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Oxford Industries, Inc. (NYSE:OXM)

F2Q08 Earnings Call

September 9, 2008 4:30 pm ET

Executives

Anne M. Shoemaker – Vice President, Capital Markets & Treasurer

J. Hicks Lanier – Chairman of the Board & Chief Executive Officer

Terry R. Pillow – Chief Executive Officer, Tommy Bahama Group

Thomas C. Chubb III – Executive Vice President

Analysts

Sean Naughton - Piper Jaffray

Eric Tracy – BB&T Capital Markets

Operator

Good day everyone and welcome to today’s Oxford Industries, Inc. Q2 2008 conference call. (Operator Instruction) Now, I would like to turn the conference over to Ms. Anne Shoemaker.

Anne M. Shoemaker

Before we get started I would like to point out that some of the statements made on this call as part of the prepared remarks are in response to your questions which are not historical facts and may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties which are described in our annual report on Form 10-KT filed with the Securities and Exchange Commission on April 1, 2008, and in our subsequent filings with the Securities and Exchange Commission. A copy of this report is available online or upon request from our Investor Relations department. We disclaim any duty to update any forward-looking statements.

Finally, during this call in talking about our results we will discuss some non-GAAP financial measures about earnings per share. You can find a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release, which is posted under the News tab of our website at www.oxfordinc.com.

And now I’d like to introduce today’s call participants. With me today are Hicks Lanier, Chairman and CEO; Terry Pillow and Doug Wood from our Tommy Bahama group; Tom Chubb, Executive Vice President; and Scott Grassmyer, CFO. Thank you for your attention and now I’d like to turn the call over to Hicks Lanier.

J. Hicks Lanier

We are pleased to have exceeded our financial plan for the quarter and to have taken decisive action to restructure our legacy businesses. While the tough environment continues, we remain confident in our full-year outlook and believe that we will be able to leverage our brands well, improve our efficiency, and focus our organization on the best opportunities we have for growth.

Consolidated net sales for the second quarter ended August 2, 2008, were $231.0 million compared to $245.0 million in the same period of the prior year. Earnings per share during this period, excluding our restructuring charges and other unusual items, were $0.43. This is better than our previous guidance of $0.31 to $0.36, though still below the year-ago level of $0.49.

Given the current economic environment we believe our second quarter results are solid and we are pleased with our performance. Part of the positioning our company for long-term improvement has been to focus the legacy businesses on profitability rather than growth.

We have taken significant steps to exit underperforming pieces of Lanier Clothes, similar to the successful approach we took with Oxford Apparel. The restructuring reduces our working our working capital requirements in these businesses and improves our return on investment.

As we have previously made clear with respect to Tommy Bahama and Ben Sherman, it is our policy not to sacrifice our brand position in order to shore up short-term results. This decision has prompted us to keep our inventories clean, to maintain the integrity of our whole sale distribution, and to minimize promotional activity.

While we have been careful to control our costs and to watch our risk levels, we have been able to continue to invest in Tommy Bahama and Ben Sherman for new store openings and marketing initiatives.

Tommy Bahama is a very healthy business and while the numbers don’t reflect it yet, we are becoming increasingly positive about Ben Sherman’s brand positioning and its prospects for the future. We continue to think when the market improves, as it inevitably will, we will be in a position to quickly see incremental benefits.

I will reserve some additional comments for closing. I would now like to turn the call over to Terry Pillow, the CEO of our Tommy Bahama Group.

Terry R. Pillow

As Tommy Bahama, we produced some respectable results in light of this difficult economic environment. Tommy Bahama reported net sales of $112.0 million for the second quarter of fiscal 2008 compared to $114.4 million in the same period of the prior year. The slight sales decrease continued to be driven by some softness above wholesale sales and company-owned retail stores. We believe that while holiday will still be challenging we are well positioned with strong product offering and a clean inventory position.

Tommy Bahama’s operating income for the second quarter was $18.1 million compared to $20.9 million in the same quarter of the prior year due to higher SG&A expenses associated with the operation of nine more stores than the prior year. We saw a slight gross margin improvement during the quarter, which we believe is validation of our approach to the market.

Traffic in retail continues to be weak but conversion rates are good and the average unit retail prices have continued to hold and we have maintained our philosophy as a full-price retailer. Recently we are still seeing better performances outside of those states hit hardest by the housing and credit crisis.

E-commerce continues to be a high spot for the Tommy Bahama customer. As we approach its first anniversary this venture continues to exceed our expectations. This summer we initiated a new branding concept for Tommy Bahama, the one brand concept, we introduced. It is designed to seamlessly blend our popular men’s wear collections and bring them all together under the Tommy Bahama label.

Although these collections were originally introduced as independent brands, uniting them under the Tommy Bahama brand reinforces the company’s position as a true life-style brand that covers all aspects of our customers’ lives.

At the Magic tradeshow we previewed the blended lines concept for spring 2009 and it was overwhelmingly well received by our wholesale customer base. We expect our concept to create a strong and cohesive brand presence.

Some areas we expect ongoing challenges from the market so we are continuing to operate prudently. Our third quarter has historically been Tommy Bahama’s smallest retail period and we do not see that trend changing. We believe that we are well positioned in terms of our inventory, our merchandising plan, the brand streak with customer, and good healthy holiday season.

Now I will turn the call over to Tom Chubb with details on our other three operating groups with validated figures for the quarter.

Thomas C. Chubb III

I will start with Ben Sherman. Ben Sherman reported net sales of $32.5 million for the second quarter of fiscal 2008 compared to $36.5 million in the same period of the prior year. The lower sales reflect a continued repositioning in the better tiers of distribution in the U.K. as well as fewer off-price sales and our exit from the Evisu brand here in the U.S.

The decline was partially offset by increased sales in markets outside of the U.S. and U.K. and by the growth in company-owned retail sales. We were quite pleased with our U.S. stores, which continue to track at or above our model expectations and the progress we have made in repositioning the brand in the U.K. market.

I hope you had a chance to visit our project booth two weeks ago in Las Vegas. Our customers were very excited and frankly, we had nothing short of an extraordinary response to our spring ’09 line, with bookings significantly outpacing last year’s show.

Ben Sherman had an operating loss of $2.0 million in the second quarter of fiscal 2008 compared to $1.5 million loss in last year’s comparable period. This decrease was due primarily to lower sales. We continue to believe that we will turn a corner on volume and expense leverage in fiscal 2009 with our elevated distribution in the U.K., continued growth in the U.S. wholesale business, and our expansion into the international market.

Net sales for Lanier Clothes in the quarter were $28.2 million compared to $31.6 million in the same period of the prior year. For the quarter Lanier Clothes reported an operating loss of $11.4 million versus a loss of $2.2 million in the year-ago period. The increase in the operating loss was a direct result of $9.2 million of restructuring charges.

As you know, we have been talking for quite a while now about the softness in the moderate-tailored clothing market. We have taken some painful but necessary steps to put this business back on track and expect the changes we have made to result in smaller, but profitable, business.

Oxford Apparel reported net sales of $58.0 million for the second quarter compared to $61.0 million in the same period of the prior year. Operating income for Oxford Apparel was $3.7 million for the second quarter of fiscal 2008 compared to $3.1 million in the same period of the prior year.

We continue to drive increased profitability by managing costs carefully, resulting in reduced SG&A expenses. The reduction in SG&A more than offset the unfavorable net impact of the restructuring charges and unusual items for Oxford Apparel in the quarter.

The corporate and other expenses decreased $0.5 million for the second quarter of fiscal 2008 from $3.8 million in the same period of the prior year. This improvement was due primarily to the impact of LIFO accounting adjustments which included the reversal of $1.9 million of restructuring charges as well as lower corporate SG&A.

I will now move on to consolidated results for the income statement and balance sheet and cash flow statement.

As Hicks mentioned earlier, for the second quarter ended August 2, 2008, consolidated net sales were $231.0 million compared to $245.0 million in the same period of the prior year.

Consolidated gross margins for the second quarter of fiscal 2008 were 41.9% compared to 42.1% in the same period of the prior year. The slight decrease in gross margins was primarily due to the restructuring charges to Lanier Clothes and Oxford Apparel, partially offset by the increased proportion of Tommy Bahama and Ben Sherman sales, which generally have higher gross margins than Lanier Clothes and Oxford Apparel. Gross margins by both Tommy Bahama and Ben Sherman improved to the prior year.

Selling, general, and administrative expenses, or SG&A, for the second quarter of fiscal 2008 were $89.0 million, or 38.6% of net sales, compared to $89.0 million, or 36.4 % of net sales, in the same period of the prior year. Restructuring charges in Lanier Clothes and increased expenses associated with the operation of additional retail stores were offset by reduction to the employment and other costs and the resolution of a contingent liability. The increase in SG&A as a percentage of net sales was due to the reduction in net sales.

Amortization of intangible assets increased to $4.1 million for the second quarter of fiscal 2008, from $1.3 million in the same period of the prior year. The increase was primarily due to the impairment charges associated with Lanier Clothes and Oxford Apparel.

Royalties and other operating income for the second quarter of fiscal 2008 increased 13.6% to $4.4 million, from $3.8 million in the same period of the prior year, primarily due to the sale of the trademark by Oxford Apparel which is included in the unusual items.

As a result of these factors, operating income for the quarter was $8.0 million versus $16.6 million in the same period of the prior year.

We believe our annual effective tax rate for fiscal 2008, before the impact of any discrete events, will be approximately 32%.

As we have explained, we have had a net impact of $0.34 per diluted share for restructuring charges and other unusual items of which $0.16 per diluted share were non-cash charges. Excluding these charges, diluted net earnings per common share for the second quarter were $0.43 compared to $0.49 in the same period of the prior year. These restructuring charges and unusual items reduced diluted earnings per share to $0.09.

Turning to the balance sheet, receivables were $96.5 million in August 2, 2008, compared to $99.2 million at the same time last year. Total inventories decreased 17%, to $129.9 million at August 2, 2008, compared to $156.9 million at August 3, 2007. We continue to manage inventory levels carefully and do not believe we have a significant risk from excess inventory.

Cash flow from operating activities for the first six months of fiscal 2008 were $62.1 million compared to $44.5 million in the same period for the prior year. Significant work in capital reductions associated with the rationalization of our legacy business has contributed to our strong operating cash flow.

For the year, we expect to generate cash flow from operations in excess of $75.0 million, incur capital expenditures of approximately $25.0 million, and due to the change in our fiscal year, we expect to make five dividend payments totaling approximately $14.5 million. With our strong free cash flow and our new credit facility, our liquidity remains excellent.

In the third quarter we expect to incur approximately $0.06 per share of additional charges, which include both restructuring charges and the write-off of unamortized financing costs related to our prior credit agreement. Including the restructuring and write-off charges, we expect diluted earnings per share to be between $0.37 to $0.42 on sales of $250.0 million to $260.0 million.

While market conditions remain challenging, for the year we believe we will be in a position to deliver sales and earnings consistent with our prior full-year guidance. Excluding the impact of our restructuring charges and unusual items, we expect diluted earnings per share of $1.90 to $2.05. Including the impact of these items, we expect diluted earnings per share to be in the range of $1.50 to $1.65.

Thanks for your attention and now I will turn the call over to Hicks Lanier for some closing comments.

J. Hicks Lanier

Our capital risk management and it’s best control had allowed us to deliver respectable results and strong cash flow even in this difficult economic environment. We have a strong balance sheet that provides us ample financial flexibility today and will support our strategic objectives going forward.

We continue to be excited about the long-term growth opportunities with Tommy Bahama and Ben Sherman and are pleased with the work we have done to reposition our legacy businesses. While we are not sure when it will happen, when the inevitable turn around in the economy occurs, we believe our business will be well positioned to provide great value to our shareholders.

Thank you for your time this afternoon and your continued support. Nicole, we’re ready for questions now.

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from Sean Naughton with Piper Jaffray.

Sean Naughton - Piper Jaffray

Quick question for you on Tommy Bahama to start, on the retail sales portion. Is there any way you could talk about the tops in those stores, how things are different in housing states versus non-housing states and then in addition, your expansion plans for next year?

Terry R. Pillow

Our traffic in our retail stores continues, as I said in the prepared announcement, continues to be weak which is affecting our comp sales for our retail business. Particularly being hit hard, as you mentioned, in the states where the housing and credit crisis, not to mention the weather that we’ve had in Florida.

As far as our cadence on opening new stores, we will continue to open stores as we’ve said that we are, even though we’re looking at opportunistic situations as they come available in the market place. We’re still on track to open another five stores this year and we’re on track for 2009, we have stores on the plans right now and we’re looking at opportunities as they come available.

This retail, this economic environment, there are some opportunistic stages that we have been looking at that are becoming available. So we’re still optimistic and looking to continue to open new stores.

Sean Naughton - Piper Jaffray

And then on the wholesale channel for TV, have you guys been narrowing the distribution at all, trying to maintain some of the price points or any price conflicts that may be in there in the mall?

Terry R. Pillow

We constantly look at our distribution and performance in stores that we’re in with our department store partners, looking at new opportunities for the stores and also looking at our performance to play up our distribution. So it is something that we do look at.

However, our wholesale business, as we’ve talked about, with our partners that we’re with has been good, even though their businesses, as has been reported in the press, haven’t been great either, but we have a good position with those partners.

Sean Naughton - Piper Jaffray

And then finally, just based on the $9.2 million of restructuring in Lanier and I guess there were a couple of things in Oxford, is there way you could provide some additional color on what the $9.2 million is paying for? Is that in terms of some severance or some other SG&A reductions? What does that number entail?

Thomas C. Chubb III

There are really a couple of things, Sean. There are inventory disposal costs related specifically to the businesses that we’re exiting and as we clear out of those businesses, while we’ve taken some hits on the inventory to get out, there’s some royalty and license termination type fees involved in the exit of the two businesses within Lanier Clothes. There are some asset write-downs, both intangible and tangible.

And there is some severance, which to your question, does lead to a significant reduction going forward in Lanier Clothes in particular, to the tune of well in excess of $3.0 million a year in SG&A savings going forward.

I guess the thing I will comment on, Sean, is we view those moves in Lanier, as we said in the prepared remarks as painful. It’s not the type of thing we want to have to do but we really do think it’s a very positive step for the business going forward, in making it smaller but more focused and profitable.

Just like we’ve done in Oxford Apparel over the last six or seven quarters. And I think you’ve witnessed that story and you’re well familiar with our sort of mantra that less can be more, particularly in these legacy businesses.

Operator

Your next question comes from Eric Tracy with BB&T Capital Markets.

Eric Tracy – BB&T Capital Markets

Terry, maybe just a follow in the Tommy Bahama, could you provide a little more color in sort of the decision around bringing the sub-brands back under the parent Tommy Bahama brand and seemingly a very favorable response at Magic. Kind of talk through how you see that playing out for the balance of the year.

Terry R. Pillow

The decision was made, these brands have been successful, it’s not that these brands have not been successful. We just felt that the best place, the best foot forward we had was the Tommy Bahama brand. So to integrate all of them under the Tommy Bahama brand in our own stores and with our wholesale partners was the right thing to do for the branding message. And also our ability to market the brand, through our advertising and communication across the brands.

Tommy Bahama is the best asset that we have and integrating all of these brands under the Tommy Bahama umbrella, as I said, has been received very, very positively and we think that we will see good results from it.

J. Hicks Lanier

Let me just add one comment to that. We had had a [inaudible] of duplication in product categories between the three brands and with them all being under the Tommy Bahama umbrella, and all under a central design group, we are going to eliminate a lot of duplication. And I think it was a disservice to us and an inefficiency.

Eric Tracy – BB&T Capital Markets

And sort of in that context, just in terms of retailer merchandising, looking at a given retail partner and the path that they may play, is this an incremental positive or is this potentially saying okay, here’s the Tommy Bahama line, generally we’re streaming back a little bit on some of the sub-brands. How should we look at that?

J. Hicks Lanier

We view it very much as a positive. Particularly, as Terry mentioned, the ability to leverage our marketing efforts to one brand instead of three brands is just huge for us. And as you know for the Spring season we kicked up our marketing effort pretty dramatically in Tommy Bahama and plan to continue that through the holiday and beyond. So it’s just a plus, plus, from every standpoint.

Eric Tracy – BB&T Capital Markets

And maybe either Hicks or Tom, just kind of touch on Ben Sherman. You know, it sounds like the growth outside the U.S., the U.K., still pretty good, I guess, relatively speaking. Maybe just provide a bit more color on that. And just in the context of Europe, slowing macro over there, how you view, because I know that’s one of the key focal points of growing in Western Europe. How do you see that going out?

J. Hicks Lanier

There’s no question that the U.K. market has been sluggish just like the U.S. market for some time and that, as we all know, that has spread to the continent, with Germany probably being the biggest focal point right now, but I think it’s throughout the continent. So that’s something we have to deal with.

As Tom said, in the rest of the world we’re continuing our expansion, opening stores. We just opened a store last week in Osaka, Japan, which is our first store in Japan and we’re real pleased with that. There’s another one on the drawing board for Tokyo before the end of the year.

We are continuing to expand in most of the geographic areas of the world. We continue to think that that process is rolling out. The economic environment certainly doesn’t give us wind at our back but I think with our other situations, when this thing turns, our positioning, we think, is going to be terrific.

Eric Tracy – BB&T Capital Markets

And it sounds like the U.S.-based retail is tracking quite well despite the environment. Any kind of plans to accelerating that?

J. Hicks Lanier

Well, we’ve got four stores open now and we’ve got two other locations we’re trying to open in Chicago and Boston. And the results we’ve had so far, in the U.S. particularly in the [inaudible] store, the San Francisco store, we’ve been exceedingly pleased with. Unfortunately the Las Vegas store is suffering from the same traffic issues we have in Tommy Bahama.

Eric Tracy – BB&T Capital Markets

In terms of the guidance, just kind of want to clarify for Q3 there’s a GAAP number of about $0.37 to $0.42, which given the $0.06 restructuring is kind of a $0.43 to $0.48?

Thomas C. Chubb III

I think you could think of it that way.

Eric Tracy – BB&T Capital Markets

And then just given kind of the top line appears to be holding, at least relative to my expectations, and I think the Street’s, is there something going on at the margin that is kind of causing that delta, relative to what I’m expecting? There just seems to be something that must be taking place here that the gross or [inaudible] that perspective.

Thomas C. Chubb III

I’m sorry, I’m not understanding your question.

Eric Tracy – BB&T Capital Markets

Well, you basically held the sales constant for that quarter, the $250.0 million to $265.0 million, yet from an EPS perspective, again that $0.43 to $0.48 relative to I think kind of $0.64 to $0.66. Is there something going on with the margin there that?

Thomas C. Chubb III

I think one of the issues we have is that that’s a very small retail quarter for us. If you think of those three months, it’s a very small retail period for us and so you’ve got all the additional SG&A expenses of having the additional stores opened but it’s not a heavy sales period. So you get the expenses weighing heavier than they do in an up-sales period, like the fourth quarter.

Even though this year we’re looking at, probably for the balance of the year, the year being a pretty good traffic year, the fourth quarter is still relatively a big retail quarter.

J. Hicks Lanier

And that’s particularly true with Tommy Bahama. We actually had a stronger second quarter than we expected but we could earn more in a strong fourth quarter.

Operator

There are no more questions at this time.

J. Hicks Lanier

We thank you for your attendance and interest in Oxford.

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