID is how to run the stores more efficiently regarding store labor. As stores have reopened, is this part of the flow-through beyond the gross margin of what's leading to the operating margin increases? And how do you think about labor going forward?

[Tom Chubb:]

Dana, I would say, yes, it is part of the flow-through. We did learn how to operate more efficiently. And I think we're benefiting from that right now. There's a part of that that is sort of intentional, if you will or deliberate. And then I think there's actually a little bit of it that has to do with trouble as many employers are having right now and filling open positions. And we're actually running a little thinner than we want. At the margins, it's probably costing us a few sales dollars. So I'm not sure it would hurt us as on labor cost as a percentage of sales. But in absolute dollars, it's probably -- we're spending less just because we can't get people in.

[Dana Telsey:]

Got it. And then as you think about inventory going through the balance of the year, how do you think about inventory as approaching the fourth quarter? And how long this congestion lasts? Everything we hear, it seems like it continues to be extended?

[Scott Grassmyer:]

Yes, it does. One thing we have just did in merchandising calendars to order earlier to build in a little more time for any kind of transit delays, especially for that fourth quarter, especially when you get into resort and then into in the early deliveries of spring, which some of those happened in the first quarter. We plan on attempting to at least ordering and the inventory earlier. And hopefully, any delays will be -- that cushion that we accelerate the orders, we'll absorb that. So -- and inventory levels, we are operating more efficiently with inventory. As far as we expect to be below 20% in the whole year and whether it will be quite as big a percentage or not, not quite sure. That should be lower all year. I think we can just run the business with less inventory due to some of the investments.

[Operator:]

Our final question is from Steve Marotta of CL King. Please state your question.

[Steve Marotta:]

Tom, maybe you could address, given how this year is shaping up? And there's the reopening, performance is actually very good, very, very good. To the extent I know, you can't talk about next year from a guidance standpoint, but maybe you can talk at a very high level about what you think optimal operating margin is for the business and for the long term? I'd like to ask you how you expect to lap this next year, but that would be maybe giving too much specific guidance on next year. If you could just frame it a little bit on where you are and where you think you can -- how this can -- you could build off of this? Or if maybe the margins are playing a little bit above themselves at the moment, given all of the dynamics in the industry?

[Tom Chubb:]

Yes. Thank you, Steve. Thanks for the question, and I'll let my partner, Scott, chime in here in a minute with some further detail in thinking on the operating margin long term. But what I would tell you at the very highest level, Steve, and this is a message that we've been trying to deliver since this time last year, is the first couple of months of the pandemic, we were very focused on making sure that we would get through it and financially survive. And as you know, we did that with flying colors. But really about this time last year, we also pivoted to make sure that we were doing everything we could across all of our brands to emerge from the pandemic even stronger than we went into it. And this was part of our prepared remarks today is that we believe that we are seeing not only the benefits of the reopening, but also the benefits of the priorities that we have internally and that those are paying off. And we do believe that we have come out of this as brands, which ultimately drive our business in a stronger position and what that's helping us do is drive sales. No doubt, the reopening is part of it. But we think the strength of our brands and the activities and priorities that we've done to bolster those are also paying off. That's resulting in higher gross margins. We've developed skills that have helped -- are helping us operate more efficiently from an operating expense leverage standpoint as well as an inventory efficiency standpoint. And we're also focused on and while we love wholesale and we want to continue our wholesale business, we're very focused on driving our direct-to-consumer businesses. And when you look at all of those, what I would tell you is it's really hard for me to predict what next year looks like. But over the long term, I do believe we will be expanding our enterprise-wide operating margin. And Scott, if you want to?

[Scott Grassmyer:]

Yes. Total company, I mean, we really expect to be a low double-digit operating margin company. I think we can enter that double-digit territory this year. And at Tommy Bahama, we've always felt there was a lot of room for operating margin improvement. And we really believe this year, we're going to have a lot of progress, and they can get into double digits this year. Also, we want to get them 12% in North. I don't think that will happen this year. But I think that certainly in the not-too-long-term future to get them there. So -- and then Lilly has great operating margins. They always have, and we think they can maybe expand slightly over '19 margin levels. So -- and so, we think our margin profile is certainly improving, and I think it can continue to improve.

[Operator:]

We have reached the end of the question-and-answer session. I will now turn the call over to Tom Chubb for closing remarks.

[Tom Chubb:]

Thank you, Hillary, and thanks to all of you for your interest in our company and your support. And we look forward to talking to you again in September when we report second quarter results. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.