Oxford Industries F1Q08 (Qtr End 8/31/07) Earnings Call Transcript

by: SA Transcripts

Oxford Industries Inc. (NYSE:OXM)

F1Q08 Earnings Call

October 9, 2007 8:30 am ET

Executives

Reese Lanier - IR

Hicks Lanier - Chairman and CEO

Doug Wood - COO, Tommy Bahama Group

Tom Chubb - EVP

Scott Grassmyer – Controller

Anne Shoemaker – VP, Treasurer

Analysts

Jeff Klinefelter - Piper Jaffray

Eric Tracy - BB&T Capital Markets

Elizabeth Montgomery - Cowen & Co.

John Rouleau - Wachovia

Jeff Blaeser - Morgan Joseph

Steven Martin - Slater Capital

Clark Orsky - KDP

Robin Murchison - SunTrust Robinson Humphrey

Operator

Welcome to today's Oxford Industries Inc. first quarter 2008 earnings conference call. (Operator Instructions) Now I would like to turn the conference over to Mr. Reese Lanier, Senior Vice President and Treasurer. Please go ahead, sir.

Reese Lanier

Thank you and good morning, everyone. Thank you for joining us today. 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, or in response to your questions, which are not historical facts 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 the company's annual report on Form 10-K filed with the Securities and Exchange Commission on July 31 2007 and in our subsequent filings with the Securities and Exchange Commission. A copy of this report is available online, or upon request from Oxford’s investor relations department. Oxford disclaims any duty to update any forward-looking statements.

Now I would like to introduce today's call participants. With me today are Hicks Lanier, Chairman and CEO; Doug Wood, Chief Operating Officer of our Tommy Bahama Group; Tom Chubb, Executive Vice President; Scott Grassmyer, Controller; and Anne Shoemaker, who after today will be Vice President and Treasurer.

Thank you for your attention. Now, I would like to turn the call over to Hicks Lanier.

Hicks Lanier

Good morning and thank you for joining us on the call. Earlier this morning, we reported our financial results for our fiscal quarter ended August 31 2007. These results were below our expectations and reflect the difficult retail markets that we, and our customers, have encountered over the past several months. Our consolidated net sales in the first quarter were $238 million, down 16% from last year's first quarter.

The bulk of the sales decline, as expected, was in Oxford Apparel where we have exited underperforming lines of business.

In Tommy Bahama, the regions where the majority of our stores are located have been adversely impacted by declines in residential real estate values and waning consumer confidence. I will let Doug walk you through Tommy Bahama's quarterly results in more detail in a moment.

Ben Sherman experienced a slight sales decrease, but was about where we thought they would be for the quarter.

Finally, Lanier Clothes struggled through another very tough quarter as demand for tailored clothing remains sluggish, particularly at chain stores and department stores.

Our gross margins continued to improve as we shifted our sales mix to a higher percentage of branded and retail sales. Our first quarter gross margin reflects this shift, with an increase of 290 basis points to 41%.

SG&A expenses increased as a percentage of net sales to 37.3% from 30.4% last year, primarily due to deleveraging associated with lower sales volume and to our increasing proportion of branded and retail sales.

Diluted earnings from continuing operations per common share for the first quarter were $0.27 compared to $0.63 in last year's first quarter. Our first quarter results were certainly disappointing, but not inconsistent with the recent results reported by our peers and customers. It appears that the worsening housing slump and turmoil in the credit markets have clearly impacted consumer demand. Despite the difficulties we encountered in the quarter, we remain optimistic and continue to execute our strategies.

The positioning of our key brands remains healthy. Ben Sherman has made progress in elevating the brand in the UK by moving away from lower-tiered businesses and transitioning to more upscale retailers, and continues to execute a more focused strategy in the U.S. We continue to be very pleased with Ben Sherman retail, both in the U.S. and the UK, which has been performing above plan in the last year.

Tommy Bahama expanded its retail presence with the launch of an ecommerce website earlier this month. The site has been developed to enhance our marketing strategies and to extend the reach of our brands to new customers.

As you have read, we have also elected to shift our fiscal calendar to end each year on the Saturday closest to January 31. This calendar will synchronize our disclosures with our industry peers and our major customers, and eliminate the perceived reporting lag associated with our current fiscal calendar. The new calendar coincides with the National Retail Federation calendar. Tom Chubb will describe in a moment how we're going to handle guidance for our newly-defined fiscal year.

I would now like to turn the call over to Doug Wood. The CEO of Tommy Bahama, Tony Margolis, had a scheduling conflict and could not be on the call this morning. Doug has been with Tommy Bahama for over six years and has played an instrumental role in their success.

Doug Wood

Thank you, Hicks and good morning. I'm sure you have all seen that we had a tough quarter. Net sales for the quarter were $99.2 million, down 4.8% from the first quarter of last year. The softness in sales was most pronounced in the states of Florida, California, Arizona, and Nevada, which accounted for roughly two-thirds of our retail store sales in fiscal 2007. We saw softness in these states in both our own stores and in the stores of our major customers. We believe that economic weakness and a tighter consumer credit market have had an impact on our consumer demand, particularly in these regions that have experienced dramatic declines in residential real estate values.

Our operating income in the quarter was $13.1 million, compared to $16.8 million in the first quarter of fiscal 2007, due to lower sales volume and the higher SG&A expenses associated with operating additional retail stores.

Several of our key customers have been taking delivery of product later in their delivery windows, which resulted in some deferrals of first quarter deliveries into the second quarter. This trend of releasing orders later in the delivery window is continuing. When we saw this beginning to occur in the first quarter, we immediately responded by moderating our inventory buy plan for the holiday season, reducing some of our inventory exposure going forward.

Despite the soft quarter, we remain confident that Tommy Bahama is healthy and well positioned. We see the launch of our website as a major milestone for our direct to consumer efforts. The website will enable us to deliver a complete and consistent brand message to our retail guests. The site launched last week featuring men's and accessories. By the end of November, the site will have expanded to include women's sportswear and women's swim.

With respect to retail store development, we opened a new retail and restaurant compound in Sandestin, Florida this quarter, bringing our total units to 69 from 62 last year. We anticipate opening four additional new stores before the end of January.

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

Tom Chubb

Thanks, Doug. Good morning and thank you for joining us. I will start with Ben Sherman. Over the past two years we have taken significant steps to reposition the Ben Sherman brand at a higher level of distribution in its home market in the UK. We have also continued with our international expansion of the brand, and believe Ben Sherman is well-positioned to generate sales growth and improved profitability in Europe, the United States and elsewhere around the world.

First quarter net sales for Ben Sherman were $37.6 million, down 3.9% from the first quarter last year. The sales decline was expected and is partly attributable to the discontinuation of the Evisu denim business. We elected to cease distributing Evisu denim following delivery of the spring 2007 collection. Although we experienced a unit sales decline in our U.S. wholesale business as we continued to realign distribution of our product, we are encouraged with improving sales productivity of Ben Sherman product at our key wholesale customers.

In addition, we are pleased with the positive sales increases in both our U.S. and UK retail operations, as well as our international divisions. Operating income also affected by the sales decline was $700,000, compared to $1.9 million in the same period last year.

Lanier Clothes continues to be challenged by very sluggish demand in the tailored clothing market, particularly in the chain and department store channels of distribution. First quarter net sales were $35.6 million, down $5.1 million from the first quarter last year. Operating income was also down significantly, due primarily to the reduction in sales and some erosion in average selling price.

Oxford Apparel was responsible for the bulk of our consolidated sales decline, and was down 34% versus last year to $65.3 million. This sales decrease was anticipated, as we continued to focus on key categories and certain lines of business.

First quarter operating income was $3.6 million, down $2.6 million from last year's $6.2 million. This decline resulted from the decrease in net sales, as well as a $1 million charge for asset impairment and operating losses at the Honduran manufacturing facility that we plan to sell this year.

Now for our results on a consolidated level. Consolidated net sales in the first quarter were $238 million, 16% below the $284 million we reported in the year-ago period. Again, the majority of this decline was expected and was attributable to the Oxford Apparel Group. Gross margins increased in the first quarter to 41% from 38.1% in last year's first quarter, due to the increased proportion of branded and retail sales in the total mix.

Selling, general and administrative expenses increased as a percentage of net sales to 37.3% in the first quarter from 30.4% of net sales in the first quarter of fiscal 2007, primarily due to deleveraging associated with lower sales volume and to an increasing proportion of branded and retail sales.

First quarter royalty and other operating income increased to $3.8 million from $2.9 million in last year's first quarter, due to an increase in sales of licensed products. As a result, operating income for the quarter was $11.2 million versus $23 million last year. The reduction was primarily due to lower sales volume.

Our first quarter's effective tax rate was 22.8% compared to 36.3% in the same period last year. In the first quarter, a change in the enacted tax rate in the UK resulted in a decrease to our deferred tax liability and a decrease to our tax expense. We continue to expect our annual effective tax rate on current year earnings, before the impact of any discrete events such as the decrease in the UK tax rate, will run in the 34% to 34.5% range.

Diluted earnings from continuing operations per common share in the first quarter were $0.27 compared to $0.63 in last year's first quarter.

Turning to the balance sheet, accounts receivable at the end of the quarter decreased 22% from last year to $123 million. The decrease was primarily due to the reduction in the wholesale sales. Total inventories at the end of the first quarter increased 11% from last year to $155 million, due to higher inventories at Tommy Bahama to support the additional retail stores, and the higher than optimal levels at Lanier Clothes. Inventory levels at Ben Sherman were consistent with last year.

With respect to future operating results, we expect net sales and earnings for the second quarter and the two-month period ending February 2, 2008 to be flat to slightly higher than the comparable periods last year.

For the second quarter of fiscal 2007, net sales were $291 million and diluted earnings from continuing operations per common share were $0.68. For the two months ended February 2, 2007 net sales were $164.4 million and diluted earnings from continuing operations per common share were $0.16.

In light of the company's change in its fiscal year, previously announced guidance for the 12 months ending May 30, 2008 should not be relied upon.

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

Hicks Lanier

Thank you, Tom. Although we had anticipated this year's sales and income to be below last year's levels, the shortfall was greater than expected and was clearly exacerbated by macro economic issues. Despite these challenges impacting the retail marketplace, we expect our operating results for the remainder of this short year to be more consistent with comparable prior year levels.

We were frankly surprised at the degree to which Tommy Bahama was affected by economic issues in the first quarter. Nevertheless, we are encouraged by an uptick over the past few weeks in the performance in our own retail stores an d are confident that we are well-positioned to achieve improved financial results.

I would like to thank you for your attention and continued support. With that, I will open it up for questions.

Question-and-Answer Session

Operator

Your first question comes from Jeff Klinefelter - Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

Your legacy business, the Lanier business. Clearly it continues to be challenging. I know you have announced you are reviewing your options for that business and it is probably difficult to discuss formally, but is there any more you can share with us given the ongoing deterioration in the business and what your options are, and what your timing is for that?

Hicks Lanier

I think that the key goals operationally are to make sure we manage the risk aspects of the business, particularly inventory, going forward. As I think I said on the last call, we have made it a high priority to get the inventory in line and we made some progress in the first quarter, but we did not meet the goals we had set out. To do this, we obviously had to curtail production in a fairly significant way, and we will be doing that going forward.

There is no question we are -- and have been for a period of time -- in a slump in the tailored sector, particularly moderate and down. It is a situation that we think is somewhat cyclical. We certainly don’t think it is going to be permanent, but until we get an uptick, it is going to be a pretty difficult situation for us.

Jeff Klinefelter - Piper Jaffray

Has your performance over the last couple of quarters changed your view of the strategic importance of that business? How should shareholders think about that in terms of trying to minimize volatility longer term?

Hicks Lanier

Well, I think we have made it pretty clear that any business that is not performing up to our financial targets over time, we will make every attempt to come up with a solution for.

Jeff Klinefelter - Piper Jaffray

Ben Sherman, you said it was in line with expectations. What are your expectations for that business, top line performance for the balance of your new fiscal year? What sort of operating margins are you looking for out of that business, generally speaking?

Hicks Lanier

When you say new fiscal year, are you talking about the one starting in February?

Jeff Klinefelter - Piper Jaffray

No, the balance of this year too.

Hicks Lanier

Our situation in Ben Sherman is not so much about growth as it is positioning the brand properly. That relates to both the UK business, where we are continuing to add more upscale accounts and drop accounts on the bottom end of the scale. So while we are in that process, we don't see a lot of growth.

But we couldn't be more pleased with the way the product is retailing now in both our own stores and at our wholesale accounts around the globe; also particularly the expansion we're doing in markets other than the U.S. and the UK.

But here again, for the next few months we are not expecting a huge uptick in the top line, but we think we are in the process of a huge improvement in the brand positioning, which will pay dividends for years to come.

Jeff Klinefelter - Piper Jaffray

So down low single-digits or something in that range, we shouldn’t expect much change from that; and then operating income year-over-year likely higher than last year?

Hicks Lanier

Yes, going forward.

Jeff Klinefelter - Piper Jaffray

Tommy Bahama, you did mention that the last few weeks have improved at your retail stores. Any sense at all for whether the business has bottomed out in the wholesale channel? Also, what changes can you make going forward or would you make going forward in that business in order to manage inventories?

Hicks Lanier

Well, that is obviously a high priority. I'll let Doug comment on that. We think we have probably experienced the depth of the consumer demand trough in Tommy Bahama in the first quarter and into September. Actually, September was weaker than the first quarter up until the last week or so. But the last week of September, the first two weeks of October, we have been very, very excited and pleased with the results we've gotten in our own stores.

Obviously, the deleveraging that happened in the first quarter, as we have sales increases we get the reverse of that. With the increasing gross margin that we've achieved, it does not take much to move the needle pretty dramatically in an upward direction, just as the sales decrease in the first quarter was certainly hard to overcome, even with enhanced margins.

Doug Wood

Jeff, I mentioned a little bit when I was talking but about midway through first quarter we saw this starting to occur and that allowed us to get pretty aggressive with regards to our holiday buys. So we were able to minimize the impact with regard to our inventory exposure into holiday. So if anything right now, the combination of seeing an uptick in our business in the beginning of October, combined with how we manage our inventories, we don’t see a large exposure at all here with regard to inventories.

Jeff Klinefelter - Piper Jaffray

For the next fiscal quarter then we're not anticipating any sort of an inventory writedown or a margin hit, given that sales have improved?

Doug Wood

No. In fact if anything, none of us like to see this type of economic situation that we have right now, but this is nothing new to us. We have had to manage through this type of situation before. Really, this is when you tighten down your inventories and really make sure you're not too aggressive on your sales projections and don't get too far out there ahead of yourself. So I don't expect anything like that.

Operator

Your next question comes from Eric Tracy - BB&T Capital Market.

Eric Tracy - BB&T Capital Markets

Hicks or Doug, if you could talk just a little bit more on Tommy Bahama. You mentioned the region specific markets that were hit by the macro issues. Is it possible to break out those markets, the weakness there versus the rest of the country?

Doug Wood

I don't think you're going to hear anything new from me today. Florida, for sure, has been hurting for awhile now. In fact if anything, I think Florida has led the country; even a year ago we saw weakness in Eastern Florida. Really what kind of took us by surprise is the impact to California, Arizona, and Nevada which we refer to as the desert and California regions. Looking back, we started seeing some indication maybe in May, but really things hit us in July and in August is when we really saw some impact there.

Now having said that, we are also now, just as Hicks said, seeing some really good signs specifically in California and Arizona and Nevada in the last couple of weeks. The good news about our business is because we have retail stores as well as wholesale accounts, but our retail stores specifically, you can see changes in the markets so much quicker than just a pure wholesaler.

So right now, for sure those are areas in the country of weakness. Having said that, I will tell you that we've got areas of the country, specifically Texas, the middle of the country where we've seen really no impact at all. In fact if anything, those are areas of the country right now that have performed pretty much throughout the first quarter into second. So that is why we are really looking this as being more of a macro issue than anything.

Eric Tracy - BB&T Capital Markets

Are you able to micromanage the inventory buys by region for your own wholesale or retail in terms of managing? You mentioned using retail as your barometer for the market, but any way that you could be surprised by Texas or some of these key markets?

I guess my question is, does what's happened in some of these key markets start to trickle into some of the wider, broader markets as well?

Doug Wood

You know, from a broader market and from an exposure standpoint, to reemphasize something I said earlier, because we have so much retail penetration in the markets that were impacted, that is our broader market. Having said that, one of our strengths as a company really is the fact that we have a wholesale and retail company so if we see some weakness in our retail, we can actually manage that inventory and move that inventory over to our wholesale divisions, or vice versa.

If anything over the years, we are extremely aggressive with inventory management and actually I would say that is probably one of our core competencies is managing that inventory. Because at the end of the day when you're managing a brand like Tommy Bahama, the one thing you can do to hurt yourself is have too much inventory. So if anything, we will probably err on the other side and manage ourselves a lot tighter through times like this just to make sure that we don't get caught with a lot of excess inventory. I certainly don't expect anything like that to happen here.

Eric Tracy - BB&T Capital Markets

Hicks, on Ben Sherman, talk a little bit more in terms of on a go-forward basis, the profitability improvements. We've seen an expected turnaround for that business over the last 12 months. (1) just on the profitability side and (2) I know the focus would be to try to ramp the growth on an international perspective. Can you provide any color on some of those initiatives on a global basis?

Hicks Lanier

Sure. Let me just say that the improvement in profitability starts with the improvement in the product's performance at retail. That is what we are seeing pretty consistently now and that goes all the way around the globe; we feel that our product is on track. The spring '08 line has been extremely well-received and you may remember this is the first time that we've got the same product throughout the globe. What we have done there is working.

Now, when it reflects in the numbers -- and I guess it is frustrating to us because we have been able to see the foundation of the business really being solidified, and it had not reflected itself in the numbers, mainly because some of our customers have bought rather conservatively until they see the whites of our eyes on this thing. But they are seeing that now and it’s reflecting itself in the bookings going forward into spring '08.

As to what is happening around the globe, we have got two international managers, one who is based in Germany and is responsible for the whole continent of Europe and another that we just moved to Hong Kong in the last month who is going to be responsible for the Middle East and Asia. We have got retail partners lined up in all of those markets, in virtually every country in Europe and all of the major areas in the Far East. Most of these entail opening Ben Sherman stores. So we expect a dramatic rollout of Ben Sherman stores over the next two to three years really around the globe. We're talking about China, we're talking about Singapore, we're talking about Hong Kong, we're talking about Japan. As you know, we are already well established in Australia in Ben Sherman; that is probably our most developed international market.

In Europe, Scandinavia is a particularly well-developed market. Germany is a market we're doing ourselves and it is just in terrific shape right now. I think I may have mentioned before that we were voted the top new lifestyle brand in Germany by GQ magazine. France, Italy; we have got a store in Sofia, Bulgaria that one of our partners has put up. We've got three stores currently in the Middle East with another one coming. So it is truly a global brand at this point, and getting stronger by the day.

So the payoff has not been there yet, but we feel very confident that we are on the right track and it will be Oxford's first truly global brand.

Operator

Your next question comes from Elizabeth Montgomery - Cowen.

Elizabeth Montgomery - Cowen & Co.

I don't mean to harp on Tommy Bahama too much, but I wondered if Doug could maybe talk about any specific trends he observed? Maybe the difference between men's and women's; was women's as weak as men's or was it performing a little bit better?

Doug Wood

Actually if I look at first quarter I'd have to say that women's actually was performing a little worse than men's in our own retail stores, but I will just point at the way we bought it. We actually did a pretty significant change with women's between what we had in the stores in first quarter and what you're going to see for holiday.

In first quarter, I'd say we bought very basic, and so even though our President of our women's division, Lynn Koplin, had developed a very strong line for fall, the way we ended up buying it was we took the fashion out and bought the basics and put it in our retail stores, and it didn't perform very well.

In the last several weeks, we shifted our holiday buy to where we went very much towards the fashion pieces and we have actually seen a significant upturn. In fact if anything, I'd have to say that our women's performance followed right along with how our retail performance has improved over the last couple weeks. That has everything to do with the fact that our holiday 1 product that we're getting in the stores is a lot more fashionable than what we had in there for fall. That is on women's.

With regards to men's, the weaknesses that we saw in those regions pretty much has everything to do with the percentage of men's and women's that we actually do in our retail stores. Our men's product was down as a percentage in both wholesale and retail. It was pretty consistent. Once again, that is pretty much what we also have seen in the last couple weeks, the uptick; it pretty much went in the other direction for us.

So it isn't balanced, but it has a lot to do with the fact that men's is so much larger than women's for us right now. So even though women's was bigger, it had less of an impact than men's. But men's being down still impacted us pretty significantly in that first quarter.

Hicks Lanier

Beth, let me add to that if I may just a minute. Doug is right on the mark as far as the women's product, us missing on not having enough fashion. The core issue in the first quarter in our stores -- and I think in our customer stores -- was a case of traffic. Footfall, as they call it in the UK. We get pretty good tracking on that from our landlords as well as our own stores. We know what kind of traffic we're getting, and our conversion rate has continued to be outstanding. When we get the guest in the store, we convert it.

Our problem has been a broader one, and it is just traffic in general has been down. I think in addition to the falling real estate values in those four states Doug mentioned, I think tourist traffic generally to those areas has also been down. So this is, as I say, a traffic, a footfall situation, more so than product misses or product hits.

Elizabeth Montgomery - Cowen & Co.

Understood, that makes sense. I have a question about the legacy business too. So Lanier is mostly suits and Oxford Apparel is more dress shirts and casual. If I'm remembering correctly, Lanier had been struggling in the weak tailored clothing market for quite a while.

Hicks Lanier

Well this past year was a terrible year for Lanier; very uncharacteristic, and unfortunately, that trend continues into the first quarter.

Elizabeth Montgomery - Cowen & Co.

But it has been going on for a couple quarters. The Oxford Apparel business, if we strip out the lines that you decided to exit because they were not profitable or high margin enough, what would the core run rate of that business have been in Q1? Have we seen a slowdown in the overall men's category? Say, from three quarters ago?

Hicks Lanier

No, actually there was a very significant volume drop in the first quarter in Oxford Apparel going from $99 million to $65 million; a 34% decline. Most of that was planned. They were pretty much on target for our plans for the first quarter. The one thing we did not factor in our plan when we were putting our budgets together and our guidance together back in April and May was we have concluded to eliminate the last manufacturing facility. There's about $1 million charge in those figures. If you had taken the $65 million that we did do and added that $1 million back, you would have $4.6 million in profitability or 7%.

So you know, that was sort of where we anticipated and when you consider the volume drop, that 7% would have been a good point better than we did last year in terms of percentage. We are pleased with what is happening there in terms of our positioning. When you chop off $35 million in sales, it is pretty difficult to get the overhead down in sync with that, but fundamentally we did and we got the margins up a bit, so that is really, when all the dust settles, a pretty good story.

I think the more important thing is to recognize that used to be a big business producing marginal returns. Now it has become a more modest-sized business generating better returns but its percentage of the total is less. So to me, that is a good thing and we are pleased with what's happened in the last nine to 12 months in that business.

Elizabeth Montgomery - Cowen & Co.

The bulk of the revenue decline was what you expected as a result of leaving those other lines?

Hicks Lanier

Yes, as I say, we were fundamentally on plan there.

Operator

Your next question comes from John Rouleau - Wachovia.

John Rouleau - Wachovia

On Tommy Bahama, you've talked about managing inventory and there is not a whole lot you can do on the retail side as far as foot traffic is concerned. How about on the overall expense side? Anything on the marketing side or maybe the store growth or anything that is a variable expense that you might be able to pull back on? Anything that you are managing differently on the expense side of the equation?

Hicks Lanier

John, you might think I am crazy but if anything we're going to add to some of the expenses in things like marketing there. We view this first quarter for Tommy Bahama as an aberration and we think we have got a terrific brand there and going forward, if anything, we're going to add to things like marketing expenses, which we could pull our horns in on but do not plan to. We are expecting growth to resume going forward. This is really, in our opinion, an aberrational quarter there. We're not in any kind of long-term slump.

John Rouleau - Wachovia

In looking at the Tommy Bahama group for the rest of the year, we should continue to model growth, maybe not quite as aggressive as we saw last year, but including in the next quarter some modest type growth out of that business?

Hicks Lanier

Yes. We've given that general guidance and it would apply to Tommy Bahama.

John Rouleau - Wachovia

Going to the legacy side of the business, I believe last quarter you had assumed a modest pick up in that business, simply because I think there was some new fabrications, maybe some new product advancements.

Hicks Lanier

Are you talking about tailored?

John Rouleau - Wachovia

Yes, coming to the market. I am just wondering what your outlook is there now since that business continues to deteriorate a bit from a macro perspective. Have you modified your expectations there?

Hicks Lanier

I think the guidance we gave, which was relatively flat or slightly up, factors a pretty modest expectation. We have factored all of the current, most recent trends into our guidance.

John Rouleau - Wachovia

When you look at some of the legacy businesses, I know Beth was asking some questions as far as how they segment out. But help us better understand in terms of if at some point you were to decide to rationalize down or sell or do something different with some of the segments on the legacy side, how can we look at those businesses and where can we assume that you might take some more aggressive steps sooner versus later?

Hicks Lanier

I think the situation in Oxford Apparel is a pretty good model to look at, where you would have to say what we have been doing and are continuing to do there is rationalize the business. Where we are making it smaller, we are dropping off the marginal to unsatisfactory parts of it and it is a case of less is more.

As it relates to the cost of a rationalization process, we had this $1 million charge to exit this plant in the first quarter. You should be interested to know -- we certainly think it is of interest -- is we now only have one remaining plant on the globe and that is in the tailored clothing area and it out of the manufacturing headquarters in Merida, Mexico. But we are fundamentally out of that infrastructure of manufacturing now. So it gives us a heck of a lot more flexibility as far as doing what we think is appropriate, that we are not carrying a lot of baggage that would entail writedowns and special charges and all that type of thing.

Operator

Your next question comes from Jeff Blaeser - Morgan Joseph.

Jeff Blaeser - Morgan Joseph

On the guidance side, what are your expectations on the macro conditions? Are you expecting them to continue at this base? Two, on a forward nine-month trend, would your previous guidance have changed or your expectations changed at all taking out of the fiscal year end change?

Hicks Lanier

Well, first on the macro economic issues, we are not planning for a big uptick in external factors. We are assuming just more of the same. We're not expecting it to get a lot worse, but we're not expecting it to get a lot better.

As it relates to forecasts going forward, we would expect in January to give guidance for our new year which will start the first of February and will go for a 12-month period. So at this juncture, we're just focusing on the five months and that is the guidance that we've given.

Now I would hope that come January we may have a more optimistic looking external environment, which could have an impact on the next year. But we're not trying to forecast that far in advance, particularly on the macro issues.

Jeff Blaeser - Morgan Joseph

Within the Oxford Apparel side, I think the plan going forward was to cut about $60 million, $65 million. You got half in the first quarter.

Hicks Lanier

More than half.

Jeff Blaeser - Morgan Joseph

More than half -- that was in line with expectations. Any long-term plan of how you would like to get Oxford Apparel, annual sales?

Hicks Lanier

What we attempted to do there is position it in businesses that (1) met our financial model but (2) had growth opportunities. So it is a case of shrinking to get in a position to grow again. I think in the next six months or so we will be at a point where we think it will be. We are growing in parts of it as we speak. It is just that, we are still shuffling some stuff out.

Operator

Your next question comes from Steven Martin - Slater Capital.

Steven Martin - Slater Capital

You had a good growth in royalty income, but it's labeled royalty and other. Can you talk about your licensees and what progress you've made there?

Hicks Lanier

Well, we have got quite a portfolio of licensees in Ben Sherman, both in the U.S. and the UK. Tommy Bahama is principally a U.S. situation. Doug, do you want to comment on our licensee group?

Doug Wood

I think what you saw in the first quarter has to do with just we added some licensees and some licensee revenue. Specifically, we added rum in there as well as I think we saw some performance out of our shoe licensing. So that is what you saw out of the Tommy Bahama side.

Steven Martin - Slater Capital

Are you saying that those were initial minimum payments or were those actual royalties for sales?

Doug Wood

I think you have a combination of both there, and I just called out two, I think we have close to a dozen licensees. You would almost have to go licensee by licensee and say yes, some of them have minimums in the contracts, others it is a combination of they exceeded their minimums and actually performed better than expected. But overall, the increase has to do with the fact that we had some new licensees that added to our licensee income.

Hicks Lanier

I think it is important to note that our philosophy as far as licensed products is the first question is, does this enhance the brand? Does it enhance the lifestyle approach to the brand? If it doesn't, the royalty stream is pretty unimportant to us. But if it does, the royalty stream and the brand enhancement works. So our priority is to make sure we are putting together a portfolio of licensee partners that enhance the brand image. A byproduct of that is when we do it right, we have an increasing stream of royalties.

Operator

Your next question comes from Clark Orsky - KDP Investment Advisers.

Clark Orsky - KDP

How much did you say the excess inventory is, and how long do you think it will take to work off?

Hicks Lanier

The only inventory that we have pegged as excess would be in the tailored clothing area. We think we have got a specific plan to reduce that inventory. We slightly missed our plan in the first quarter as far as inventory reduction, but we think that in the next nine months we should be where we want to be there.

Obviously during that period of time, you have some negatives as it relates to the one plant that we have remaining in that you are not running it as full as you would like. So you have some operating issues there, but by and large we think we will be through that cycle within nine months. Doug has already commented on the Tommy Bahama inventory scenario and Ben Sherman, we don't perceive we have a problem, nor do we in Oxford Apparel.

Clark Orsky - KDP

One other question just on the cash flow statement, it shows a $21 million acquisition.

Hicks Lanier

That would be the final earn out payment for Tommy Bahama.

Operator

Your next question comes from Robin Murchison - SunTrust Robinson Humphrey.

Robin Murchison - SunTrust Robinson Humphrey

Can you update us on what the market is looking like in terms of acquisitions and divestitures? What does that market look like? Also if you could update us on what you think from a vendor perspective the department store and mass merchant channel looks like?

Hicks Lanier

You shot a live one in here, Robin.

Robin Murchison - SunTrust Robinson Humphrey

It can't all be about you.

Hicks Lanier

Tell me that first question again.

Robin Murchison - SunTrust Robinson Humphrey

Acquisition and divestiture.

Hicks Lanier

We think what has happened in the debt markets over the past couple of months is actually favorable to us, both in terms of valuation of acquisitions and in terms of disadvantaging the private equity people, who most of their deals are based on a high leverage-backed, abundant cheap debt which is no longer there. I think the risk equations have changed in the debt market and the pricing has changed in the debt market. So I think those will benefit us from that standpoint. I think all of those factors will have an effect on the valuation metrics of the M&A markets. We assumed at some point this had to happen and it has, so we will see.

As it relates to the key retail customer question you have, this is a continuation of the ramifications of consolidation in the retail industry. It has certainly happened on the mass levels and the department store arena also. It is one of the key factors that sent us off on our strategy to reposition the company.

I don't see the trends in dealing with the mega retailers changing a lot in the near term. I think that is why we feel so good about our direct to consumer initiatives and the fact that they are just gaining a larger and larger share of our company. They are all related and it certainly has a lot to do with our strategy.

Robin Murchison - SunTrust Robinson Humphrey

They continue to hunker down, be defensive, especially I would imagine for balance of the year? That would be the right characterization?

Hicks Lanier

Your words, not mine, but I would not disagree with them.

Robin Murchison - SunTrust Robinson Humphrey

Your one last plant that you have, what division is that? In Oxford?

Hicks Lanier

That is in tailored clothing, Lanier Clothes, and it is in Merida, Mexico.

Operator

Your final question comes from Elizabeth Montgomery - Cowen.

Elizabeth Montgomery - Cowen & Co.

Did you buy back any stock during the quarter?

Hicks Lanier

We did not.

Elizabeth Montgomery - Cowen & Co.

What are your thoughts on a repurchase?

Hicks Lanier

As you know, we have authorization placed for stock buybacks and we are constantly evaluating that as a use of our excess cash and balancing that out with acquisition opportunities. So it is sort of a balancing act to see which way we're going.

Thanks for your interest today. We certainly did not look forward to this call because we're not proud of the performance. But on the flip side, we are pretty encouraged on a lot of fronts, particularly our positioning and the direction we're going. Also as Doug pointed out, we have gotten some recent, pretty favorable reaction on the retail side, but not enough for us to go out and load the wagon with inventory. We are going to be pretty cautious.

We look forward to our next call. Thank you.

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