OXM - 11.2.2013 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended NOVEMBER 2, 2013 |
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to |
Commission File Number: 1-4365
OXFORD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Georgia | | 58-0831862 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
999 Peachtree Street, N.E., Suite 688, Atlanta, Georgia 30309
(Address of principal executive offices) (Zip Code)
(404) 659-2424
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ | Accelerated filer þ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
| | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | Number of shares outstanding |
Title of each class | | as of December 6, 2013 |
Common Stock, $1 par value | | 16,412,687 |
OXFORD INDUSTRIES, INC.
INDEX TO FORM 10-Q
For the third quarter of fiscal 2013
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Our SEC filings and public announcements may include forward-looking statements about future events. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. We intend for all forward-looking statements contained herein, in our press releases or on our website, and all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). Important assumptions relating to these forward-looking statements include, among others, assumptions regarding the impact of economic conditions on consumer demand and spending, particularly in light of general economic uncertainty that continues to prevail, demand for our products, timing of shipments requested by our wholesale customers, expected pricing levels, competitive conditions, retention of and disciplined execution by key management, the timing and cost of store openings and of planned capital expenditures, costs of products as well as the raw materials used in those products, costs of labor, acquisition and disposition activities, expected outcomes of pending or potential litigation and regulatory actions, access to capital and/or credit markets and the impact of foreign losses on our effective tax rate. Forward-looking statements reflect our current expectations, based on currently available information, and are not guarantees of performance. Although we believe that the expectations reflected in such forward-looking statements are reasonable, these expectations could prove inaccurate as such statements involve risks and uncertainties, many of which are beyond our ability to control or predict. Should one or more of these risks or uncertainties, or other risks or uncertainties not currently known to us or that we currently deem to be immaterial, materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Important factors relating to these risks and uncertainties include, but are not limited to, those described in Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for fiscal 2012, as updated by Part II, Item 1A. Risk Factors in this report and those described from time to time in our future reports filed with the SEC. We caution that one should not place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We disclaim any intention, obligation or duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
DEFINITIONS
As used in this report, unless the context requires otherwise, “our,” “us” or “we” means Oxford Industries, Inc. and its consolidated subsidiaries; “SG&A” means selling, general and administrative expenses; “SEC” means U.S. Securities and Exchange Commission; “FASB” means Financial Accounting Standards Board; “ASC” means the FASB Accounting Standards Codification; and “GAAP” means generally accepted accounting principles in the United States. Additionally, the terms listed below reflect the respective period noted:
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Fiscal 2014 | | 52 weeks ending January 31, 2015 |
Fiscal 2013 | | 52 weeks ending February 1, 2014 |
Fiscal 2012 | | 53 weeks ended February 2, 2013 |
Fourth quarter fiscal 2013 | | 13 weeks ending February 1, 2014 |
Third quarter fiscal 2013 | | 13 weeks ended November 2, 2013 |
Second quarter fiscal 2013 | | 13 weeks ended August 3, 2013 |
First quarter fiscal 2013 | | 13 weeks ended May 4, 2013 |
Fourth quarter fiscal 2012 | | 14 weeks ended February 2, 2013 |
Third quarter fiscal 2012 | | 13 weeks ended October 27, 2012 |
Second quarter fiscal 2012 | | 13 weeks ended July 28, 2012 |
First quarter fiscal 2012 | | 13 weeks ended April 28, 2012 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OXFORD INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par amounts)
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| November 2, 2013 | | February 2, 2013 | | October 27, 2012 |
ASSETS | |
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Current Assets: | |
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Cash and cash equivalents | $ | 9,310 |
| | $ | 7,517 |
| | $ | 5,621 |
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Receivables, net | 71,205 |
| | 62,805 |
| | 68,920 |
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Inventories, net | 123,987 |
| | 109,605 |
| | 102,172 |
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Prepaid expenses, net | 27,280 |
| | 19,511 |
| | 20,111 |
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Deferred tax assets | 20,104 |
| | 22,952 |
| | 19,327 |
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Total current assets | 251,886 |
| | 222,390 |
| | 216,151 |
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Property and equipment, net | 143,710 |
| | 128,882 |
| | 123,841 |
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Intangible assets, net | 170,842 |
| | 164,317 |
| | 165,013 |
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Goodwill | 21,006 |
| | 17,275 |
| | 17,273 |
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Other non-current assets, net | 23,508 |
| | 23,206 |
| | 22,544 |
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Total Assets | $ | 610,952 |
| | $ | 556,070 |
| | $ | 544,822 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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Current Liabilities: | |
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Accounts payable and other accrued expenses | $ | 82,137 |
| | $ | 90,850 |
| | $ | 78,550 |
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Accrued compensation | 14,864 |
| | 25,472 |
| | 21,705 |
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Contingent consideration current liability | 2,500 |
| | — |
| | 2,500 |
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Short-term debt | 2,307 |
| | 7,944 |
| | 6,955 |
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Total current liabilities | 101,808 |
| | 124,266 |
| | 109,710 |
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Long-term debt | 164,414 |
| | 108,552 |
| | 123,301 |
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Non-current contingent consideration | 12,156 |
| | 14,450 |
| | 9,945 |
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Other non-current liabilities | 49,926 |
| | 44,572 |
| | 43,107 |
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Non-current deferred income taxes | 35,652 |
| | 34,385 |
| | 31,459 |
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Commitments and contingencies |
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Shareholders’ Equity: | |
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Common stock, $1.00 par value per common share | 16,410 |
| | 16,595 |
| | 16,572 |
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Additional paid-in capital | 113,578 |
| | 104,891 |
| | 103,603 |
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Retained earnings | 141,337 |
| | 132,944 |
| | 130,153 |
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Accumulated other comprehensive loss | (24,329 | ) | | (24,585 | ) | | (23,028 | ) |
Total shareholders’ equity | 246,996 |
| | 229,845 |
| | 227,300 |
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Total Liabilities and Shareholders’ Equity | $ | 610,952 |
| | $ | 556,070 |
| | $ | 544,822 |
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See accompanying notes.
OXFORD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(in thousands, except per share amounts)
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| Third Quarter Fiscal 2013 | | Third Quarter Fiscal 2012 | | First Nine Months Fiscal 2013 | | First Nine Months Fiscal 2012 |
Net sales | $ | 197,506 |
| | $ | 181,414 |
| | $ | 666,733 |
| | $ | 619,296 |
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Cost of goods sold | 92,721 |
| | 84,592 |
| | 291,024 |
| | 274,980 |
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Gross profit | 104,785 |
| | 96,822 |
| | 375,709 |
| | 344,316 |
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SG&A | 104,434 |
| | 94,146 |
| | 329,883 |
| | 295,656 |
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Change in fair value of contingent consideration | 68 |
| | 600 |
| | 206 |
| | 1,800 |
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Royalties and other operating income | 4,268 |
| | 3,844 |
| | 12,704 |
| | 12,166 |
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Operating income | 4,551 |
| | 5,920 |
| | 58,324 |
| | 59,026 |
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Interest expense, net | 1,195 |
| | 959 |
| | 3,173 |
| | 7,876 |
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Loss on repurchase of senior notes | — |
| | — |
| | — |
| | 9,143 |
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Net earnings before income taxes | 3,356 |
| | 4,961 |
| | 55,151 |
| | 42,007 |
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Income taxes | 2,467 |
| | 1,951 |
| | 24,833 |
| | 15,967 |
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Net earnings | $ | 889 |
| | $ | 3,010 |
| | $ | 30,318 |
| | $ | 26,040 |
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Net earnings per share: | |
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Basic | $ | 0.05 |
| | $ | 0.18 |
| | $ | 1.84 |
| | $ | 1.57 |
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Diluted | $ | 0.05 |
| | $ | 0.18 |
| | $ | 1.84 |
| | $ | 1.57 |
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Weighted average shares outstanding: | |
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Basic | 16,406 |
| | 16,580 |
| | 16,463 |
| | 16,555 |
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Diluted | 16,435 |
| | 16,591 |
| | 16,492 |
| | 16,572 |
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Dividends declared per share | $ | 0.18 |
| | $ | 0.15 |
| | $ | 0.54 |
| | $ | 0.45 |
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See accompanying notes.
OXFORD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
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| Third Quarter Fiscal 2013 | | Third Quarter Fiscal 2012 | | First Nine Months Fiscal 2013 | | First Nine Months Fiscal 2012 |
Net earnings | $ | 889 |
| | $ | 3,010 |
| | $ | 30,318 |
| | $ | 26,040 |
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Other comprehensive income (loss), net of taxes | |
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Foreign currency translation gain (loss) | 1,266 |
| | 1,031 |
| | (96 | ) | | 1,129 |
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Net unrealized gain (loss) on cash flow hedges | 3 |
| | (594 | ) | | 352 |
| | (483 | ) |
Total other comprehensive income, net of taxes | 1,269 |
| | 437 |
| | 256 |
| | 646 |
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Comprehensive income | $ | 2,158 |
| | $ | 3,447 |
| | $ | 30,574 |
| | $ | 26,686 |
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See accompanying notes.
OXFORD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
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| First Nine Months Fiscal 2013 | | First Nine Months Fiscal 2012 |
Cash Flows From Operating Activities: | |
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Net earnings | $ | 30,318 |
| | $ | 26,040 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation | 23,426 |
| | 17,430 |
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Amortization of intangible assets | 1,295 |
| | 769 |
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Change in fair value of contingent consideration | 206 |
| | 1,800 |
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Amortization of deferred financing costs and bond discount | 323 |
| | 846 |
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Loss on repurchase of senior notes | — |
| | 9,143 |
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Stock compensation expense | 1,550 |
| | 2,215 |
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Deferred income taxes | 4,078 |
| | (3,151 | ) |
Changes in working capital, net of acquisitions and dispositions: | | | |
Receivables | (8,377 | ) | | (8,902 | ) |
Inventories | (10,036 | ) | | 2,266 |
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Prepaid expenses | (7,471 | ) | | (2,541 | ) |
Current liabilities | (12,729 | ) | | (12,501 | ) |
Other non-current assets | (584 | ) | | (3,182 | ) |
Other non-current liabilities | 5,356 |
| | 4,444 |
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Excess tax benefits related to stock-based compensation | (6,100 | ) | | — |
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Net cash provided by operating activities | 21,255 |
| | 34,676 |
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Cash Flows From Investing Activities: | |
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Acquisitions, net of cash acquired | (17,888 | ) | | (1,813 | ) |
Purchases of property and equipment | (36,743 | ) | | (47,653 | ) |
Net cash used in investing activities | (54,631 | ) | | (49,466 | ) |
Cash Flows From Financing Activities: | |
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Repayment of revolving credit arrangements | (226,182 | ) | | (149,266 | ) |
Proceeds from revolving credit arrangements | 276,496 |
| | 276,826 |
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Repurchase of senior notes | — |
| | (111,000 | ) |
Deferred financing costs paid | — |
| | (1,524 | ) |
Payment of contingent consideration amounts earned | — |
| | (2,500 | ) |
Proceeds from issuance of common stock, including excess tax benefits | 7,176 |
| | 1,768 |
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Repurchase of restricted stock for employee tax withholding liabilities | (13,200 | ) | | — |
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Dividends on common stock | (8,949 | ) | | (7,438 | ) |
Net cash provided by financing activities | 35,341 |
| | 6,866 |
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Net change in cash and cash equivalents | 1,965 |
| | (7,924 | ) |
Effect of foreign currency translation on cash and cash equivalents | (172 | ) | | 172 |
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Cash and cash equivalents at the beginning of year | 7,517 |
| | 13,373 |
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Cash and cash equivalents at the end of the period | $ | 9,310 |
| | $ | 5,621 |
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Supplemental disclosure of cash flow information: | |
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Cash paid for interest, net | $ | 2,768 |
| | $ | 7,279 |
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Cash paid for income taxes | $ | 16,424 |
| | $ | 20,904 |
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See accompanying notes.
OXFORD INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THIRD QUARTER OF FISCAL 2013
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1. | Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP. We believe the accompanying unaudited condensed consolidated financial statements reflect all normal, recurring adjustments that are necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods presented. Results of operations for the interim periods presented are not necessarily indicative of results to be expected for our full fiscal year. The accounting policies applied during the interim periods presented are consistent with the significant accounting policies described in our Annual Report on Form 10-K for fiscal 2012. |
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2. | Inventories: The components of inventories as of the dates specified are summarized in the following table (in thousands): |
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| November 2, 2013 | | February 2, 2013 | | October 27, 2012 |
Finished goods | $ | 170,100 |
| | $ | 154,593 |
| | $ | 146,044 |
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Work in process | 7,366 |
| | 6,028 |
| | 3,561 |
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Fabric, trim and supplies | 2,968 |
| | 5,431 |
| | 4,943 |
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LIFO reserve | (56,447 | ) | | (56,447 | ) | | (52,376 | ) |
Total | $ | 123,987 |
| | $ | 109,605 |
| | $ | 102,172 |
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LIFO accounting adjustments, which we consider to include changes in the LIFO reserve as well as the impact of changes in inventory reserves related to lower of cost or market adjustments that do not exceed the LIFO reserve, were a credit of $0.2 million in the third quarter of fiscal 2013, a credit of $0.4 million in the third quarter of fiscal 2012, a charge of $0.1 million in the first nine months of fiscal 2013 and a credit $0.5 million in the first nine months of fiscal 2012.
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3. | Operating Group Information: Our business is primarily operated through our four operating groups: Tommy Bahama, Lilly Pulitzer, Lanier Clothes and Ben Sherman, as disclosed in our Annual Report on Form 10-K for fiscal 2012. We identify our operating groups based on the way our management organizes the components of our business for purposes of allocating resources and assessing performance. Our operating group structure reflects a brand-focused management approach, emphasizing operational coordination and resource allocation across each brand’s direct to consumer, wholesale and licensing operations. The tables below present certain information (in thousands) about our operating groups, as well as Corporate and Other, which is a reconciling category for reporting purposes. |
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| Third Quarter Fiscal 2013 | | Third Quarter Fiscal 2012 | | First Nine Months Fiscal 2013 | | First Nine Months Fiscal 2012 |
Net sales | | | | | | | |
Tommy Bahama | $ | 113,528 |
| | $ | 103,193 |
| | $ | 417,174 |
| | $ | 371,790 |
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Lilly Pulitzer | 30,326 |
| | 26,939 |
| | 107,939 |
| | 93,475 |
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Lanier Clothes | 30,144 |
| | 27,180 |
| | 79,719 |
| | 84,995 |
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Ben Sherman | 18,627 |
| | 19,781 |
| | 47,138 |
| | 57,234 |
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Corporate and Other | 4,881 |
| | 4,321 |
| | 14,763 |
| | 11,802 |
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Total net sales | $ | 197,506 |
| | $ | 181,414 |
| | $ | 666,733 |
| | $ | 619,296 |
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Depreciation and amortization | | | | | | | |
Tommy Bahama | $ | 6,449 |
| | $ | 4,511 |
| | $ | 17,929 |
| | $ | 12,793 |
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Lilly Pulitzer | 1,013 |
| | 604 |
| | 2,409 |
| | 1,674 |
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Lanier Clothes | 79 |
| | 107 |
| | 275 |
| | 298 |
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Ben Sherman | 812 |
| | 729 |
| | 2,298 |
| | 2,016 |
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Corporate and Other | 610 |
| | 526 |
| | 1,810 |
| | 1,418 |
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Total depreciation and amortization | $ | 8,963 |
| | $ | 6,477 |
| | $ | 24,721 |
| | $ | 18,199 |
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Operating income (loss) | | | | | | | |
Tommy Bahama | $ | 971 |
| | $ | 3,366 |
| | $ | 46,190 |
| | $ | 45,511 |
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Lilly Pulitzer | 3,947 |
| | 3,528 |
| | 24,535 |
| | 21,949 |
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Lanier Clothes | 3,414 |
| | 2,402 |
| | 7,901 |
| | 8,845 |
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Ben Sherman | (1,873 | ) | | (2,149 | ) | | (10,538 | ) | | (6,352 | ) |
Corporate and Other | (1,908 | ) | | (1,227 | ) | | (9,764 | ) | | (10,927 | ) |
Total operating income | $ | 4,551 |
| | $ | 5,920 |
| | $ | 58,324 |
| | $ | 59,026 |
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Interest expense, net | 1,195 |
| | 959 |
| | 3,173 |
| | 7,876 |
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Loss on repurchase of senior notes | — |
| | — |
| | — |
| | 9,143 |
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Net earnings before income taxes | $ | 3,356 |
| | $ | 4,961 |
| | $ | 55,151 |
| | $ | 42,007 |
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4. | Income Taxes: Income tax expense reflects effective tax rates of 73.5%, 39.3%, 45.0% and 38.0% for the third quarter of fiscal 2013, the third quarter of fiscal 2012, the first nine months of fiscal 2013 and the first nine months of fiscal 2012, respectively. The effective tax rates for all periods were impacted by losses in foreign jurisdictions for which we were not able to recognize an income tax benefit; however, the effective tax rates in the third quarter of fiscal 2012 and the first nine months of fiscal 2012 benefited from certain favorable discrete items, including a reduction in income tax contingency reserves upon the expiration of the corresponding statute of limitations totaling approximately $2.1 million. Additionally, the effective tax rates for each year to date period were favorably impacted by a decrease in the enacted tax rate in the United Kingdom in the second quarter of each year. |
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5. | Accumulated Other Comprehensive Loss: The following tables detail the changes in our accumulated other comprehensive loss by component (in thousands), net of related income taxes, for the periods specified: |
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Third Quarter Fiscal 2013 | Foreign currency translation gain (loss) | Net unrealized gain (loss) on cash flow hedges | Accumulated other comprehensive income (loss) |
Beginning balance | $ | (25,348 | ) | $ | (250 | ) | $ | (25,598 | ) |
Other comprehensive income before reclassifications | 1,266 |
| 36 |
| 1,302 |
|
Amounts reclassified from accumulated other comprehensive income (loss) for gain realized | — |
| (33 | ) | (33 | ) |
Total other comprehensive income, net of taxes | 1,266 |
| 3 |
| 1,269 |
|
Ending balance | $ | (24,082 | ) | $ | (247 | ) | $ | (24,329 | ) |
| | | |
Third Quarter Fiscal 2012 | Foreign currency translation gain (loss) | Net unrealized gain (loss) on cash flow hedges | Accumulated other comprehensive income (loss) |
Beginning balance | $ | (24,059 | ) | $ | 594 |
| $ | (23,465 | ) |
Other comprehensive income (loss) before reclassifications | 1,031 |
| (758 | ) | 273 |
|
Amounts reclassified from accumulated other comprehensive income (loss) for loss realized | — |
| 164 |
| 164 |
|
Total other comprehensive income (loss), net of taxes | 1,031 |
| (594 | ) | 437 |
|
Ending balance | $ | (23,028 | ) | $ | — |
| $ | (23,028 | ) |
| | | |
First Nine Months Fiscal 2013 | Foreign currency translation gain (loss) | Net unrealized gain (loss) on cash flow hedges | Accumulated other comprehensive income (loss) |
Beginning balance | $ | (23,986 | ) | $ | (599 | ) | $ | (24,585 | ) |
Other comprehensive (loss) income before reclassifications | (96 | ) | 407 |
| 311 |
|
Amounts reclassified from accumulated other comprehensive income (loss) for gain realized | — |
| (55 | ) | (55 | ) |
Total other comprehensive (loss) income, net of taxes | (96 | ) | 352 |
| 256 |
|
Ending balance | $ | (24,082 | ) | $ | (247 | ) | $ | (24,329 | ) |
| | | |
First Nine Months Fiscal 2012 | Foreign currency translation gain (loss) | Net unrealized gain (loss) on cash flow hedges | Accumulated other comprehensive income (loss) |
Beginning balance | $ | (24,157 | ) | $ | 483 |
| $ | (23,674 | ) |
Other comprehensive income (loss) before reclassifications | 1,129 |
| (1,164 | ) | (35 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) for loss realized | — |
| 681 |
| 681 |
|
Total other comprehensive income (loss), net of taxes | 1,129 |
| (483 | ) | 646 |
|
Ending balance | $ | (23,028 | ) | $ | — |
| $ | (23,028 | ) |
Substantially all of the amounts reclassified from accumulated comprehensive loss included in the tables above relate to the gain (loss) on forward foreign currency exchange contracts. When forward foreign currency exchange contracts are settled, the resulting gain (loss) is reclassified from accumulated other comprehensive income to inventory in our consolidated balance sheet and then ultimately recognized in net earnings as cost of goods sold as the inventory is sold. The amounts reclassified from accumulated other comprehensive income relating to the gain (loss) on our interest rate swap agreements, if any, are recognized as interest expense in our consolidated statement of earnings.
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6. | Business Combination: On May 6, 2013, we acquired from our former licensee the business operations relating to the Tommy Bahama business in Canada, which was accounted for as a business combination. As part of the acquisition, we reacquired the rights pursuant to the license agreement and we acquired nine Tommy Bahama retail store operations and a wholesale business. As we have not completed our valuation of assets and liabilities acquired, we have not finalized the purchase price allocation related to this acquisition. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to the unaudited condensed consolidated financial statements contained in this report and the consolidated financial statements, notes to consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for fiscal 2012.
OVERVIEW
We generate revenues and cash flow primarily through our design, sourcing, marketing and distribution of branded apparel products bearing the trademarks of our owned lifestyle brands, as well as certain licensed and private label apparel products. We distribute our products through our direct to consumer channels, including our retail stores, e-commerce sites and restaurants, and our wholesale distribution channel, which includes better department stores, specialty stores, national chains, specialty catalogs, mass merchants and Internet retailers. In fiscal 2012, more than 90% of our consolidated net sales were to customers located in the United States, with the remainder primarily being sales of our Ben Sherman® products in the United Kingdom and Europe. We source substantially all of our products through third party manufacturers located outside of the United States.
Our business strategy is to develop and market compelling lifestyle brands and products that evoke a strong emotional response from our target consumers. We strive to exploit the potential of our existing brands and products and, as suitable opportunities arise, we may acquire additional lifestyle brands that we believe fit within our business model. We believe that lifestyle branded products that create an emotional connection with our target consumers can command greater customer loyalty and higher price points at retail, resulting in higher earnings. We also believe a successful lifestyle brand opens up greater opportunities for direct to consumer and licensing operations.
We operate in highly competitive domestic and international markets in which numerous U.S.-based and foreign apparel firms compete. No single apparel firm or small group of apparel firms dominates the apparel industry and our direct competitors vary by operating group and distribution channel. We believe that the principal competitive factors in the apparel industry are the reputation, value and image of brand names; design; consumer preference; price; quality; marketing; and customer service. We believe that our ability to compete successfully in styling and marketing is directly related to our proficiency in foreseeing changes and trends in fashion and consumer preference, and presenting appealing products for consumers. In some instances, a retailer that is our customer may compete directly with us by offering certain of its own competing products, some of which may be sourced directly by our customer, in its own retail stores. Additionally, the apparel industry is cyclical and dependent upon the overall level of discretionary consumer spending, which changes as regional, domestic and international economic conditions change. Often, negative economic conditions have a longer and more severe impact on the apparel and retail industry than the conditions have on other industries.
We believe the global economic conditions and resulting economic uncertainty that have prevailed in recent years continue to impact each of our operating groups, and the apparel industry as a whole. Although some signs of economic improvements exist in the United States, the retail environment remains promotional and economic uncertainty remains. Further, the economies of the United Kingdom and Europe, which are important to our Ben Sherman operating group, continue to struggle more than the economy in the United States. We anticipate that sales of our products may continue to be negatively impacted as long as there is an elevated level of economic uncertainty. Additionally, we were impacted in recent periods by pricing pressures on raw materials, fuel, transportation, labor and other costs necessary for the production and sourcing of apparel products, which continues in fiscal 2013.
We believe that our Tommy Bahama® and Lilly Pulitzer® lifestyle brands have significant opportunities for long-term growth in their direct to consumer businesses through expansion of our retail store operations, as we add additional retail store locations, and increases in same store and e-commerce sales, with e-commerce likely to grow at a faster rate than retail store operations. We also believe that these lifestyle brands provide an opportunity for moderate sales increases in their wholesale businesses in the long-term primarily from our current customers adding to their existing door count and the selective addition of new wholesale customers. We believe that we must continue to invest in our Tommy Bahama and Lilly Pulitzer lifestyle brands in order to take advantage of long-term growth opportunities.
We believe that the tailored clothing environment will continue to be very challenging, with competition and costing pressures negatively impacting operating income in Lanier Clothes in the near term. The Ben Sherman lifestyle brand has recently faced challenges due to our ongoing elevation of the distribution of the brand, the sluggish economic conditions in the United Kingdom and Europe and missteps in the merchandise mix in our own retail stores during the second half of fiscal
2012. We believe that in the long-term Ben Sherman will have opportunities to improve its operating results if the elevation of the brand is successful and the economic conditions in the United Kingdom and Europe improve.
We continue to believe that it is important to maintain a strong balance sheet and ample liquidity. We believe that our positive cash flow from operations coupled with the strength of our balance sheet and liquidity will provide us with ample resources to fund future investments in our lifestyle brands. In the future, we may add additional lifestyle brands to our portfolio, if we identify appropriate targets which meet our investment criteria; however, we believe that we have significant opportunities to appropriately deploy our capital and resources in our existing lifestyle brands.
The following table sets forth our consolidated operating results (in thousands, except per share amounts) for the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012:
|
| | | | | | | |
| First Nine Months Fiscal 2013 | | First Nine Months Fiscal 2012 |
Net sales | $ | 666,733 |
| | $ | 619,296 |
|
Operating income | $ | 58,324 |
| | $ | 59,026 |
|
Net earnings | $ | 30,318 |
| | $ | 26,040 |
|
Net earnings per diluted share | $ | 1.84 |
| | $ | 1.57 |
|
The primary reasons for the higher earnings in the first nine months of fiscal 2013 were:
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• | The first nine months of fiscal 2012 including a charge of $9.1 million related to a loss on the repurchase of senior notes, which resulted from our July 2012 redemption of the remaining $105 million in aggregate principal amount of our 11 3/8% senior notes using borrowings under our U.S. Revolving Credit Agreement, with no loss on repurchase of senior notes in the first nine months of fiscal 2013; |
| |
• | A $4.7 million reduction in interest expense in the first nine months of fiscal 2013 to $3.2 million primarily due to our borrowing at lower interest rates in the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012 as a result of our July 2012 senior notes redemption; |
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• | An increase in net sales in both the Tommy Bahama and Lilly Pulitzer operating groups; |
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• | A $1.6 million reduction in the charge for the change in fair value of contingent consideration; and |
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• | Improved operating results in Corporate and Other. |
These items were partially offset by:
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• | An increase in SG&A for Tommy Bahama and Lilly Pulitzer which was primarily due to the $26.4 million of incremental SG&A associated with the operation of retail stores opened in fiscal 2012 and fiscal 2013 and other SG&A increases to support the growing Tommy Bahama and Lilly Pulitzer businesses; |
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• | A decrease in net sales and operating results at both Lanier Clothes and Ben Sherman; |
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• | A higher effective tax rate in the first nine months of fiscal 2013 primarily due to our inability to recognize the income tax benefit of losses in foreign jurisdictions in both periods, with the impact of the foreign losses in the first nine months of fiscal 2012 being partially offset by the impact of certain favorable discrete items; and |
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• | $1.4 million of charges in the aggregate incurred in the first nine months of fiscal 2013 related to an inventory step-up charge and amortization of intangible assets as a result of our acquisition of the Tommy Bahama operations in Canada in the second quarter of fiscal 2013. |
OPERATING GROUPS
Our business is primarily operated through our four operating groups: Tommy Bahama, Lilly Pulitzer, Lanier Clothes and Ben Sherman. We identify our operating groups based on the way our management organizes the components of our
business for purposes of allocating resources and assessing performance. Our operating group structure reflects a brand-focused management approach, emphasizing operational coordination and resource allocation across each brand’s direct to consumer, wholesale and licensing operations.
Tommy Bahama designs, sources, markets and distributes men’s and women’s sportswear and related products. The target consumers of Tommy Bahama are primarily affluent men and women age 35 and older who embrace a relaxed and casual approach to daily living. Tommy Bahama products can be found in our Tommy Bahama stores within and outside the United States and on our Tommy Bahama e-commerce website, tommybahama.com, as well as in better department stores and independent specialty stores throughout the United States. We also operate Tommy Bahama restaurants and license the Tommy Bahama name for various product categories. As of November 2, 2013, we operated 137 owned Tommy Bahama retail stores, including 90 full-price stores, 14 restaurant-retail locations and 33 outlet stores. This includes 126 owned North America and 11 owned Asia-Pacific retail store locations.
Lilly Pulitzer designs, sources and distributes upscale collections of women’s and girl’s dresses, sportswear and related products. Lilly Pulitzer was originally created in the late 1950’s and is an affluent brand with a heritage and aesthetic based on the Palm Beach resort lifestyle. The brand is somewhat unique among women’s brands in that it has demonstrated multi-generational appeal, including young women in college or recently graduated from college; young mothers with their daughters; and women who are not tied to the academic calendar. Lilly Pulitzer products can be found in our owned Lilly Pulitzer stores, in Lilly Pulitzer Signature Stores and on our Lilly Pulitzer website, lillypulitzer.com, as well as in better department and independent specialty stores. We also license the Lilly Pulitzer name for various product categories. As of November 2, 2013, we operated 22 owned Lilly Pulitzer retail stores.
Lanier Clothes designs, sources and markets branded and private label men’s tailored clothing, including suits, sportcoats, suit separates and dress slacks across a wide range of price points, with the majority of the business at moderate price points. Substantially all of our Lanier Clothes branded products are sold under certain trademarks licensed to us by third parties. Licensed brands included Kenneth Cole®, Dockers®, Geoffrey Beene® and Ike Behar®. Additionally, we design and market products for our owned Billy London®, Arnold Brant® and Oxford Republic® brands. In addition to the branded businesses, which represented 73% of Lanier Clothes net sales in fiscal 2012, Lanier Clothes designs and sources private label tailored clothing products for certain customers. Our Lanier Clothes products are sold to national chains, department stores, specialty stores, specialty catalog retailers and discount retailers throughout the United States.
Ben Sherman is a London-based designer, marketer and distributor of men’s branded sportswear and related products. Ben Sherman was established in 1963 as an edgy shirt brand that was adopted by the “Mods” and has throughout its history been inspired by what is new and current in British art, music, culture and style. The brand has evolved into a British modernist lifestyle brand of apparel targeted at style conscious men ages 25 to 40 in multiple markets throughout the world. Ben Sherman products can be found in better department stores, a variety of independent specialty stores and our owned and licensed Ben Sherman retail stores, as well as on Ben Sherman e-commerce websites. We also license the Ben Sherman name for various product categories. As of November 2, 2013 we operated 17 owned Ben Sherman international and domestic retail stores, including 11 full-price retail stores and six outlets.
Corporate and Other is a reconciling category for reporting purposes and includes our corporate offices, substantially all financing activities, elimination of inter-segment sales, LIFO inventory accounting adjustments, other costs that are not allocated to the operating groups and operations of our other businesses which are not included in our four operating groups. LIFO inventory calculations are made on a legal entity basis which does not correspond to our operating group definitions; therefore, LIFO inventory accounting adjustments are not allocated to operating groups. In addition to our corporate activities and other costs not allocated to our operating groups, Corporate and Other includes our Oxford Golf business and our Lyons, Georgia distribution center operations.
For further information regarding our operating groups, see Note 3 to our unaudited condensed consolidated financial statements included in this report and Part I, Item 1. Business in our Annual Report on Form 10-K for fiscal 2012.
COMPARABLE STORE SALES
We often disclose comparable store sales in order to provide additional information regarding changes in our results of operations between periods. Our disclosures of comparable store sales include sales from full-price stores and our e-commerce sites, excluding sales associated with e-commerce flash clearance sales. We believe that given the similar nature and process of inventory planning, allocation and return policy, as well as our cross-channel marketing and other initiatives, for the direct to consumer channel, the inclusion of our e-commerce sites in the comparable store sales disclosures is a more meaningful way of reporting our comparable store sales results. For our comparable store sales disclosures, we exclude (1) outlet store sales,
warehouse sales and amounts related to e-commerce flash clearance sales, as those sales are used primarily to liquidate end of season inventory, which may vary significantly depending on the level of end of season inventory on hand and generally occurs at lower gross margins than our full-price direct to consumer sales and (2) restaurant sales as we do not believe that the inclusion of restaurant sales is meaningful in assessing our results of operations.
For purposes of our disclosures, we consider a comparable store to be, in addition to our e-commerce sites, a physical full-price retail store that was owned and open as of the beginning of the prior fiscal year and which did not during the relevant periods, and is not within the current fiscal year scheduled to, have (1) a remodel resulting in the store being closed for an extended period of time (which we define as a period of two weeks or longer), (2) a greater than 15% change in the size of the retail space due to expansion, reduction or relocation to a new retail space or (3) a relocation to a new space that was significantly different from the prior retail space. For those stores which are excluded from comparable stores based on the preceding sentence, we treat those stores as new store openings. Generally, a store that is remodeled will continue to be included in our comparable store metrics as a store is not typically closed for a two week period during a remodel. However, a store that is relocated generally will not be included in our comparable store metrics until that store has been open in the relocated space for the entirety of the prior fiscal year as the size or other characteristics of the store typically change significantly from the prior location. Additionally, any stores that were closed during the prior fiscal year or which we plan to close or vacate in the current fiscal year are excluded from the definition of comparable stores.
Definitions and calculations of comparable store sales differ among companies in the apparel retail industry, and therefore comparable store metrics disclosed by us may not be comparable to the metrics disclosed by other companies.
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL 2013 COMPARED TO THIRD QUARTER OF FISCAL 2012
The following table sets forth the specified line items in our unaudited condensed consolidated statements of earnings both in dollars (in thousands) and as a percentage of net sales. The table also sets forth the dollar change and the percentage change of the data as compared to the same period of the prior year. We have calculated all percentages based on actual data, but percentage columns may not add due to rounding.
|
| | | | | | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Net sales | $ | 197,506 |
| 100.0 | % | $ | 181,414 |
| 100.0 | % | $ | 16,092 |
| 8.9 | % |
Cost of goods sold | 92,721 |
| 46.9 | % | 84,592 |
| 46.6 | % | 8,129 |
| 9.6 | % |
Gross profit | 104,785 |
| 53.1 | % | 96,822 |
| 53.4 | % | 7,963 |
| 8.2 | % |
SG&A | 104,434 |
| 52.9 | % | 94,146 |
| 51.9 | % | 10,288 |
| 10.9 | % |
Change in fair value of contingent consideration | 68 |
| — |
| 600 |
| 0.3 | % | (532 | ) | (88.7 | )% |
Royalties and other operating income | 4,268 |
| 2.2 | % | 3,844 |
| 2.1 | % | 424 |
| 11.0 | % |
Operating income | 4,551 |
| 2.3 | % | 5,920 |
| 3.3 | % | (1,369 | ) | (23.1 | )% |
Interest expense, net | 1,195 |
| 0.6 | % | 959 |
| 0.5 | % | 236 |
| 24.6 | % |
Net earnings before income taxes | 3,356 |
| 1.7 | % | 4,961 |
| 2.7 | % | (1,605 | ) | (32.4 | )% |
Income taxes | 2,467 |
| 1.2 | % | 1,951 |
| 1.1 | % | 516 |
| 26.4 | % |
Net earnings | $ | 889 |
| 0.5 | % | $ | 3,010 |
| 1.7 | % | $ | (2,121 | ) | (70.5 | )% |
The discussion and tables below compare certain line items included in our statements of earnings for the third quarter of fiscal 2013 to the third quarter of fiscal 2012. Each dollar and percentage change provided reflects the change between these periods unless indicated otherwise. Each dollar and share amount included in the tables is in thousands except for per share amounts. Individual line items of our consolidated statements of earnings may not be directly comparable to those of our competitors, as classification of certain expenses may vary by company.
Net Sales
|
| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Tommy Bahama | $ | 113,528 |
| $ | 103,193 |
| $ | 10,335 |
| 10.0 | % |
Lilly Pulitzer | 30,326 |
| 26,939 |
| 3,387 |
| 12.6 | % |
Lanier Clothes | 30,144 |
| 27,180 |
| 2,964 |
| 10.9 | % |
Ben Sherman | 18,627 |
| 19,781 |
| (1,154 | ) | (5.8 | )% |
Corporate and Other | 4,881 |
| 4,321 |
| 560 |
| 13.0 | % |
Total net sales | $ | 197,506 |
| $ | 181,414 |
| $ | 16,092 |
| 8.9 | % |
Consolidated net sales increased $16.1 million, or 8.9%, in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 primarily due to the net sales increases at Tommy Bahama, Lilly Pulitzer and Lanier Clothes, which were partially offset by decreased net sales at Ben Sherman, each as discussed below. Further, as consolidated direct to consumer sales grew and consolidated wholesale sales were comparable between the two periods, during the third quarter of fiscal 2013, net sales in the direct to consumer channel of distribution represented a greater percentage of net sales as compared to the third quarter of fiscal 2012, as presented below:
|
| | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 |
Full-price retail stores and outlets | 36 | % | 33 | % |
E-commerce | 11 | % | 10 | % |
Restaurant | 6 | % | 6 | % |
Wholesale | 47 | % | 51 | % |
Total | 100 | % | 100 | % |
Tommy Bahama:
The Tommy Bahama sales increase of $10.3 million, or 10.0%, was primarily driven by (1) a net sales increase of $8.1 million associated with domestic retail stores and outlet stores opened during fiscal 2012 and fiscal 2013 and Canadian retail stores acquired during the second quarter of fiscal 2013, (2) a $2.9 million, or 8%, increase in comparable store sales, which includes full price retail stores and e-commerce sales, to $40.2 million in the third quarter of fiscal 2013 compared to $37.3 million in the third quarter of fiscal 2012, (3) a net sales increase of $1.8 million attributable to the expansion of our Tommy Bahama operations in the Asia-Pacific region and (4) a net sales increase of $1.1 million in our North American restaurant operations. These increases in sales were partially offset by a $3.4 million decrease in North American wholesale sales during the third quarter of fiscal 2013, after giving effect to our acquisition of the Tommy Bahama operations in Canada during the second quarter of fiscal 2013. Tommy Bahama’s apparel unit sales increased by 4.9% driven by higher volume in the direct to consumer distribution channel which was partially offset by lower volume in the wholesale distribution channel, and the average selling price per apparel unit increased by 4.6% as sales in the direct to consumer channel of distribution, which generally have a higher sales price per unit than wholesale sales, represented a greater proportion of Tommy Bahama net sales in the third quarter of fiscal 2013. The following table presents the proportion of net sales by distribution channel for Tommy Bahama for each period presented:
|
| | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 |
Full-price retail stores and outlets | 50 | % | 46 | % |
E-commerce | 8 | % | 7 | % |
Restaurant | 11 | % | 10 | % |
Wholesale | 31 | % | 37 | % |
Total | 100 | % | 100 | % |
Lilly Pulitzer:
The Lilly Pulitzer sales increase of $3.4 million, or 12.6%, was primarily driven by (1) $7.6 million of e-commerce flash sales in the third quarter of fiscal 2013, which represented a $1.5 million increase from the third quarter of fiscal 2012, (2) a $1.1 million increase in wholesale sales during the third quarter of fiscal 2013 and (3) a net sales increase of $1.0 million associated with retail stores opened in fiscal 2012 and fiscal 2013. These increases in net sales were partially offset by a 2% decrease in comparable store sales to $8.7 million in the third quarter of fiscal 2013 compared to $8.9 million in the third quarter of fiscal 2012. Lilly Pulitzer’s apparel unit sales decreased by 2.0% while the average selling price per unit increased by 14.9%. The decrease in units sold was primarily due to a decrease in units of certain lower priced product items including accessories. The increased selling price per unit primarily resulted from the higher proportion of direct to consumer sales in the third quarter of fiscal 2013 and the higher proportion of sales of higher priced products in the current year, as accessories represented a lower proportion of sales. The following table presents the proportion of net sales by distribution channel for Lilly Pulitzer for each period presented:
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| | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 |
Full-price retail stores and warehouse sales | 26 | % | 26 | % |
E-commerce | 37 | % | 36 | % |
Wholesale | 37 | % | 38 | % |
Total | 100 | % | 100 | % |
Lanier Clothes:
The increase in net sales for Lanier Clothes of $3.0 million, or 10.9%, was primarily due to the increase in sales in the branded business, which was partially offset by a decrease in private label sales. The increase in sales was primarily due to the timing of wholesale orders, with some sales shifting from the second quarter to the third quarter in fiscal 2013, and certain new branded programs. Unit sales increased 13.8% driven by the increase in the branded sales. A decrease in average selling price per unit of 2.5% was primarily due to (1) a change in product mix, as more products sold during the third quarter of fiscal 2013 were lower price per unit items, including pants and separates, and (2) the continued pricing pressures in the tailored clothing business.
Ben Sherman:
Net sales for Ben Sherman decreased by $1.2 million, or 5.8%, in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012, primarily due to a $1.4 million decline in Ben Sherman wholesale sales resulting from the exit from certain wholesale customers, particularly in the United States, with direct to consumer net sales increasing slightly, in part due to higher comparable store sales.
During the third quarter of fiscal 2013, Ben Sherman experienced a reduction in unit volume of 7.3% primarily attributable to our exit from certain wholesale accounts in the United States. The lower United States wholesale unit sales that negatively impacted sales were partially offset by certain wholesale sales in the United Kingdom shifting from the second quarter of fiscal 2013 to the third quarter of fiscal 2013 and higher sales in the direct to consumer channel of distribution. The reduction in units sold was partially offset by an increase in the average selling price per unit of 1.5%, reflecting the higher proportion of direct to consumer sales in the third quarter of fiscal 2013. The following table presents the proportion of net sales by distribution channel for Ben Sherman for each period presented:
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| | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 |
Wholesale | 61 | % | 65 | % |
Direct to consumer | 39 | % | 35 | % |
Total | 100 | % | 100 | % |
Corporate and Other:
Corporate and Other net sales primarily consisted of the net sales of our Oxford Golf business and our Lyons, Georgia distribution center. The $0.6 million increase in net sales for Corporate and Other was primarily driven by higher net sales in our Oxford Golf business during the third quarter of fiscal 2013.
Gross Profit
The table below presents gross profit by operating group and in total for the third quarter of fiscal 2013 and the third quarter of fiscal 2012 as well as the change between those two periods. Our gross profit and gross margin, which is calculated as gross profit divided by net sales, may not be directly comparable to those of our competitors, as statement of operations classification of certain expenses may vary by company.
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| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Tommy Bahama | $ | 67,726 |
| $ | 61,162 |
| $ | 6,564 |
| 10.7 | % |
Lilly Pulitzer | 17,444 |
| 15,970 |
| 1,474 |
| 9.2 | % |
Lanier Clothes | 8,513 |
| 7,396 |
| 1,117 |
| 15.1 | % |
Ben Sherman | 9,078 |
| 9,906 |
| (828 | ) | (8.4 | )% |
Corporate and Other | 2,024 |
| 2,388 |
| (364 | ) | (15.2 | )% |
Total gross profit | $ | 104,785 |
| $ | 96,822 |
| $ | 7,963 |
| 8.2 | % |
LIFO credit included in Corporate and Other | $ | (210 | ) | $ | (426 | ) | |
| |
|
Inventory step-up charge included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 424 |
| $ | — |
| | |
The increase in consolidated gross profit was primarily driven by the higher net sales in Tommy Bahama, Lilly Pulitzer and Lanier Clothes partially offset by the lower net sales in Ben Sherman, each as discussed above, as well as the unfavorable impact of purchase accounting and LIFO accounting. In addition to the impact of changes in net sales, gross profit on a consolidated basis and for each operating group was also impacted by the changes in gross margin by operating group, as discussed below. The table below presents gross margin by operating group and in total for the third quarter of fiscal 2013 and the third quarter of fiscal 2012.
|
| | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 |
Tommy Bahama | 59.7 | % | 59.3 | % |
Lilly Pulitzer | 57.5 | % | 59.3 | % |
Lanier Clothes | 28.2 | % | 27.2 | % |
Ben Sherman | 48.7 | % | 50.1 | % |
Corporate and Other | 41.5 | % | 55.3 | % |
Consolidated gross margin | 53.1 | % | 53.4 | % |
On a consolidated basis, the decrease in gross margin from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 was in part due to the net impact of the LIFO accounting and the inventory step-up charge in the third quarter of fiscal 2013. After removing the impact of these items, consolidated gross margins were comparable between periods as the changes in consolidated sales mix and the various impacts of changes of gross margins within our operating groups generally offset one another despite direct to consumer sales representing a greater percentage of consolidated net sales.
The higher gross margin at Tommy Bahama was primarily due to the change in the proportion of sales in each distribution channel as sales in the direct to consumer distribution channel, which typically have higher gross margins than the wholesale distribution channel, represented a greater proportion of Tommy Bahama’s net sales in the third quarter of fiscal 2013. The change in sales mix towards the direct to consumer channel of distribution offset the negative impact of $0.4 million of purchase accounting charges recognized in cost of goods sold in the third quarter of fiscal 2013 related to the acquisition of the previously licensed business in Canada. We do not anticipate any charges for inventory step-up beyond the third quarter of fiscal 2013 related to this acquisition.
The decrease in gross margin for Lilly Pulitzer from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 was primarily driven by (1) a larger e-commerce flash clearance sale in the third quarter of fiscal 2013 than in the prior year, with these sales typically having gross margins more in line with wholesale sales than direct to consumer sales, (2) a change in sales mix with sportswear, which generally has lower gross margins, representing a greater proportion of Lilly Pulitzer sales in the third quarter of fiscal 2013, (3) more promotions in our Lilly Pulitzer direct to consumer operations, including our e-commerce operations offering free shipping on a more frequent basis, and (4) higher off-price wholesale sales in the third quarter of fiscal 2013 due to the timing of certain inventory liquidation.
The increase in gross margin at Lanier Clothes was primarily the result of a change in the sales mix within Lanier Clothes. We anticipate that gross margins in the short-term may decrease primarily due to a change in sales mix.
The decrease in gross margin at Ben Sherman reflects a higher proportion of off-price sales in the wholesale business, which exceeded the impact of a greater proportion of net sales in the direct to consumer channel of distribution and higher gross margins within the Ben Sherman direct to consumer operations. The higher proportion of off-price wholesale sales were necessary to appropriately manage inventory levels that resulted from the merchandising missteps which occurred in the second half of fiscal 2012 and impacted our product assortment into the first half of fiscal 2013.
The gross profit in Corporate and Other in each period primarily reflects (1) the gross profit of our Oxford Golf and Lyons, Georgia distribution center operations, (2) the impact of LIFO accounting adjustments and (3) the impact of certain consolidating adjustments. Gross margins for the Oxford Golf business declined in the third quarter of fiscal 2013, and there was a net unfavorable impact of LIFO accounting between the two periods. The LIFO accounting credit was $0.2 million in the third quarter of fiscal 2013 compared to a credit of $0.4 million in the third quarter of fiscal 2012.
SG&A
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| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
SG&A | $ | 104,434 |
| $ | 94,146 |
| $ | 10,288 |
| 10.9 | % |
SG&A (as % of net sales) | 52.9 | % | 51.9 | % | |
| |
|
Amortization of intangible assets included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 329 |
| $ | — |
| | |
The increase in SG&A was primarily due to (1) $7.9 million of incremental SG&A in the third quarter of fiscal 2013 associated with operating additional Tommy Bahama retail stores and restaurants and Lilly Pulitzer stores and (2) higher costs, consisting primarily of employment expenses, to support the growing Tommy Bahama and Lilly Pulitzer businesses. The incremental SG&A costs of operating additional Tommy Bahama retail stores and restaurants include incremental costs associated with North American and Asia-Pacific locations. The increases in SG&A for Tommy Bahama and Lilly Pulitzer were partially offset by SG&A reductions in Ben Sherman.
SG&A included $0.5 million of amortization of intangible assets in the third quarter of fiscal 2013 compared to $0.3 million in the third quarter of fiscal 2012 with the increase being the $0.3 million of amortization associated with the intangible assets acquired as part of the acquisition of the previously licensed Tommy Bahama business operations in Canada. We anticipate that amortization of intangible assets for fiscal 2013 will be approximately $1.8 million, with approximately $1.0 million of the amortization reflecting nine months of amortization of the intangible assets acquired as part of the Tommy Bahama Canada acquisition from the date of acquisition through the end of the 2013 fiscal year. However, the amount of amortization for the full year may change as we finalize our purchase price allocation associated with the Tommy Bahama Canada acquisition.
Change in fair value of contingent consideration
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| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Change in fair value of contingent consideration | $ | 68 |
| $ | 600 |
| $ | (532 | ) | (88.7 | )% |
Change in fair value of contingent consideration reflects the current period impact of the change in the fair value of the contingent consideration obligation associated with the Lilly Pulitzer acquisition, as discussed in our Annual Report on Form 10-K for fiscal 2012. The decrease in change in fair value of contingent consideration in the third quarter of fiscal 2013 was primarily due to the significant increase in the fair value of the contingent consideration recognized in the fourth quarter of fiscal 2012 which resulted from our assessment of greater certainty that the full amount of the contingent consideration will be paid in the future. We anticipate that the charge for the change in the fair value of the contingent consideration for the full 2013 fiscal year will be $0.3 million.
Royalties and other operating income
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| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Royalties and other operating income | $ | 4,268 |
| $ | 3,844 |
| $ | 424 |
| 11.0 | % |
Royalties and other operating income in the third quarter of fiscal 2013 primarily reflect income received from third parties from the licensing of our Tommy Bahama, Ben Sherman and Lilly Pulitzer brands. The increase in royalties and other income was primarily due to increased royalty income for Tommy Bahama and Lilly Pulitzer and higher other income in Corporate and Other partially offset by lower royalty income for Ben Sherman.
Operating income (loss)
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| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Tommy Bahama | $ | 971 |
| $ | 3,366 |
| $ | (2,395 | ) | (71.2 | )% |
Lilly Pulitzer | 3,947 |
| 3,528 |
| 419 |
| 11.9 | % |
Lanier Clothes | 3,414 |
| 2,402 |
| 1,012 |
| 42.1 | % |
Ben Sherman | (1,873 | ) | (2,149 | ) | 276 |
| 12.8 | % |
Corporate and Other | (1,908 | ) | (1,227 | ) | (681 | ) | (55.5 | )% |
Total operating income | $ | 4,551 |
| $ | 5,920 |
| $ | (1,369 | ) | (23.1 | )% |
LIFO credit included in Corporate and Other | $ | (210 | ) | $ | (426 | ) | |
| |
|
Inventory step-up charge included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 424 |
| $ | — |
| | |
Amortization of intangible assets included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 329 |
| $ | — |
| | |
Change in fair value of contingent consideration included in Lilly Pulitzer | $ | 68 |
| $ | 600 |
| |
| |
|
Operating income, on a consolidated basis, was $4.6 million in the third quarter of fiscal 2013 compared to $5.9 million in the third quarter of fiscal 2012. The 23.1% decrease in operating income was primarily due to the lower operating results of Tommy Bahama and Corporate and Other partially offset by improved operating results in Lanier Clothes, Lilly Pulitzer and Ben Sherman. Changes in operating income (loss) by operating group are discussed below.
Tommy Bahama:
|
| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Net sales | $ | 113,528 |
| $ | 103,193 |
| $ | 10,335 |
| 10.0 | % |
Gross margin | 59.7 | % | 59.3 | % | |
| |
|
Operating income (loss) | $ | 971 |
| $ | 3,366 |
| $ | (2,395 | ) | (71.2 | )% |
Operating income as % of net sales | 0.9 | % | 3.3 | % | |
| |
|
Inventory step-up charge included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 424 |
| $ | — |
| | |
Amortization of intangible assets included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 329 |
| $ | — |
| | |
The decrease in operating income for Tommy Bahama was primarily attributable to the higher SG&A associated with operating additional retail stores during the third quarter, which is not a strong direct to consumer sales quarter for Tommy Bahama, and the impact of the $0.4 million of inventory step-up charge and $0.3 million of amortization of intangible assets associated with Tommy Bahama Canada. The increased SG&A was primarily associated with (1) operating additional North American and Asia-Pacific retail stores and restaurants in fiscal 2013 which resulted in $7.0 million of incremental SG&A and (2) higher costs to support the growing Tommy Bahama business. These items that negatively impacted operating income were partially offset by higher net sales, gross margin and royalty income, each as discussed above.
Due to seasonality, certain of our Tommy Bahama retail stores typically do not earn a profit during the third quarter of our fiscal year. As we add more retail stores in the future, those additional stores may further decrease Tommy Bahama's operating results during the third quarter. Thus, as Tommy Bahama's retail store operations continue to expand to represent a larger proportion of the Tommy Bahama business, the operating results gap between the strong first, second and fourth quarters and the smaller third quarter may widen.
The third quarter of fiscal 2013 included an operating loss of $2.5 million related to our Tommy Bahama Asia-Pacific expansion compared to an operating loss of $2.6 million in the third quarter of fiscal 2012. We anticipate that in the fourth quarter the operating losses related to our Asia-Pacific operations will not be as significant as the prior year; however, we believe that the operating loss for fiscal 2013 for these operations will be approximately $13 million.
Lilly Pulitzer:
|
| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Net sales | $ | 30,326 |
| $ | 26,939 |
| $ | 3,387 |
| 12.6 | % |
Gross margin | 57.5 | % | 59.3 | % | |
| |
|
Operating income | $ | 3,947 |
| $ | 3,528 |
| $ | 419 |
| 11.9 | % |
Operating income as % of net sales | 13.0 | % | 13.1 | % | |
| |
|
Change in fair value of contingent consideration included in Lilly Pulitzer | $ | 68 |
| $ | 600 |
| |
| |
|
The increase in operating income in Lilly Pulitzer for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 was primarily due to the higher net sales for Lilly Pulitzer, a $0.5 million lower charge for the change in fair value of contingent consideration and higher royalty income, each as discussed above. These items that favorably impacted operating income were offset by lower gross margin and increased SG&A. The increased SG&A was primarily associated with (1) higher costs, consisting primarily of employment expenses, to support the growing Lilly Pulitzer business and (2) $0.9 million of incremental SG&A associated with the cost of operating additional retail stores during fiscal 2013.
Lanier Clothes:
|
| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Net sales | $ | 30,144 |
| $ | 27,180 |
| $ | 2,964 |
| 10.9 | % |
Gross margin | 28.2 | % | 27.2 | % | |
| |
|
Operating income | $ | 3,414 |
| $ | 2,402 |
| $ | 1,012 |
| 42.1 | % |
Operating income as % of net sales | 11.3 | % | 8.8 | % | |
| |
|
The increase in operating income for Lanier Clothes was primarily the result of the higher sales and higher gross margins, as discussed above, with only a nominal increase in SG&A.
Ben Sherman:
|
| | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Net sales | 18,627 |
| 19,781 |
| (1,154 | ) | (5.8 | )% |
Gross margin | 48.7 | % | 50.1 | % | |
| |
|
Operating loss | (1,873 | ) | (2,149 | ) | 276 |
| 12.8 | % |
Operating loss as % of net sales | (10.1 | )% | (10.9 | )% | |
| |
|
The improved operating results for Ben Sherman were primarily due to lower SG&A in the third quarter of fiscal 2013 as compared to the prior year. The reduction in SG&A exceeded the impact of lower sales, lower gross margins and lower royalty income, each as discussed above.
Corporate and Other:
|
| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Net sales | $ | 4,881 |
| $ | 4,321 |
| $ | 560 |
| 13.0 | % |
Operating loss | $ | (1,908 | ) | $ | (1,227 | ) | $ | (681 | ) | (55.5 | )% |
LIFO credit included in Corporate and Other | $ | (210 | ) | $ | (426 | ) | |
| |
|
The Corporate and Other operating results decreased by $0.7 million from a loss of $1.2 million in the third quarter of fiscal 2012 to a loss of $1.9 million in the third quarter of fiscal 2013. The lower operating results were primarily due to higher Corporate and Other SG&A, including increases in the growing Oxford Golf business, and the $0.2 million net unfavorable impact of LIFO accounting between the two periods partially offset by (1) the higher sales of the Oxford Golf and Lyons, Georgia distribution center operations and (2) higher other income in Corporate and Other.
Interest expense, net
|
| | | | | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Interest expense, net | $ | 1,195 |
| $ | 959 |
| $ | 236 |
| 24.6 | % |
Interest expense for the third quarter of fiscal 2013 increased from the prior year primarily due to our higher levels of borrowings in the third quarter of fiscal 2013 compared to the levels of borrowings in the third quarter of fiscal 2012. During the third quarter of fiscal 2013 and the third quarter of fiscal 2012, substantially all of our borrowings were under our U.S. Revolving Credit Agreement. We anticipate interest expense for the fourth quarter of fiscal 2013 will be approximately $1.1 million.
Income taxes
|
| | | | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 | $ Change | % Change |
Income taxes | 2,467 |
| 1,951 |
| 516 |
| 26.4 | % |
Effective tax rate | 73.5 | % | 39.3 | % | |
| |
|
Income tax expense for the third quarter of fiscal 2013 increased compared to the third quarter of fiscal 2012 due to an increase in the effective tax rate. The effective tax rates for both periods reflect the impact of foreign losses for which we are not able to recognize an income tax benefit as well as changes to the projected earnings by jurisdiction for the fiscal year. The effective tax rate for the third quarter of fiscal 2012 was also impacted by certain favorable discrete items, including a reduction in income tax contingency reserves upon the expiration of the corresponding statute of limitations totaling approximately $2.1 million, which offset the unfavorable impact of the foreign losses. We anticipate that our effective tax rate for the full year fiscal 2013 will be approximately 43%. Our effective tax rate in future years will be dependent upon our ability to recognize an income tax benefit for foreign losses and the amount of taxable income (loss) in foreign jurisdictions in future years, among other factors.
Net earnings
|
| | | | | | |
| Third Quarter Fiscal 2013 | Third Quarter Fiscal 2012 |
Net earnings | $ | 889 |
| $ | 3,010 |
|
Net earnings per diluted share | $ | 0.05 |
| $ | 0.18 |
|
Weighted average shares outstanding - diluted | 16,435 |
| 16,591 |
|
The lower net earnings for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 were primarily due to (1) lower operating results for Tommy Bahama and Corporate and Other and (2) a higher effective tax rate which were partially offset by improved operating results for Lanier Clothes, Lilly Pulitzer and Ben Sherman.
FIRST NINE MONTHS OF FISCAL 2013 COMPARED TO FIRST NINE MONTHS OF FISCAL 2012
The following table sets forth the specified line items in our unaudited condensed consolidated statements of earnings both in dollars (in thousands) and as a percentage of net sales. The table also sets forth the dollar change and the percentage change of the data as compared to the same period of the prior year. We have calculated all percentages based on actual data, but percentage columns may not add due to rounding.
|
| | | | | | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Net sales | $ | 666,733 |
| 100.0 | % | $ | 619,296 |
| 100.0 | % | 47,437 |
| 7.7 | % |
Cost of goods sold | 291,024 |
| 43.6 | % | 274,980 |
| 44.4 | % | 16,044 |
| 5.8 | % |
Gross profit | 375,709 |
| 56.4 | % | 344,316 |
| 55.6 | % | 31,393 |
| 9.1 | % |
SG&A | 329,883 |
| 49.5 | % | 295,656 |
| 47.7 | % | 34,227 |
| 11.6 | % |
Change in fair value of contingent consideration | 206 |
| — |
| 1,800 |
| 0.3 | % | (1,594 | ) | (88.6 | )% |
Royalties and other operating income | 12,704 |
| 1.9 | % | 12,166 |
| 2.0 | % | 538 |
| 4.4 | % |
Operating income | 58,324 |
| 8.7 | % | 59,026 |
| 9.5 | % | (702 | ) | (1.2 | )% |
Interest expense, net | 3,173 |
| 0.5 | % | 7,876 |
| 1.3 | % | (4,703 | ) | (59.7 | )% |
Loss on repurchase of senior notes | — |
| — |
| 9,143 |
| 1.5 | % | (9,143 | ) | (100.0 | )% |
Net earnings before income taxes | 55,151 |
| 8.3 | % | 42,007 |
| 6.8 | % | 13,144 |
| 31.3 | % |
Income taxes | 24,833 |
| 3.7 | % | 15,967 |
| 2.6 | % | 8,866 |
| 55.5 | % |
Net earnings | $ | 30,318 |
| 4.5 | % | $ | 26,040 |
| 4.2 | % | $ | 4,278 |
| 16.4 | % |
The discussion and tables below compare certain line items included in our statements of earnings for the first nine months of fiscal 2013 to the first nine months of fiscal 2012. Each dollar and percentage change provided reflects the change between these periods unless indicated otherwise. Each dollar and share amount included in the tables is in thousands except for per share amounts. Individual line items of our consolidated statements of earnings may not be directly comparable to those of our competitors, as classification of certain expenses may vary by company.
Net Sales
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Tommy Bahama | $ | 417,174 |
| $ | 371,790 |
| $ | 45,384 |
| 12.2 | % |
Lilly Pulitzer | 107,939 |
| 93,475 |
| 14,464 |
| 15.5 | % |
Lanier Clothes | 79,719 |
| 84,995 |
| (5,276 | ) | (6.2 | )% |
Ben Sherman | 47,138 |
| 57,234 |
| (10,096 | ) | (17.6 | )% |
Corporate and Other | 14,763 |
| 11,802 |
| 2,961 |
| 25.1 | % |
Total net sales | $ | 666,733 |
| $ | 619,296 |
| $ | 47,437 |
| 7.7 | % |
Consolidated net sales increased $47.4 million, or 7.7%, in the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012 primarily due to the net sales increases at Tommy Bahama and Lilly Pulitzer, which were partially offset by decreased net sales at Lanier Clothes and Ben Sherman, each as discussed below. Further, as direct to consumer sales grew at a faster rate than wholesales sales, net sales in the direct to consumer channel of distribution represented a greater percentage of consolidated net sales as compared to the first nine months of fiscal 2012, as presented below:
|
| | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 |
Full-price retail stores and outlets | 39 | % | 36 | % |
E-commerce | 11 | % | 9 | % |
Restaurant | 7 | % | 7 | % |
Wholesale | 43 | % | 48 | % |
Total | 100 | % | 100 | % |
Tommy Bahama:
The Tommy Bahama sales increase of $45.4 million, or 12.2%, was primarily driven by (1) a net sales increase of $26.3 million associated with domestic retail stores and outlet stores opened during fiscal 2012 and fiscal 2013 and Canadian retail store operations acquired during the second quarter of fiscal 2013, (2) a $16.9 million, or 11%, increase in comparable store sales to $174.0 million in the first nine months of fiscal 2013 compared to $157.1 million in the first nine months of fiscal 2012, (3) a net sales increase of $6.3 million attributable to the expansion of our Tommy Bahama operations in the Asia-Pacific region and (4) an increase in North American restaurant sales. These increases in sales were partially offset by (1) a $6.4 million sales decrease in the North American wholesale business, which included a shift in the timing of shipments, in part due to the impact of the 53rd week in fiscal 2012, which resulted in more spring 2013 product being shipped during fiscal 2012 as compared to the prior year, and reductions in orders from certain wholesale customers, and (2) lower sales in outlet stores that were opened prior to fiscal 2012. Tommy Bahama’s apparel unit sales increased by 8.0%, driven by higher volume in the direct to consumer distribution channel partially offset by lower volume in the wholesale distribution channel, and the average selling price per apparel unit increased by 4.1% as sales in the direct to consumer channel of distribution, which generally have a higher sales price per unit than wholesale sales, represented a greater proportion of Tommy Bahama net sales in the first nine months of fiscal 2013. The following table presents the proportion of net sales by distribution channel for Tommy Bahama for each period presented:
|
| | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 |
Full-price retail stores and outlets | 50 | % | 47 | % |
E-commerce | 11 | % | 9 | % |
Restaurant | 11 | % | 11 | % |
Wholesale | 28 | % | 33 | % |
Total | 100 | % | 100 | % |
Lilly Pulitzer:
The Lilly Pulitzer sales increase of $14.5 million, or 15.5%, was primarily driven by (1) a net sales increase of $5.6 million associated with retail stores opened in fiscal 2012 and fiscal 2013, (2) a $3.1 million, or 8%, increase in comparable store sales to $40.3 million in the first nine months of fiscal 2013 compared to $37.2 million in the first nine months of fiscal 2012, (3) a wholesale sales increase of $4.3 million reflecting an increase in full-price and off-price wholesale sales and (4) $2.0 million of higher e-commerce flash clearance sales and warehouse sales in the first nine months of fiscal 2013. Lilly Pulitzer’s apparel unit sales increased by 1.3% while the average selling price per apparel unit increased by 13.9%. The increase in units sold was driven by increased units in all channels of distribution. The increased selling price per unit primarily resulted from a higher proportion of direct to consumer sales in the first nine months of fiscal 2013 as well as a change in product mix. The following table presents the proportion of net sales by distribution channel for Lilly Pulitzer for each period presented:
|
| | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 |
Full-price retail stores and warehouse sales | 32 | % | 31 | % |
E-commerce | 24 | % | 22 | % |
Wholesale | 44 | % | 47 | % |
Total | 100 | % | 100 | % |
Lanier Clothes:
The decrease in net sales for Lanier Clothes of $5.3 million, or 6.2%, was due to a decrease in sales in both the branded and private label businesses. The decrease in sales was primarily due to the timing of wholesale orders, as some sales that have historically occurred in the first half shifted into the fourth quarter of fiscal 2012, reduced volume in or exit from certain programs, and softness in the suits business of certain of our customers. These factors resulted in a 1.4% decrease in unit sales. A decrease in average selling price per unit of 4.9% was primarily due to a change in product mix, with certain lower
price items, including pants and separates, representing a larger proportion of the net sales, as well as continued pricing pressures in the tailored clothing business.
Ben Sherman:
Net sales for Ben Sherman decreased by $10.1 million, or 17.6%, in the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012, due to a $10.3 million decline in wholesale sales, with direct to consumer net sales increasing between the two periods as sales at the stores opened in fiscal 2012 offset comparable store sales decreases.
During the first nine months of fiscal 2013, Ben Sherman experienced a reduction in unit volume of 21.1% primarily attributable to reductions in our wholesale business resulting from (1) our exit from certain wholesale accounts in the United Kingdom and the United States, (2) the impact of fiscal 2012 being a 53 week year resulting in some sales that typically occur in the first quarter of a year shifting into the fourth quarter of fiscal 2012 and (3) the difficult economic conditions that have persisted in the United Kingdom and Europe. The direct to consumer operations of Ben Sherman continued to be negatively impacted by the missteps in Ben Sherman’s merchandise assortment planning that began in the second half of fiscal 2012, and, particularly in the current economic environment, resulted in too much product offering in styles at the higher end of the price range, which gave rise to more promotions in our retail stores to sell inventory on hand.
The reduction in units sold was partially offset by an increase in the average selling price per unit of 4.4%, reflecting the larger proportion of direct to consumer sales in the first nine months of fiscal 2013. The change in sales mix that positively impacted average selling price per unit was partially offset by a 2.8% unfavorable foreign currency translation change in the average exchange rates between the two periods. The following table presents the proportion of net sales by distribution channel for Ben Sherman for each period presented:
|
| | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 |
Wholesale | 56 | % | 64 | % |
Direct to consumer | 44 | % | 36 | % |
Total | 100 | % | 100 | % |
Corporate and Other:
Corporate and Other net sales primarily consisted of the net sales of our Oxford Golf and our Lyons, Georgia distribution center businesses. The increase in the net sales for Corporate and Other was primarily driven by higher net sales in our Oxford Golf business during the first nine months of fiscal 2013.
Gross Profit
The table below presents gross profit by operating group and in total for the first nine months of fiscal 2013 and the first nine months of fiscal 2012 as well as the change between those two periods. Our gross profit and gross margin, which is calculated as gross profit divided by net sales, may not be directly comparable to those of our competitors, as statement of operations classification of certain expenses may vary by company.
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Tommy Bahama | $ | 257,305 |
| $ | 226,259 |
| $ | 31,046 |
| 13.7 | % |
Lilly Pulitzer | 66,896 |
| 59,367 |
| 7,529 |
| 12.7 | % |
Lanier Clothes | 22,770 |
| 24,291 |
| (1,521 | ) | (6.3 | )% |
Ben Sherman | 22,974 |
| 29,656 |
| (6,682 | ) | (22.5 | )% |
Corporate and Other | 5,764 |
| 4,743 |
| 1,021 |
| 21.5 | % |
Total gross profit | $ | 375,709 |
| $ | 344,316 |
| $ | 31,393 |
| 9.1 | % |
LIFO charge (credit) included in Corporate and Other | $ | 135 |
| $ | (461 | ) | |
| |
|
Inventory step-up charge included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 707 |
| $ | — |
| | |
The increase in consolidated gross profit was primarily due to higher net sales in Tommy Bahama and Lilly Pulitzer partially offset by the lower sales in Ben Sherman and Lanier Clothes, each as discussed above, as well as the net unfavorable impact of LIFO accounting and the inventory step-up charge. In addition to the impact of changes in net sales, gross profit on a consolidated basis and for each operating group were impacted by the changes in gross margin by operating group, as discussed below. The table below presents gross margin by operating group and in total for the first nine months of fiscal 2013 and the first nine months of fiscal 2012.
|
| | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 |
Tommy Bahama | 61.7 | % | 60.9 | % |
Lilly Pulitzer | 62.0 | % | 63.5 | % |
Lanier Clothes | 28.6 | % | 28.6 | % |
Ben Sherman | 48.7 | % | 51.8 | % |
Corporate and Other | 39.0 | % | 40.2 | % |
Consolidated gross margin | 56.4 | % | 55.6 | % |
On a consolidated basis, the increase in gross margins from the first nine months of fiscal 2012 to the first nine months of fiscal 2013 was primarily due to a change in the sales mix. The change in sales mix in the first nine months of fiscal 2013 included (1) Tommy Bahama and Lilly Pulitzer, which typically have higher gross margins than our other operating groups, representing a greater proportion of our consolidated net sales and (2) direct to consumer sales, which generally have higher gross margins than wholesale sales, making up a larger proportion of the Tommy Bahama, Lilly Pulitzer and Ben Sherman sales. These items, which positively impacted gross margins, were partially offset by the negative impact of more significant off-price sales and promotions at Ben Sherman during the first nine months of fiscal 2013 and the $0.7 million impact of the inventory step-up charge in the first nine months of fiscal 2013 associated with the Tommy Bahama Canada acquisition and the $0.6 million net unfavorable impact of LIFO accounting.
The higher gross margin at Tommy Bahama was primarily due to the change in the proportion of sales in each distribution channel as sales in the direct to consumer distribution channel, which typically have higher gross margins than the wholesale distribution channel, represented a greater proportion of Tommy Bahama’s net sales in the first nine months of fiscal 2013. This change in sales mix offset the negative impact of $0.7 million of purchase accounting charges related to the Tommy Bahama Canada acquisition recognized in cost of goods sold in the first nine months of fiscal 2013. We do not anticipate any charges for inventory step-up beyond the third quarter of fiscal 2013 related to this acquisition.
The decrease in gross margin for Lilly Pulitzer from the first nine months of fiscal 2012 to the first nine months of fiscal 2013 was primarily driven by (1) a change in sales mix with sportswear, which generally has lower gross margins, representing a greater proportion of Lilly Pulitzer sales in the first nine months of fiscal 2013, (2) a larger e-commerce flash clearance sale in the first nine months of fiscal 2013 than in the prior year, with these sales typically having a gross margin more in line with wholesale sales than direct to consumer sales, (3) more promotions in our direct to consumer operations in order to move a greater amount of remaining spring inventory and (4) our e-commerce operations offering free shipping on a more frequent basis. The negative gross margin impact of these factors exceeded the positive impact of the change in sales mix towards direct to consumer sales.
The gross margin at Lanier Clothes was comparable between the two periods primarily as a result of a change in sales mix offsetting the continuing gross margin pressures, including both competitive factors and higher product costs that continue to impact the tailored clothing business.
The decrease in gross margin at Ben Sherman reflects (1) a higher proportion of off-price sales in the wholesale business, (2) heavier promotions in the direct to consumer business and (3) the competitive factors resulting from the difficult economic conditions that continued to persist in the United Kingdom and Europe. The heavier promotions and the higher proportion of off-price sales, which were necessary to appropriately manage inventory levels, primarily resulted from the merchandising misstep in the second half of fiscal 2012 and the impact of the economic environment. These negative factors offset the positive gross margin impact of the change in the sales mix with direct to consumer sales representing a larger proportion of Ben Sherman sales in the first nine months of fiscal 2013.
The gross profit in Corporate and Other in each period primarily reflects the impact on gross profit of our Oxford Golf and Lyons, Georgia distribution center operations offset by the impact of LIFO accounting adjustments. The increase in the gross profit for Corporate and Other was primarily due to higher sales and higher gross margins in Oxford Golf in the first nine months of fiscal 2013 offset by the net unfavorable impact of LIFO accounting. The LIFO accounting charge was $0.1 million in the first nine months of fiscal 2013 compared to a $0.5 million LIFO credit in the first nine months of fiscal 2012.
SG&A
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
SG&A | $ | 329,883 |
| $ | 295,656 |
| $ | 34,227 |
| 11.6 | % |
SG&A (as % of net sales) | 49.5 | % | 47.7 | % | |
| |
|
Amortization of intangible assets included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 662 |
| $ | — |
| | |
The increase in SG&A was primarily due to (1) $26.4 million of incremental SG&A in the first nine months of fiscal 2013 associated with operating additional Tommy Bahama retail stores and restaurants and Lilly Pulitzer retail stores and (2) higher costs, consisting primarily of employment expenses, to support the growing Tommy Bahama and Lilly Pulitzer businesses. The incremental SG&A costs of operating additional Tommy Bahama retail stores and restaurants include incremental costs associated with North American and Asia-Pacific locations. The increases in SG&A for Tommy Bahama and Lilly Pulitzer were partially offset by SG&A reductions in Ben Sherman and Lanier Clothes.
SG&A included $1.3 million of amortization of intangible assets in the first nine months of fiscal 2013 compared to $0.8 million in the first nine months of fiscal 2012 with the increase primarily being $0.7 million of amortization associated with the intangible assets acquired as part of the Tommy Bahama Canada acquisition. We anticipate that amortization of intangible assets for fiscal 2013 will be approximately $1.8 million, with approximately $1.0 million of the amortization reflecting nine months of amortization of the intangible assets acquired as part of the Tommy Bahama Canada acquisition from the date of acquisition through the end of the 2013 fiscal year. However, the amount of amortization for the full year may change as we finalize our purchase price allocation associated with the Tommy Bahama Canada acquisition.
Change in fair value of contingent consideration
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Change in fair value of contingent consideration | $ | 206 |
| $ | 1,800 |
| $ | (1,594 | ) | (88.6 | )% |
Change in fair value of contingent consideration reflects the current period impact of the change in the fair value of the contingent consideration obligation associated with the Lilly Pulitzer acquisition, as discussed in our Annual Report on Form 10-K for fiscal 2012. The decrease in change in fair value of contingent consideration in the first nine months of fiscal 2013 was primarily due to the significant increase in the fair value of the contingent consideration recognized in the fourth quarter of fiscal 2012, which resulted from our assessment of greater certainty that the full amount of the contingent
consideration will be paid in the future. We anticipate that the charge for the change in the fair value of the contingent consideration for the full 2013 fiscal year will be $0.3 million.
Royalties and other operating income
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Royalties and other operating income | $ | 12,704 |
| $ | 12,166 |
| $ | 538 |
| 4.4 | % |
Royalties and other operating income in the first nine months of fiscal 2013 primarily reflect income received from third parties from the licensing of our Tommy Bahama, Ben Sherman and Lilly Pulitzer brands. The increase in royalty and other income in the first nine months of fiscal 2013 was primarily due to higher royalty income for Tommy Bahama and Lilly Pulitzer and higher other income in Corporate and Other which were partially offset by lower royalty income for Ben Sherman.
Operating income (loss)
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Tommy Bahama | $ | 46,190 |
| $ | 45,511 |
| $ | 679 |
| 1.5 | % |
Lilly Pulitzer | 24,535 |
| 21,949 |
| 2,586 |
| 11.8 | % |
Lanier Clothes | 7,901 |
| 8,845 |
| (944 | ) | (10.7 | )% |
Ben Sherman | (10,538 | ) | (6,352 | ) | (4,186 | ) | (65.9 | )% |
Corporate and Other | (9,764 | ) | (10,927 | ) | 1,163 |
| 10.6 | % |
Total operating income | $ | 58,324 |
| $ | 59,026 |
| $ | (702 | ) | (1.2 | )% |
LIFO charge (credit) included in Corporate and Other | $ | 135 |
| $ | (461 | ) | |
| |
|
Inventory step-up charge included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 707 |
| $ | — |
| | |
Change in fair value of contingent consideration included in Lilly Pulitzer | $ | 206 |
| $ | 1,800 |
| |
| |
|
Amortization of intangible assets included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 662 |
| $ | — |
| | |
Operating income, on a consolidated basis, was $58.3 million in the first nine months of fiscal 2013 compared to $59.0 million in the first nine months of fiscal 2012. The 1.2% decrease in operating income was primarily due to the lower operating results of Ben Sherman and Lanier Clothes, partially offset by improved operating results of Tommy Bahama, Lilly Pulitzer and Corporate and Other. Changes in operating income by operating group are discussed below.
Tommy Bahama:
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Net sales | $ | 417,174 |
| $ | 371,790 |
| $ | 45,384 |
| 12.2 | % |
Gross margin | 61.7 | % | 60.9 | % | |
| |
|
Operating income | $ | 46,190 |
| $ | 45,511 |
| $ | 679 |
| 1.5 | % |
Operating income as % of net sales | 11.1 | % | 12.2 | % | |
| |
|
Inventory step-up charge included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 707 |
| $ | — |
| | |
Amortization of intangible assets included in Tommy Bahama associated with Tommy Bahama Canada acquisition | $ | 662 |
| $ | — |
| | |
The increase in operating income for Tommy Bahama was primarily due to the higher net sales and gross margin in the Tommy Bahama business, each as discussed above. The impact of the higher sales and gross margin were partially offset by higher SG&A and $1.4 million of charges in the aggregate related to an inventory step-up charge and amortization of intangible assets associated with Tommy Bahama Canada, which was acquired in the second quarter of fiscal 2013. The increased SG&A was primarily associated with (1) operating additional North American and Asia-Pacific retail stores and restaurants in fiscal 2013 which resulted in $23.8 million of incremental SG&A and (2) higher costs, consisting primarily of employment expenses, to support the growing Tommy Bahama business.
The first nine months of fiscal 2013 included an operating loss of $10.0 million related to our Tommy Bahama Asia-Pacific expansion compared to an operating loss of $6.9 million in the first nine months of fiscal 2012. We anticipate that the operating loss for Asia-Pacific for fiscal 2013 will be approximately $13 million compared to $10.3 million for the full 2012 fiscal year.
Lilly Pulitzer:
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Net sales | $ | 107,939 |
| $ | 93,475 |
| $ | 14,464 |
| 15.5 | % |
Gross margin | 62.0 | % | 63.5 | % | |
| |
|
Operating income | $ | 24,535 |
| $ | 21,949 |
| $ | 2,586 |
| 11.8 | % |
Operating income as % of net sales | 22.7 | % | 23.5 | % | |
| |
|
Change in fair value of contingent consideration included in Lilly Pulitzer | $ | 206 |
| $ | 1,800 |
| |
| |
|
The increase in operating income for Lilly Pulitzer for the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012 was primarily due to the higher net sales for Lilly Pulitzer, as discussed above. The first nine months of fiscal 2013 also benefited from a $1.6 million lower charge for the change in fair value of contingent consideration. The increased net sales and lower charge for the change in fair value of contingent consideration were partially offset by lower gross margin and increased SG&A. The increased SG&A was primarily associated with (1) higher costs, consisting primarily of employment expenses, to support the growing Lilly Pulitzer business and (2) $2.6 million of incremental SG&A associated with the cost of operating additional retail stores during fiscal 2013.
Lanier Clothes:
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Net sales | $ | 79,719 |
| $ | 84,995 |
| $ | (5,276 | ) | (6.2 | )% |
Gross margin | 28.6 | % | 28.6 | % | |
| |
|
Operating income | $ | 7,901 |
| $ | 8,845 |
| $ | (944 | ) | (10.7 | )% |
Operating income as % of net sales | 9.9 | % | 10.4 | % | |
| |
|
The decrease in operating income for Lanier Clothes was primarily the result of the lower sales, as discussed above, partially offset by lower SG&A in part due to lower royalty expense as a result of the lower branded sales.
Ben Sherman:
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Net sales | $ | 47,138 |
| $ | 57,234 |
| $ | (10,096 | ) | (17.6 | )% |
Gross margin | 48.7 | % | 51.8 | % | |
| |
|
Operating loss | $ | (10,538 | ) | $ | (6,352 | ) | $ | (4,186 | ) | (65.9 | )% |
Operating loss as % of net sales | (22.4 | )% | (11.1 | )% | |
| |
|
The decline in operating results for Ben Sherman was primarily due to the decrease in sales and lower gross margin, each as discussed above, and lower royalty income. These factors that negatively impacted the operating results were partially offset by reduced SG&A in Ben Sherman in the first nine months of fiscal 2013.
Corporate and Other:
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Net sales | $ | 14,763 |
| $ | 11,802 |
| $ | 2,961 |
| 25.1 | % |
Operating loss | $ | (9,764 | ) | $ | (10,927 | ) | $ | 1,163 |
| 10.6 | % |
LIFO charge (credit) included in Corporate and Other | $ | 135 |
| $ | (461 | ) | |
| |
|
The Corporate and Other operating results improved by $1.2 million from a loss of $10.9 million in the first nine months of fiscal 2012 to a loss of $9.8 million in the first nine months of fiscal 2013. The improvement in operating results was primarily due to (1) the higher sales and higher gross margins of Oxford Golf and the Lyons, Georgia distribution center businesses and (2) reduced SG&A in our corporate operations. The improved results of these businesses were offset by a $0.6 million increase in the net charge from LIFO accounting.
Interest expense, net
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Interest expense, net | $ | 3,173 |
| $ | 7,876 |
| $ | (4,703 | ) | (59.7 | )% |
Interest expense for the first nine months of fiscal 2013 decreased primarily due to our borrowing at lower interest rates in the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012. During the first nine months of fiscal 2013, substantially all of our borrowings were under our U.S. Revolving Credit Agreement, whereas substantially all of our borrowings in the first half of fiscal 2012 were from our previously outstanding senior notes, which had a coupon rate of 11 3/8%. The change in the source of our borrowings resulted from our redemption of the remaining outstanding principal amount of the senior notes in July 2012, which was primarily funded with borrowings under our U.S. Revolving Credit Agreement. We anticipate that interest expense for fiscal 2013 will be approximately $4.3 million.
Loss on repurchase of senior notes
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Loss on repurchase of senior notes | $ | — |
| $ | 9,143 |
| $ | (9,143 | ) | (100.0 | )% |
On July 16, 2012, we redeemed the remaining outstanding $105.0 million in aggregate principal amount of our 11 3/8% senior notes for approximately $111.0 million, plus accrued interest, using borrowings under our U.S. Revolving Credit Agreement and cash on hand. The redemption of the 11 3/8% senior notes and related write-off of approximately $3.1 million of unamortized deferred financing costs and discount resulted in a loss of approximately $9.1 million.
Income taxes
|
| | | | | | | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 | $ Change | % Change |
Income taxes | $ | 24,833 |
| $ | 15,967 |
| $ | 8,866 |
| 55.5 | % |
Effective tax rate | 45.0 | % | 38.0 | % | |
| |
|
Income tax expense for the first nine months of fiscal 2013 increased compared to the first nine months of fiscal 2012 due to higher earnings and an increase in the effective tax rate. The effective tax rates for both periods reflect the unfavorable impact of foreign losses for which we are not able to recognize an income tax benefit and the favorable impact of a decrease in the enacted tax rate in the United Kingdom. The effective tax rate for the first nine months of fiscal 2012 was also impacted by certain other favorable discrete items, including a reduction in income tax contingency reserves upon the expiration of the corresponding statute of limitations totaling approximately $2.1 million. We anticipate that our effective tax rate for the full year fiscal 2013 will be approximately 43%. Our effective tax rate in future years will be dependent upon our ability to recognize an income tax benefit for foreign losses and the amount of taxable income (loss) in foreign jurisdictions in future years, among other factors.
Net earnings
|
| | | | | | |
| First Nine Months Fiscal 2013 | First Nine Months Fiscal 2012 |
Net earnings | $ | 30,318 |
| $ | 26,040 |
|
Net earnings per diluted share | $ | 1.84 |
| $ | 1.57 |
|
Weighted average shares outstanding - diluted | 16,492 |
| 16,572 |
|
The higher net earnings for the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012 was primarily due to (1) the first nine months of fiscal 2012 including a loss on repurchase of senior notes of $9.1 million, (2) a $4.7 million reduction in interest expense and (3) an increase in the operating results of Tommy Bahama, Lilly Pulitzer and Corporate and Other. These factors were partially offset by (1) a higher effective tax rate due to our inability to recognize the income tax benefit of losses in foreign jurisdictions in fiscal 2013 and (2) lower operating results in Lanier Clothes and Ben Sherman.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our primary source of revenue and cash flow is our distribution of apparel products through our direct to consumer and wholesale channels of distribution. Our primary uses of cash flow include the acquisition of apparel products in the operation of our business, as well as employee compensation and benefits, occupancy costs, marketing and advertising costs, other general and administrative operating expenses, funding of capital expenditures for retail stores and information technology initiatives, payment of quarterly dividends, periodic interest payments related to our financing arrangements and repayment of indebtedness. As we purchase products for sale prior to selling the products to our customers in both our direct to consumer and wholesale operations, in the ordinary course of business, we maintain certain levels of inventory and we also extend credit to our wholesale customers. These factors impact our working capital levels. If cash inflows are less than cash outflows, we have access to amounts under our U.S. Revolving Credit Agreement and U.K. Revolving Credit Agreement, subject to their terms, each of which is described below. We may seek to finance future capital investment programs through various methods, including, but not limited to, cash on hand, cash flow from operations, borrowings under our current or additional credit facilities and sales of debt or equity securities.
As of November 2, 2013, we had $9.3 million of cash on hand, with $166.7 million of borrowings outstanding and $68.7 million of availability under our revolving credit agreements. We believe our balance sheet and anticipated positive cash flows from operating activities in the future provides us with ample opportunity to continue to invest in our brands and our direct to consumer initiatives in future periods.
Key Liquidity Measures
|
| | | | | | | | | | | | |
($ in thousands) | November 2, 2013 | February 2, 2013 | October 27, 2012 | January 28, 2012 |
Total current assets | $ | 251,886 |
| $ | 222,390 |
| $ | 216,151 |
| $ | 214,070 |
|
Total current liabilities | 101,808 |
| 124,266 |
| 109,710 |
| 117,554 |
|
Working capital | $ | 150,078 |
| $ | 98,124 |
| $ | 106,441 |
| $ | 96,516 |
|
Working capital ratio | 2.47 |
| 1.79 |
| 1.97 |
| 1.82 |
|
Debt to total capital ratio | 40 | % | 34 | % | 36 | |