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Oxford Industries Inc. (NYSE:OXM)

2013 Consumer & Retail Conference

March 13, 2013 9:40 am ET


Thomas Caldecot Chubb - Chief Executive Officer, President and Director


Robert F. Ohmes - BofA Merrill Lynch, Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

This is the Oxford Industries presentation. We're very pleased to have Tom Chubb, President of Oxford; Scott Grassmyer, CFO; and also Anne Shoemaker, Treasurer, sitting right up here with us. I'm going to turn it over to Tom for some comments before we open it up to Q&A.

Thomas Caldecot Chubb

Okay. Good morning to everybody, and thank you for coming. We're Oxford. If you look there, we've got our safe harbor statement, mandatory safe harbor statement. I'm not going to read that to you. You can read more about that on our website.

As Robbie mentioned, I'm Tom Chubb, CEO of Oxford. We're thrilled to be here today to tell you about our company and some of the great growth opportunities that we think we have. Q3 9-month numbers, at this point, are a little stale but that's all we've got. That's the most recent thing that we've reported. We're actually reporting the full year in a couple of weeks, on April 2.

Through the 9 months, you can see that sales were up 11% to $619 million. And through the first 3 quarters, EPS was up to $1.96 compared to $1.80 in the prior year. We paid a $0.15 dividend per share per quarter through the first 3 quarters, compared to $0.13 per quarter in the prior year.

What I'm going to do is give you a little bit of an overview of the business and some of the growth opportunities that we think we have throughout the business. You can see here on this slide that we have 2 businesses, which we think of as being our 2 power brands, Tommy Bahama and Lilly Pulitzer, that together comprise 75% of the business. So when you think Oxford, for the most part, you're thinking Tommy Bahama and Lilly Pulitzer. And these are really what's driving the growth and they're also where our major growth initiatives are focused.

Our third brand, Ben Sherman, which is struggling at this point, is less than 10% of the business. And then our last group is our very solid tailored clothing business, Lanier Clothes, which is slightly less than 15% of the business.

Tommy Bahama is obviously our largest business. You can see some highlights there about the business. We're up to 113 stores. 70% of the business is direct to consumer. We launched into international in fiscal 2012. We opened a store in New York, our first New York store and restaurant, in 2012. So lots of great things going on in Tommy Bahama. And as you can see from some of the financial highlights, we've experienced some great growth in Tommy Bahama. Tommy continues to grow, and we believe it's got great growth opportunities going forward. So as a result of that, the priorities at Tommy Bahama, as you might expect, are, first and foremost, growth; and secondly, making sure that we're building the infrastructure and the platform to support long-term growth in this business.

For Tommy, we think there are multiple growth opportunities, including e-com, which is the fastest growing part of the business. It's going to end up 2012 more than 10% of the Tommy Bahama total business. It grew at a very rapid rate, and we think there's lots of runway in e-commerce.

Second is international. As I mentioned, as of the end of fiscal 2012, we have 8 international stores. We went into the year with none. We bought back our distributor in Australia that had 4 small full-priced stores. We subsequently added an outlet store in Australia. And then on our own, we opened stores in Hong Kong, Singapore and Macau during the course of fiscal 2012. So international is a big initiative for us. In 2012, we spent a lot of money getting that up and going, but we think that's an investment that's very worthwhile to make. We think the runway that, that creates for us, long term, is substantial, and it's all about building the platform for growth.

Continued domestic store rollout is another opportunity for growth. We're at 105 stores now domestically. We've been opening about 7 to 10 per year and we plan to continue at that kind of pace.

And the final growth opportunity that I would highlight is women's. Women's currently is a little bit less than 30% of our retail business. We believe it's got the opportunity to grow significantly. While men's has been growing for the last several years, women's has been growing at a faster pace. We think that women's can continue that growth and continue to become a larger and larger portion of the total Tommy Bahama business. As all of you know, the women's market is several times larger than the men's market. We know we've got the female consumer in our store, she's there either buying for her husband or significant other or maybe they're shopping with him.

We've always done a nice business in the home arena, tabletop sort of items, which are largely purchased by women, and we've now begun to really offer her the products she wants from an apparel and accessories standpoint. And we're seeing very positive results and think that we've got more opportunity there.

So to support these growths, we're doing a lot of investing in people, which are the most important element, systems and property, plant and equipment. And the PP&E is not just the stores, but also we've done some significant work on our distribution center to expand it and allow it to better support this very rapidly growing e-com business that we've had. Those investments are very important to support growth for the long term, and we're happy to be doing them. And as you might expect, they've got sort of a dual impact on us.

There's obviously the CapEx side, as you're investing in stores and systems and DCs and that type of thing, but there's also a P&L impact. And you see that show up in our fiscal 2012 results where we've added a lot of infrastructure to try to support the international business and make sure that we're launching that correctly. That's resulted in about a $10 million drag on our earnings. So as good as the Tommy Bahama picture looks, it's actually being weighted down a bit by some of the investments that we're making in future growth. And the impact of that, I think, is that we're -- with the top line growth that we've seen, you might expect to see a little more leverage at the operating margin level. We're not getting as much as you might expect, but that's really because we're investing in the business to make sure that we can achieve long-term growth.

I'll move on now to Lilly Pulitzer, which is our other major growth opportunity in Tommy Bahama. Like Tommy, Lilly has been growing very nicely. We bought this business at the end of calendar 2010. So fiscal 2012 was really our second full year of operation. Had great growth in '11, great growth in '12, and we think there are great growth opportunities ahead.

For Lilly, again, the priorities are achieving that growth and building the platform for that growth. The growth opportunities are slightly different, they overlap to some degree, but in Lilly, we're really focused on new store openings, we opened 4 in 2012. Those were the first 4 new openings that the business had done in several years. We plan to continue to open stores in Lilly. E-com is growing very, very rapidly in Lilly Pulitzer. For 2012, it'll finish the year being more than 20% of the total business. Growing at a very rapid rate and lots of runway ahead of it.

And then the third growth opportunity for Lilly that I would highlight is a very careful expansion of the product categories that Lilly covers. Lilly's largest product category historically has been dresses. I think we've been slightly underrepresented in sportswear. Sportswear is growing and growing nicely, and then our accessories and footwear business is quite small. And I think those present -- all of those present some additional growth opportunities beyond just expanding the retail and e-com footprints.

I should touch on wholesale for a minute. I skipped it in Tommy Bahama, but I should go back to that and I can cover Lilly as well. In neither business is growth in wholesale really a priority. Nonetheless, we are growing in wholesale in both businesses.

For Lilly, it's very important that they do some things to support the kind of growth that they've had and that they continue to have, and those are really the same things as Tommy Bahama. It's people, systems and PP&E, and it's got the same impact that you have in Tommy Bahama. You got the CapEx side of it, but you also have a bit of a P&L impact. In Lilly during fiscal 2012, we saw great top line growth and really very rapid expansion of our operating margin. We've almost outgrown our infrastructure at Lilly Pulitzer, and we've got a bit of catching up to do in terms of systems and people, but we want to make sure that we do these things to support long-term growth.

The next business, our third brand, is Ben Sherman. In contrast to Tommy Bahama and Lilly Pulitzer, this business is not growing at the time and it's obviously not performing at the level it needs to. As I mentioned, fortunately, this is our smallest business at less than 10% of the total company. Nevertheless, we're spending a lot of time and focusing a lot of attention on stabilizing and improving the performance of this business.

And there are really 4 key things that we're trying to do in Ben Sherman. One is strengthening the team. The former CEO exited late last year. We have not added a new CEO yet, but we've got a very strong next level and we've augmented the team with some very highly qualified and capable individuals that we brought in from other companies. Second thing is cutting expenses. This is a very major initiative for us for 2013. This business has an expense structure which is larger than the top line would justify. We must cut expenses, we're very focused on it. Scott Grassmyer and I have spent a lot of time with the team working on this, and we think we can achieve substantial expense reductions in 2013.

Third thing we need to do is stop chasing low potential or unprofitable business. Just as an example of that, we had a group of very small customers in the United Kingdom that we were spending a lot of time and energy focusing on these customers and trying to chase business there. But when you look at the actual contribution that you're getting from those customers, there's none. There's basically 0 contribution.

So we're doing the easy thing, we're going to stop doing that and dedicate the resources and the time and effort to form better customer relationships, which is the fourth thing we're doing. It's focusing on the areas where Ben Sherman does have the potential to be profitable. These are things like e-com, where Ben Sherman only got into the e-com game at the end of 2011. Fiscal 2012 was their first full year of operation. And it actually ended up being almost 5% of the business in the first full year of operations. So despite all the bad things in Ben Sherman, there are some areas of opportunity that are quite positive and those are the ones that we need to focus on.

By taking these actions, what we believe we can do is reduce the operating loss materially. And that, combined with a reduction in working capital, because the working capital had gotten a little bit bloated in this business, I think, gives us a very good shot at having this business be cash flow neutral for the year. And I think -- obviously, that's not the type of metric that you want to brag about. But given where this business has been, I think getting it to cash flow neutral would be a very positive development for the total corporation.

Our last business is Lanier Clothes, I should say last but not least. Lanier is a little bit different. The other businesses are all -- they're all single brands. Lanier designs and markets branded and private label tailored clothing under a variety of labels, some of them licensed, some of them owned. And they sell a very broad spectrum of customers, everything from sort of Cole's and Burlington Coat Factory up to Saks Fifth Avenue. So they cover a wide stretch. It's all men's tailored clothing, so suits, sport coats and dress trousers. It's a very well-run business. It provides an excellent cash return on the cash invested. There's very small capital base here, basically just working capital, so really just inventory and accounts receivable. There's fundamentally no CapEx associated with this business, so sort of the classic cash cow.

The growth opportunities for Lanier are what I would call opportunistic situations. If we see a scenario where we can fill a need in the marketplace and make money doing it, we will do it. But if those opportunities are not there, we'll just hold back and not pursue growth sort of at any cost in Lanier Clothes.

I'll touch briefly on the capital structure. We refinanced in 2012. I won't go through all the details, but that's resulted in a significant interest expense reduction that we'll get the full benefit of in 2013. We got some of that in '12, we'll get the full year benefit in '13. And we've got a capital structure in place that works quite well for us. And that, combined with additional capacity that we have, we think, gives us more than adequate capability to support our growth plan.

I've highlighted all this, but again, the big growth opportunities are in Lilly Pulitzer and Tommy Bahama. That's where we're focused. We think the opportunities are there, and we're very, very committed to realizing those opportunities.

With that, I will wrap up and open it up for Q&A. Thank you.

Question-and-Answer Session

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Thanks, Tom. Maybe I'll start. The -- I know the New York store, I think, opened a little bit later than you thought for obvious reasons, again the storms. Can you give us an update on how that store is performing now that it's been open a while?

Thomas Caldecot Chubb

Yes. The New York store and restaurant, which, for those of you who don't know, is located at the corner of 45th and 5th Avenue. We had hoped to open it sort of the beginning November, do a big opening launch party and some other marketing activities and really drive business through the holiday season. As a result of the Hurricane Sandy, we were not able to open on time. We were actually pretty much ready to go, but the city, understandably, was in a bit of disarray. And what actually held us up was getting the inspections to have the final certificate of occupancy issued and that kind of thing. And as a result of that, we didn't get open -- fully opened, until December 17. So at that point, we decided it was too late to do the launch and associated marketing to try to support holiday. We did sort of a soft open. We've been running since mid-December. The lunchtime business has been very strong. There's generally a wait at lunch time, which we like. We don't want people to have to wait too long, but we do like that sort of scarcity element of people seeing a line waiting. Lunchtime has been very good. Dinner has been building. It's not where we want it to be yet, but we're really just coming into our peak season. And then on the retail side, that's sort of tracking alongside the restaurant. And again, with Tommy Bahama, obviously, spring is the key season there. So we're really getting into the time that I think we can really start to build the business there. And we've got a series of marketing initiatives that are going to roll out through the spring that are not all store-specific, but are very New York focused to try to drive the business there. So we're happy with it. We were disappointed to have it open a little bit later than we hoped and not really get to capitalize on the holiday season, but that's not a long-term issue at all. It impacted '12. But then, we're very proud of the store and happy to see it now.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

And can you talk a little more about the international approach for Tommy Bahama? And just how you're managing -- it sounds like you're opening a store in Hong Kong, and it sounds spread out. Can you...

Thomas Caldecot Chubb

That's a good question. The approach in international, I would describe as being Asia-focused, obviously, and I think there's sort of 2 pieces of it. I would look at Australia as being sort of a discrete market. We had a distributor there who had established a small but successful business in Australia. We bought that back from them last summer. Just because of our knowledge of the brand and merchandising for the brand and that kind of thing, we've immediately been able to get some pretty meaningful increases in productivity in those stores. They're very attractive stores. They're performing well. We've gotten some good growth on the wholesale side. We'll make money in Australia and we think that there's a lot of opportunity there. It's limited only by the size of the market really. There's some consumer awareness of the brand there. From a size and fit perspective, Australians are built like Americans, and the Tommy brand works well for them. There's a very casual sort of ethos there, and so it all works. And so, Australia, I think, over the next couple of years will develop. It's already good, it'll get better. The only limiting factor is really that it's a small market in terms of the total population. The rest of Asia, we were very anxious to get some stores open and make sure that we had things like the fit correct for the Asian market. Australia works on the U.S. fit. The rest of Asia is using what we call an international fit that we spent a couple of years developing specifically for the Chinese, Japanese, Korean-type consumer. And so we were anxious to get a couple of stores open, make sure that we had the fit right, look at some merchandising issues, color palette issues, that kind of thing and really begin learning. In the Macau and Singapore stores, were almost opportunistic openings, in a way. They're doing good business, we're learning lots of -- getting lots of good information. We were very pleased that it was apparent within weeks of opening those stores that the fit was correct for the market. We're getting very good responsiveness to that. We're learning a lot about what the consumer likes in those markets from a product perspective. Hong Kong, obviously, is a huge gateway city for the world. The exposure that you get just by being located in Hong Kong is important not only for that market but hugely important to China and also important to the rest of Asia and the rest of the world. The next 2 store openings are in Japan, and that's going to happen in April. We've got one in the Ginza district of Tokyo, that's a -- it'll have restaurant, bar, retail, so it's full, as we call it, island, with food and beverage and retail. And then we've got one opening at about the same time out at the LaLaport mall in Yokohama. We think Japan is a huge opportunity for us. As all of you know, they have a very large and well-developed consumer market there. They buy clothes, they like clothes and brands. They like American brands and American ideas, at least when it comes to fashion. Maybe not in some other things. But they -- the Japanese consumer tends to like that. We see a lot of Japanese consumers in our stores in Hawaii. As many of you know, we have quite a large presence in Hawaii. We get a lot of Japanese tourists there, so we think there's some knowledge of the brand in Japan. And then more recently, there've been -- and this is sort fortuitous for us, that there've been some other sort of U.S. beach-inspired type brands, most notably Ron Herman, which is a specialty store chain from California that's opened several stores over there in the last couple of years and has done extremely well for them. So there's sort of an appetite over there, big market, we think a lot of potential. And I think, Robbie, it's too likely to say this with certainty right now, but I think what's likely to happen is that we'll really focus in on developing the Japanese market, will probably be the major initiative in Asia. From our perspective, we are very early still in this international initiative. We think the opportunity there is a big long-term opportunity. We're trying to do this the right way, trying to build the team and the systems that we need to be able to really run a business over there correctly. And we're willing to stick at it and make this happen there in the next several years. But again, from our perspective, it's very early. We're very much in the early learning stage at this point, but we are liking an awful lot of what we're seeing there.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

And how should we think of the profitability of Tommy Bahama international? Is it a drag on results during the investment phase? Or...

Thomas Caldecot Chubb

Yes. Absolutely. During fiscal 2012, it was about a $10 million drag on results. I think when we release guidance on April 2, we'll talk about the expectations for '13, but I'll not be getting ahead of myself to say, there'll be a loss in 2013 too and possibly for several years beyond that. But again, we believe very strongly in the opportunity that's there. This is sort of the next level for Tommy Bahama, at close to $600 million, probably in '13. Tommy Bahama is a big men's brand in the U.S. at the price level it competes at. There are very few brands that are that size, as you know, in the men's arena. So going to the next level for Tommy really is about becoming a global brand. We've got a distributor in Canada. We've got a franchise license arrangement in Dubai. We had the Australian thing that we ended up buying back. But Tommy's international exposure outside the U.S. has been fairly small now. A lot of -- because of where we're located, we've always been exposed to the international consumer in California, Florida, Hawaii. But this is sort of the next stage of the game and a very exciting one for us.

Unknown Analyst

Can you just talk a little bit more about your new store openings domestically for both Tommy and Lilly? So for instance, Tommy, you sort of gave the projections for store count growth. Can you maybe talk about geographically, would they still be concentrated in the South or sort of with the New York store opening, the learnings that you might be taking seasonality-wise to grow more spread out across domestic U.S.?

Thomas Caldecot Chubb

Yes. That's a great question, and I think if you look at Tommy Bahama, while we are certainly concentrated in sunny and warm areas, we've been successful, for a lot of years, in places like Kansas City, in Mall of America in Minneapolis, in Chicago. We've got another store opening in Chicago in a couple of months on Michigan Avenue, which we're very excited about, but we've had a store in Chicago and then a suburban store too as well in the Chicago area. We've got 2 stores in Denver. So we believe that there are really not a lot of geographical limits on Tommy Bahama. It's more about demographics than geography. Now one of the things I think we've learned in recent years is that in certain markets, we can be denser than we are. The Denver example is a great example where, I think we opened the first store maybe 5 years ago or something, and prior to that, we would question can we even have a store in Denver? We opened it up, it worked great. We had another good opportunity in the Denver area for a space that seemed right. We took it, and lo and behold, that one's worked really well too. So there's some filling in that can happen for sure, where we can get denser in certain markets. And then there are certain markets that we just haven't gotten to yet.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

I'm a little surprised to see how the penetration of online is in Tommy Bahama and Lilly Pulitzer and what the growth contribution is to the overall. I'm curious about the profitability of the online sales, relative to the brick-and-mortar. And you seem to have a unique advantage in that you're not tremendously burdened by a lot of brick-and-mortar exposure, so you have open road if you want to build the online business further. So I'm curious how your view of brick-and-mortar growth for, say, Lilly Pulitzer has changed over the last 6, 9 months, given what you're seeing in that online business.

Thomas Caldecot Chubb

Yes, I think that's a great question. And obviously, the thing we talk about sometimes is we don't want to end up being Borders or Barnes & Noble, where the whole business has moved online and you're stuck with a lot of real estate. In apparel, I don't think that's going to happen. I think there's an experiential element of it that people are always going to want. But that said, I think the growth of the e-com and the potential there has absolutely impacted the way that we're thinking about things like store size, store location, how we merchandise the stores. Obviously, we want the marketing of stores and e-com to be closely connected. The consumer is telling us that she wants what a lot of people are calling a seamless omni-channel experience. She wants to be able to shop in the store, return to e-com; try it in the store but go home and buy it from e-com; look at it online in advance then go into the store and say, "These are the 3 things I want to look at." So we're spending a lot of time and effort thinking about that. But I think you're right, it is nice that in both brands we're not overexposed on real estate at all.

Unknown Analyst

Tom, can you talk about the assortment at Lilly Pulitzer and remind us what percent of the business is dresses, and how much could sportswear move up as a percent of the mix and accessories and...

Thomas Caldecot Chubb

Dresses have typically been about 40% of the business. It varies a bit from season-to-season, the percentage. But they've typically been around 40%. Sportswear's been a bit less than that. Dresses have been growing over the last couple of years, but sportswear has been growing faster. And certainly, that's an opportunity. In the women's business, it's not bad to be great at dresses and to be known as a great dress resource, and Lilly Pulitzer is. When you're in a dress cycle, everybody starts trying to sell dresses. But even when you're in a non-dress cycle, there's still a lot of dresses sold. So dresses will always be a key part of Lilly. But I do think sportswear can continue to grow and will continue to grow and become a larger share of the business. And then we're most under-penetrated in the accessories and footwear. We do some, there's probably opportunity to do more there. but I think the guys that run Lilly Pulitzer are really great about thinking about what are the most immediate opportunities and kind of the lowest-hanging fruit. And I think we all think that sportswear is actually the easier and more immediate opportunity. Not to say we're forgetting about footwear and accessories at all, but we're trying to make sure that we focus on not -- don't want to focus on too many things at the same time. Make sure that we do things well. So sportswear is probably the more immediate opportunity.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

And then maybe a last question, just on Ben Sherman. Is it -- is the strategy sort of on hold until you hire a new head of that brand? Or...

Thomas Caldecot Chubb

No. The strategy is very much what we've launched on a couple of years ago, which was to make sure that we were positioned as a premium British modernist brand. We absolutely think we've got the product right. Our distribution was not well aligned with our strategy. And that's -- trying to correct the distribution over the last couple of years was where a lot of the issues have come in play. And then particularly in 2012, we got into some pretty serious pricing issues. So it's not -- in my view, it's not so much the strategy that's been flawed as the execution of that strategy has been quite flawed. Hope that helped.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

All right. Tom, I think we're basically out of time. So I want to take Oxford for a great presentation.

Thomas Caldecot Chubb

Thank you for having us.

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