OXFORD INDUSTRIES INC - Quarter Report: 2012 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

Commission File Number: 1-4365

 

OXFORD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

222 Piedmont Avenue, N.E., Atlanta, Georgia 30308

(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.

 

 

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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OXFORD INDUSTRIES, INC.

INDEX TO FORM 10-Q

For the second quarter of fiscal 2012

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)	4
Condensed Consolidated Statements of Earnings (Unaudited)	5
Condensed Consolidated Statements of Comprehensive Income (Unaudited)	6
Condensed Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	32
Item 1A. Risk Factors	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3. Defaults Upon Senior Securities	33
Item 4. Mine Safety Disclosures	33
Item 5. Other Information	33
Item 6. Exhibits	33
Signatures	34

 

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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, the timing and cost of planned capital expenditures, costs of products and raw materials we purchase, 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 disciplined execution by key management. 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 2011, 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

 

Unless the context requires otherwise, the following terms, or words of similar import, have the following meanings:

 

Our, us or we: Oxford Industries, Inc. and its consolidated subsidiaries

 

SG&A: Selling, general and administrative expenses

 

Discontinued operations: The assets and operations of our former Oxford Apparel operating group which we sold in the fourth quarter of fiscal 2010, as discussed in our Annual Report on Form 10-K for fiscal 2011

 

SEC: U.S. Securities and Exchange Commission

 

FASB: Financial Accounting Standards Board

 

U.S. GAAP: Generally accepted accounting principles in the United States

 

Fiscal 2013		52 weeks ending February 1, 2014
Fiscal 2012		53 weeks ending February 2, 2013
Fiscal 2011		52 weeks ended January 28, 2012
First half fiscal 2012		26 weeks ended July 28, 2012
First half fiscal 2011		26 weeks ended July 30, 2011
Fourth quarter fiscal 2012		14 weeks ending February 2, 2013
Third quarter fiscal 2012		13 weeks ending October 27, 2012
Second quarter fiscal 2012		13 weeks ended July 28, 2012
First quarter fiscal 2012		13 weeks ended April 28, 2012
Fourth quarter fiscal 2011		13 weeks ended January 28, 2012
Third quarter fiscal 2011		13 weeks ended October 29, 2011
Second quarter fiscal 2011		13 weeks ended July 30, 2011
First quarter fiscal 2011		13 weeks ended April 30, 2011

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

OXFORD INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except par amounts)

 

		July 28, 2012		January 28, 2012		July 30, 2011
ASSETS
Current Assets:
Cash and cash equivalents		$   4,561		$   13,373		$   37,775
Receivables, net		61,833		59,706		53,902
Inventories, net		88,382		103,420		77,731
Prepaid expenses, net		19,991		19,041		16,337
Deferred tax assets		19,703		19,733		17,258
Assets related to discontinued operations, net		—		—		508
Total current assets		194,470		215,273		203,511
Property and equipment, net		109,500		93,206		86,889
Intangible assets, net		164,682		165,193		166,826
Goodwill		17,277		16,495		16,555
Other non-current assets, net		21,168		19,040		19,790
Total Assets		$507,097		$509,207		$493,571
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Trade accounts payable and other accrued expenses		$  76,186		$  89,149		$  76,877
Accrued compensation		19,612		23,334		19,740
Contingent consideration earned and payable		—		2,500		—
Short-term debt and current maturities of long-term debt		5,768		2,571		4,406
Liabilities related to discontinued operations		—		—		1,362
Total current liabilities		101,566		117,554		102,385
Long-term debt, less current maturities		95,249		103,405		108,088
Non-current contingent consideration		11,845		10,645		11,945
Other non-current liabilities		41,574		38,652		42,224
Non-current deferred income taxes		31,281		34,882		30,322
Commitments and contingencies
Shareholders’ Equity:
Common stock, $1.00 par value per common share		16,578		16,522		16,529
Additional paid-in capital		102,841		99,670		97,641
Retained earnings		129,628		111,551		107,160
Accumulated other comprehensive loss		(23,465	)	(23,674	)	(22,723	)
Total shareholders’ equity		225,582		204,069		198,607
Total Liabilities and Shareholders’ Equity		$507,097		$509,207		$493,571

 

See accompanying notes.

 

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OXFORD INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

(in thousands, except per share amounts)

 

		Second Quarter Fiscal 2012		Second Quarter Fiscal 2011		First Half Fiscal 2012		First Half Fiscal 2011
Net sales		$206,929		$180,646		$437,882		$388,954
Cost of goods sold		88,649		77,709		190,388		168,357
Gross profit		118,280		102,937		247,494		220,597
SG&A		100,702		88,648		201,510		179,786
Change in fair value of contingent consideration		600		600		1,200		1,200
Royalties and other operating income		3,340		4,022		8,322		8,813
Operating income		20,318		17,711		53,106		48,424
Interest expense, net		3,314		4,268		6,917		9,072
Loss on repurchase of senior secured notes		9,143		8,248		9,143		8,248
Earnings from continuing operations before income taxes		7,861		5,195		37,046		31,104
Income taxes		2,833		1,675		14,016		10,524
Earnings from continuing operations		5,028		3,520		23,030		20,580
Earnings (loss) from discontinued operations, net of taxes		—		(916	)	—		124
Net earnings		$    5,028		$  2,604		$  23,030		$  20,704
Earnings from continuing operations per common share:
Basic		$      0.30		$      0.21		$      1.39		$      1.25
Diluted		$      0.30		$      0.21		$      1.39		$      1.25
Earnings (loss) from discontinued operations, net of taxes per common share:
Basic		$         —		$     (0.06	)	$         —		$      0.01
Diluted		$         —		$     (0.06	)	$         —		$      0.01
Net earnings per common share:
Basic		$      0.30		$      0.16		$      1.39		$      1.25
Diluted		$      0.30		$      0.16		$      1.39		$      1.25
Weighted average common shares outstanding:
Basic		16,554		16,514		16,543		16,514
Diluted		16,570		16,531		16,561		16,529
Dividends declared per common share		$      0.15		$      0.13		$      0.30		$      0.26

 

See accompanying notes.

 

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OXFORD INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

		Second Quarter Fiscal 2012		Second Quarter Fiscal 2011		First Half Fiscal 2012		First Half Fiscal 2011
Net earnings		$   5,028		$   2,604		$ 23,030		$ 20,704
Other comprehensive income (loss), net of taxes
Foreign currency translation gain (loss)		(1,171	)	(642	)	98		1,126
Net unrealized gain (loss) on forward foreign currency exchange contracts		326		475		111		(30	)
Total other comprehensive income (loss), net of taxes		(845	)	(167	)	209		1,096
Comprehensive income		$   4,183		$   2,437		$ 23,239		$ 21,800

 

See accompanying notes.

 

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OXFORD INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

		First Half Fiscal 2012		First Half Fiscal 2011
Cash Flows From Operating Activities:
Earnings from continuing operations		$ 23,030		$ 20,580
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation		11,210		9,860
Amortization of intangible assets		512		598
Change in fair value of contingent consideration		1,200		1,200
Amortization of deferred financing costs and bond discount		755		906
Loss on repurchase of senior secured notes		9,143		8,248
Stock compensation expense		1,664		1,476
Deferred income taxes		(3,575)		3,040
Changes in working capital, net of acquisitions and dispositions:
Receivables		(2,139)		(3,394)
Inventories		15,691		8,042
Prepaid expenses		(844)		(3,696)
Current liabilities		(16,761)		(12,215)
Other non-current assets		(2,815)		1,502
Other non-current liabilities		2,920		(2,487)
Net cash provided by operating activities		39,991		33,660
Cash Flows From Investing Activities:
Acquisitions, net of cash acquired		(4,183)		(398)
Purchases of property and equipment		(27,264)		(12,726)
Net cash used in investing activities		(31,447)		(13,124)
Cash Flows From Financing Activities:
Repayment of revolving credit arrangements		(97,121)		(18,309)
Proceeds from revolving credit arrangements		195,590		22,670
Repurchase of senior secured notes		(111,000)		(46,600)
Deferred financing costs paid		(1,524)		—
Proceeds from issuance of common stock		1,565		1,413
Dividends on common stock		(4,956)		(4,285)
Net cash used in financing activities		(17,446)		(45,111)
Cash Flows from Discontinued Operations:
Net cash provided by discontinued operations		—		18,057
Net change in cash and cash equivalents		(8,902)		(6,518)
Effect of foreign currency translation on cash and cash equivalents		90		199
Cash and cash equivalents at the beginning of year		13,373		44,094
Cash and cash equivalents at the end of the period		$   4,561		$ 37,775
Supplemental disclosure of cash flow information:
Cash paid for interest, net		$   6,508		$   8,534
Cash paid for income taxes, including income taxes paid for discontinued operations		$ 15,704		$ 38,103

 

See accompanying notes.

 

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OXFORD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECOND QUARTER OF FISCAL 2012

 

1.                                      Basis of Presentation:  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. 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 U.S. 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 2011.

 

In May 2011, the FASB amended ASC 820 “Fair Value Measurements and Disclosures” in order to clarify existing guidance in U.S. GAAP, better align ASC 820 with International Accounting Standards and require additional fair value disclosures.  The amendments to ASC 820 were adopted by us in the first quarter of fiscal 2012, with all amendments applied prospectively with changes in measurements, if any, recognized in earnings in the first quarter of fiscal 2012. The adoption of the amendments to ASC 820 in the first quarter of fiscal 2012 did not have a material impact on our consolidated financial statements.

 

2.                                      Inventories: The components of inventories as of the dates specified are summarized as follows (in thousands):

 

		July 28, 2012			January 28, 2012			July 30, 2011
Finished goods		$130,469			$143,482			$113,468
Work in process			5,426			6,244			4,903
Fabric, trim and supplies			4,863			6,070			5,314
LIFO reserve			(52,376	)		(52,376	)		(45,954	)
Total		$  88,382			$103,420			$  77,731

 

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 $0.3 million in the second quarter of fiscal 2012, a charge of $0.4 million in the second quarter of fiscal 2011, a credit of less than $0.1 million in the first half of fiscal 2012 and a credit of $0.2 million in the first half of fiscal 2011.

 

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3.                                      Operating Group Information:  Our business is primarily operated through our four operating groups: Tommy Bahama, Lilly Pulitzer, Ben Sherman and Lanier Clothes, as disclosed in our Annual Report on Form 10-K for fiscal 2011. 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. The table below presents certain information (in thousands) about our operating groups, as well as Corporate and Other, which is a reconciling category for reporting purposes.

 

		Second Quarter Fiscal 2012		Second Quarter Fiscal 2011		First Half Fiscal 2012		First Half Fiscal 2011
Net Sales
Tommy Bahama		$127,463		$109,143		$268,597		$232,046
Lilly Pulitzer		30,903		24,823		66,536		54,696
Ben Sherman		20,101		20,893		37,453		40,314
Lanier Clothes		24,808		22,942		57,815		55,915
Corporate and Other		3,654		2,845		7,481		5,983
Total Net Sales		$206,929		$180,646		$437,882		$388,954
Depreciation and Amortization
Tommy Bahama		$    3,961		$    3,721		$    8,282		$    7,265
Lilly Pulitzer		563		461		1,069		929
Ben Sherman		613		573		1,287		1,153
Lanier Clothes		94		107		191		216
Corporate and Other		463		455		893		895
Total Depreciation and Amortization		$    5,694		$    5,317		$  11,722		$  10,458
Operating Income
Tommy Bahama		$  16,581		$  16,987		$  42,145		$  40,757
Lilly Pulitzer		7,409		5,612		18,421		12,627
Ben Sherman		(1,463	)	(1,756	)	(4,203	)	(2,582	)
Lanier Clothes		2,397		2,263		6,443		6,988
Corporate and Other		(4,606	)	(5,395	)	(9,700	)	(9,366	)
Total Operating Income		20,318		17,711		53,106		48,424
Interest expense		3,314		4,268		6,917		9,072
Loss on repurchase of senior secured notes		9,143		8,248		9,143		8,248
Earnings from Continuing Operations Before Income Taxes		$    7,861		$    5,195		$  37,046		$  31,104

 

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4.                                                                                      Debt: The following table details our debt (in thousands) as of the dates specified:

 

		July 28, 2012		January 28, 2012		July 30, 2011
$235 million U.S. Secured Revolving Credit Facility (“U.S. Revolving Credit Agreement”)(1)		$  95,249		N/A		N/A
$175 million U.S. Secured Revolving Credit Facility (“Prior Revolving Credit Agreement”)(1)		N/A		$         —		$         —
£7 million Senior Secured Revolving Credit Facility (“U.K. Revolving Credit Agreement”)(2)		5,768		2,571		4,406
11.375% Senior Secured Notes (“113/8% Senior Secured Notes”)(3)(4)		N/A		105,000		110,000
Unamortized discount		—		(1,595	)	(1,912	)
Total debt		101,017		105,976		112,494
Short-term debt and current maturities of long-term debt		(5,768	)	(2,571	)	(4,406	)
Long-term debt, less current maturities		$  95,249		$103,405		$108,088

 

(1)         The U.S. Revolving Credit Agreement, entered into in June 2012, amended and restated the Prior Revolving Credit Agreement, which was scheduled to mature in August 2013.  The U.S. Revolving Credit Agreement generally (i) is limited to a borrowing base consisting of specified percentages of eligible categories of assets; (ii) accrues interest, unused line fees and letter of credit fees based upon a pricing grid which is tied to average unused availability and/or utilization; (iii) requires periodic interest payments with principal due at maturity (June 2017); and (iv) is generally secured by a first priority security interest in the accounts receivable, inventory, general intangibles and eligible trademarks, investment property (including the equity interests of certain subsidiaries), deposit accounts, intercompany obligations, equipment, goods, documents, contracts, books and records and other personal property of Oxford Industries, Inc. and substantially all of its domestic subsidiaries.

 

(2)         The U.K. Revolving Credit Agreement generally (i) accrues interest at the bank’s base rate plus an applicable margin; (ii) requires interest payments monthly with principal payable on demand; and (iii) is collateralized by substantially all of the assets of our United Kingdom Ben Sherman subsidiaries.

 

(3)         In the second quarter of fiscal 2012, we redeemed all of the outstanding $105 million in aggregate principal amount of the 113/8% Senior Secured Notes, which were scheduled to mature in July 2015.  The redemption of the 113/8% Senior Secured Notes for $111.0 million, plus accrued interest, and the related write-off of approximately $1.7 million of unamortized deferred financing costs and $1.4 million of unamortized bond discount resulted in a loss on repurchase of senior notes of approximately $9.1 million.  The redemption of the 113/8% Senior Secured Notes satisfied and discharged all of our obligations with respect to the 113/8% Senior Secured Notes and the related indenture and was funded primarily through borrowings under our U.S. Revolving Credit Agreement.

 

(4)         In the second and third quarters of fiscal 2011, we repurchased, in privately negotiated transactions, $45.0 million in aggregate principal amount of the 113/8% Senior Secured Notes for $52.2 million, plus accrued interest. The repurchase of the 113/8% Senior Secured Notes and related write-off of approximately $1.8 million of unamortized deferred financing costs and bond discount resulted in a loss on repurchase of senior notes of approximately $9.0 million during fiscal 2011, of which $8.2 million was recognized in the second quarter of fiscal 2011 with the remaining $0.8 million being recognized in the third quarter of fiscal 2011.

 

To the extent cash flow needs exceed cash flow provided by our operations we will have access, subject to their terms, to our lines of credit to provide funding for operating activities, capital expenditures and acquisitions, if any. Our credit facilities are also used to finance trade letters of credit for product purchases, which are drawn against our lines of credit at the time of shipment of the products and reduce the amounts available under our lines of credit and borrowing capacity under our credit facilities when issued. As of July 28, 2012, approximately $9.6 million of trade letters of credit and other limitations on availability in the aggregate were outstanding against our credit facilities. After considering these limitations and the amount of eligible assets in our borrowing base, as applicable, as of July 28, 2012, we had approximately $95.1 million and $1.8 million in unused availability under the U.S. Revolving Credit Agreement and the U.K. Revolving Credit Agreement, respectively, subject to the respective limitations on borrowings set forth in the U.S. Revolving Credit Agreement and the U.K. Revolving Credit Agreement.

 

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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 2011.

 

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 websites and restaurants, and our wholesale distribution channel, which includes better department stores, specialty stores, national chains, specialty catalogs and Internet retailers. In fiscal 2011, 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 and United Kingdom.

 

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, dominate the apparel industry and our direct competitors vary by operating group. We believe that the principal competitive factors in the apparel industry are the reputation, value and image of our brand names; design; consumer preference; price; quality; marketing; and customer service. We believe 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 their own competing products, some of which may be sourced directly by our customer, in their 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.

 

The global economic environment and resulting economic uncertainty that began in fiscal 2008 continue to impact each of our operating groups, and the apparel industry as a whole. Although some signs of economic improvements exist and declines in consumer spending in the United States have moderated, unemployment levels remain high, the retail environment remains highly promotional and a significant amount of economic uncertainty remains. The economies in the United Kingdom and Europe, which are important to our Ben Sherman operating group operations, continue to show more sluggish economic conditions than the economic conditions in the United States.

 

While we anticipate sales of our products may continue to be negatively impacted as long as there is an elevated level of economic uncertainty, we believe that our operating groups have significant opportunities for long-term growth. We believe that each of our lifestyle brands has opportunities for growth in its direct to consumer businesses through expansion of our retail store operations as well as increases in same store and e-commerce sales. We also believe that our lifestyle brands provide an opportunity for moderate sales increases in our wholesale businesses primarily from our current customers adding to their existing door count and the selective addition of new wholesale customers.

 

Although the challenging economic conditions continue to have an impact on our business and the apparel industry as a whole, and we continue to focus on minimizing inventory markdown risk and promotional pressure, we were more aggressive in our inventory purchases for fiscal 2011 and thus far in fiscal 2012 and anticipate continuing to purchase inventory more aggressively for the remainder of fiscal 2012 if the economic conditions continue to show improvement. The second half of fiscal 2011 was impacted by pricing pressures on raw materials, fuel, transportation, labor and other costs necessary for the production and sourcing of apparel products and these pricing pressures have continued to negatively impact cost of goods sold into the first half of fiscal 2012. We anticipate that the impact of these increased product costs will moderate in the second half of fiscal 2012, which, along with an anticipated increase in the proportion of our consolidated sales represented by the higher gross margin Tommy Bahama and Lilly Pulitzer businesses, will provide an opportunity for some consolidated gross margin improvements compared to the second half of fiscal 2011.

 

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We continue to believe it is important to focus on maintaining a strong balance sheet and ample liquidity, and we believe that our strong balance sheet and liquidity coupled with positive cash flow from operations will provide us sufficient resources to fund future investments in our owned lifestyle brands. In the future, we may add additional lifestyle brands to our portfolio, if we identify appropriate lifestyle brands which meet our investment criteria; however, we believe that we have significant opportunities to appropriately deploy our capital and resources in our existing owned lifestyle brands even absent any future acquisition.

 

The following table sets forth our consolidated operating results (in thousands, except per share amounts) for the first half of fiscal 2012 compared to the first half of fiscal 2011:

 

		First Half
		Fiscal 2012			Fiscal 2011
Net sales		$	437,882		$	388,954
Operating income		$	53,106		$	48,424
Earnings from continuing operations		$	23,030		$	20,580
Earnings from continuing operations per diluted common share		$	1.39		$	1.25
Earnings from discontinued operations, net of taxes		$	—		$	124
Earnings from discontinued operations, net of taxes per diluted common share		$	—		$	0.01
Net earnings		$	23,030		$	20,704
Net earnings per diluted common share		$	1.39		$	1.25

 

The primary reasons for the improvement in earnings from continuing operations were:

 

·                  An increase in net sales in both the Tommy Bahama and Lilly Pulitzer operating groups; and

 

·                  Lower interest expense in the first half of fiscal 2012 due to our reduction of debt as a result of our repurchase of $45.0 million in aggregate principal amount of our 113/8% Senior Secured Notes in fiscal 2011 and our repurchase of the remaining $105.0 million in aggregate principal amount of our 113/8% Senior Secured Notes in July 2012.

 

These items were partially offset by:

 

·                  Lower gross margins primarily resulting from product costing pressures and competitive factors in Lanier Clothes, which was partially offset by the impact on gross margins of a change in our consolidated sales mix as well as no purchase accounting charges impacting cost of goods sold in the first half of fiscal 2012 compared to a $1.0 million charge in the first half of fiscal 2011;

 

·                  An increase in SG&A, which was primarily due to (1) the incremental SG&A associated with the operation of retail stores opened in fiscal 2011 and fiscal 2012, (2) certain infrastructure, pre-opening retail store rent and other costs related to the Tommy Bahama international expansion, (3) higher SG&A to support the growing Tommy Bahama and Lilly Pulitzer businesses and (4) the rent charge associated with our Tommy Bahama New York location scheduled to open in November 2012;

 

·                  A larger loss on repurchase of senior secured notes from the repurchase of $105.0 million in aggregate principal amount of our 113/8% Senior Secured Notes in the first half of fiscal 2012 compared to the repurchase of $40.0 million in aggregate principal amount of our 113/8% Senior Secured Notes in the first half of fiscal 2011; and

 

·                  A higher effective tax rate due to the first half of fiscal 2011 being impacted more significantly by certain favorable permanent differences and discrete items.

 

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Amendment and Restatement of the U.S. Revolving Credit Agreement

 

On June 14, 2012, we entered into the U.S. Revolving Credit Agreement, which provides for a revolving credit facility of up to $235 million which may be used to refinance existing debt, to redeem our previously outstanding 113/8% Senior Secured Notes, to fund working capital, to fund future acquisitions and for general corporate purposes.

 

The U.S. Revolving Credit Agreement amended and restated the Prior Revolving Credit Agreement, which was entered into on August 15, 2008 and scheduled to mature in August 2013.  We believe that the covenants in the U.S. Revolving Credit Agreement are generally less restrictive and provide greater flexibility than those contained in the Prior Revolving Credit Agreement. In addition, the U.S. Revolving Credit Agreement allows us to include in our borrowing base certain amounts attributable to “eligible trademarks,” which amounts would not have been available for inclusion in the borrowing base under the Prior Revolving Credit Agreement.

 

The material terms of the U.S. Revolving Credit Agreement are described in note 4 in the unaudited condensed consolidated financial statements and the Financial Condition, Liquidity and Capital Resources section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in this report.

 

Redemption of 113/8% Senior Secured Notes

 

On July 16, 2012, we redeemed all of the outstanding $105 million in principal amount of the 113/8% Senior Secured Notes, which were scheduled to mature in July 2015.  The redemption of the 113/8% Senior Secured Notes at a premium of $6.0 million and the write-off of approximately $3.1 million of unamortized deferred financing costs and unamortized bond discount resulted in a loss on repurchase of senior notes of approximately $9.1 million.  The redemption of the 113/8% Senior Secured Notes satisfied and discharged all of our obligations with respect to the 113/8% Senior Secured Notes and the related indenture and was funded through borrowings under our U.S. Revolving Credit Agreement and cash on hand.

 

OPERATING GROUPS

 

Our business is primarily operated through our four operating groups: Tommy Bahama, Lilly Pulitzer, Ben Sherman and Lanier Clothes. 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.

 

Tommy Bahama designs, sources and markets collections of 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 owned Tommy Bahama retail stores within and outside the United States and on our Tommy Bahama e-commerce website, www.tommybahama.com, as well as in better department stores and independent specialty stores throughout the United States and licensed Tommy Bahama retail stores outside the United States. We also operate Tommy Bahama restaurants and license the Tommy Bahama name for various product categories. As of July 28, 2012, we operated 105 owned Tommy Bahama retail stores, including 70 full-price stores, 13 restaurant-retail locations and 22 outlet stores. This store count includes both our 98 owned domestic and seven owned international retail store locations. The seven international stores include five retail stores in Australia which we acquired from our former licensee during the second quarter of fiscal 2012 as well as our Macau and Singapore stores opened in the first half of fiscal 2012.

 

Lilly Pulitzer designs, sources and distributes upscale collections of women’s and girl’s dresses, sportswear and other 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, www.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 July 28, 2012, we operated 17 owned Lilly Pulitzer retail stores.

 

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

 

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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 July 28, 2012, we operated 17 owned Ben Sherman international and domestic retail stores, including five outlet 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. Our Lanier Clothes branded products are sold under certain trademarks licensed to us by third parties including 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, Lanier Clothes designs and sources certain private label tailored clothing products. Significant private label brands for which we produce tailored clothing include Lands’ End, Stafford, Alfani, Structure, and Kenneth Roberts. Our Lanier Clothes products are sold to national chains, department stores, specialty stores, specialty catalog retailers and discount retailers throughout the United States.

 

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. The operations that are included in Corporate and Other include our Oxford Golf business and our Lyons, Georgia distribution center.

 

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 2011.

 

RESULTS OF OPERATIONS

 

SECOND QUARTER OF FISCAL 2012 COMPARED TO SECOND QUARTER OF FISCAL 2011

 

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. For purposes of the tables below, “NM” means not meaningful. 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.

 

		Second Quarter
		Fiscal 2012				Fiscal 2011				$ Change		% Change
Net sales		$ 206,929		100.0%		$ 180,646		100.0%		$ 26,283		14.5%
Cost of goods sold		88,649		42.8%		77,709		43.0%		10,940		14.1%
Gross profit		118,280		57.2%		102,937		57.0%		15,343		14.9%
SG&A		100,702		48.7%		88,648		49.1%		12,054		13.6%
Change in fair value of contingent consideration		600		0.3%		600		0.3%		—		—
Royalties and other operating income		3,340		1.6%		4,022		2.2%		(682	)	(17.0)%
Operating income		20,318		9.8%		17,711		9.8%		2,607		14.7%
Interest expense, net		3,314		1.6%		4,268		2.4%		(954	)	(22.4)%
Loss on repurchase of senior secured notes		9,143		4.4%		8,248		4.6%		895		10.9%
Earnings from continuing operations before income taxes		7,861		3.8%		5,195		2.9%		2,666		51.3%
Income taxes		2,833		1.4%		1,675		0.9%		1,158		69.1%
Earnings from continuing operations		5,028		2.4%		3,520		1.9%		1,508		42.8%
Earnings from discontinued operations, net of taxes		—		—		(916	)	NM		916		NM
Net earnings		$     5,028		NM		$     2,604		NM		$ 2,424		NM

 

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The discussion and tables below compare certain line items included in our statements of earnings for the second quarter of fiscal 2012 to the second quarter of fiscal 2011. 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.

 

Net Sales

 

		Second Quarter
		Fiscal 2012		Fiscal 2011		$ Change		% Change
Tommy Bahama		$  127,463		$  109,143		$  18,320		16.8%
Lilly Pulitzer		30,903		24,823		6,080		24.5%
Ben Sherman		20,101		20,893		(792	)	(3.8)%
Lanier Clothes		24,808		22,942		1,866		8.1%
Corporate and Other		3,654		2,845		809		28.4%
Total net sales		$  206,929		$  180,646		$  26,283		14.5%

 

Consolidated net sales increased $26.3 million, or 14.5%, in the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011 primarily due to the increase in net sales at Tommy Bahama and Lilly Pulitzer, each as discussed below.

 

Tommy Bahama:

 

The 16.8% increase in net sales for Tommy Bahama was primarily driven by increased sales in both the direct to consumer and wholesale distribution channels with the largest percentage increase in the direct to consumer business. The increased sales in the direct to consumer business resulted from a low double digit increase in comparable full-price retail store sales, net sales at additional retail stores operated during fiscal 2012 and a significant increase in e-commerce sales. Tommy Bahama apparel unit sales increased by 17.6% due to the higher volume in each distribution channel, and the average selling price per unit increased by 1.0%, primarily as a result of the higher proportion of net sales from the direct to consumer channel of distribution. As of July 28, 2012, Tommy Bahama operated 105 retail stores compared to 90 retail stores as of July 30, 2011.

 

Lilly Pulitzer:

 

The 24.5% increase in net sales for Lilly Pulitzer was driven by increased sales in both the direct to consumer distribution channel, including a high single digit increase in same store retail sales and a significant increase in e-commerce sales, and the wholesale distribution channel. Unit sales increased by 36.9% due to the higher volume in each distribution channel, while the average selling price per unit decreased by 9.1% despite a greater percentage of Lilly Pulitzer sales being direct to consumer sales. The decreased selling price per unit primarily resulted from a change in product mix as sportswear and knit dresses, both of which generally sell at lower price points than woven dresses, represented a greater proportion of the Lilly Pulitzer business. As of July 28, 2012, Lilly Pulitzer operated 17 retail stores compared to 16 retail stores as of July 30, 2011.

 

Ben Sherman:

 

Net sales for Ben Sherman decreased by approximately 3.8% in the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011. The decrease in net sales for Ben Sherman was primarily driven by a reduction in unit volume of 15.4% primarily attributable to the difficult economic conditions in the United Kingdom and Europe and our exit from certain moderate wholesale accounts in the United Kingdom. The reduction in units sold was partially offset by an increase in the average selling price per unit of 13.8%. The increase in average selling price per unit was primarily due to (1) a greater proportion of Ben Sherman’s sales being retail sales, which generally have higher selling prices, and (2) our strategy to improve the distribution of the brand in the United Kingdom by exiting certain moderate wholesale accounts and increasing product prices, which were partially offset by an unfavorable foreign currency translation impact resulting from a 3.5% change in average exchange rates between the two periods.

 

Lanier Clothes:

 

Net sales for Lanier Clothes increased by 8.1%. The average selling price per unit increased by 11.7% as a result of the change in sales mix as our branded tailored clothing products, which typically have a higher average selling price than our private label products, represented a greater percentage of net sales for Lanier Clothes. A decrease in unit sales of 3.2% was primarily driven by the decreased unit sales in the private label businesses, which was partially offset by an increase in unit sales of branded tailored clothing products.

 

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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 increase in the net sales for Corporate and Other was primarily driven by the higher net sales in our Oxford Golf business during the second quarter of fiscal 2012.

 

Gross Profit

 

		Second Quarter
		Fiscal 2012		Fiscal 2011		$ Change		% Change
Gross profit		$  118,280		$  102,937		$  15,343		14.9	%
Gross margin (gross profit as a % of net sales)		57.2	%	57.0	%
LIFO charges (credits) included in gross profit		$        (258	)	$         388

 

The 14.9% increase in gross profit in the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011 was primarily due to the 14.5% increase in net sales, as discussed above. The second quarter of fiscal 2012 experienced a slight increase in gross margins resulting, in part, from the net favorable impact of LIFO accounting adjustments between the two periods. Generally, the higher product cost impact on our gross margins was offset by a change in our consolidated sales mix. During the second quarter of fiscal 2012, the changes in sales mix included an increased proportion of sales being sales of the higher gross margin Tommy Bahama and Lilly Pulitzer brands and an increased proportion of sales being sales from the higher gross margin direct to consumer businesses rather than wholesale sales.

 

We believe that certain of the year-over-year gross margin pressures impacting our operating groups will begin to ease in the second half of fiscal 2012 as the impact of certain of the higher product costs experienced during the second half of fiscal 2011 and the first half of fiscal 2012 are expected to moderate. However, we expect that certain competitive factors impacting Lanier Clothes and Ben Sherman will continue into the second half of fiscal 2012. Our gross profit may not be directly comparable to those of our competitors, as statement of earnings classification of certain expenses may vary by company.

 

SG&A

 

		Second Quarter
		Fiscal 2012		Fiscal 2011		$ Change		% Change
SG&A		$ 100,702		$ 88,648		$ 12,054		13.6	%
SG&A (as % of net sales)		48.7	%	49.1	%

 

The increase in SG&A was primarily due to (1) the incremental SG&A in the second quarter of fiscal 2012 associated with operating additional Tommy Bahama and Lilly Pulitzer retail stores, (2) certain infrastructure, pre-opening retail store rent and other costs related to the Tommy Bahama international expansion, (3) higher SG&A to support the growing Tommy Bahama and Lilly Pulitzer businesses and (4) the rent charge associated with our Tommy Bahama New York location, which in accordance with U.S. GAAP is required to be recognized as an ongoing expense of the store from the time we took possession of the space. The second quarter of fiscal 2012 included charges of approximately $4.0 million related to the Tommy Bahama international expansion and the Tommy Bahama New York store SG&A. As a percentage of net sales, SG&A benefitted from leveraging, as our net sales increased at a greater rate than the increase in SG&A, as certain SG&A costs do not fluctuate with sales levels. SG&A for both the second quarter of fiscal 2012 and the second quarter of fiscal 2011 included charges of $0.3 million related to the amortization of intangible assets.

 

Change in fair value of contingent consideration

 

		Second Quarter
		Fiscal 2012			Fiscal 2011			$ Change			% Change
Change in fair value of contingent consideration		$	600		$	600		$	—		—	%

 

Change in fair value of contingent consideration reflects the current period impact of the change in 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 2011. We anticipate that the change in contingent consideration for the full year of fiscal 2012 will be approximately $2.4 million; however, that amount could change significantly depending upon whether there are any changes in future periods to our assumptions about the probability of payment of the contingent consideration, appropriate discount rate or other factors.

 

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Royalties and other operating income

 

		Second Quarter
		Fiscal 2012			Fiscal 2011				$ Change			% Change
Royalties and other operating income		$	3,340		$	4,022			$	(682	)	(17.0	)%

 

The decrease in royalties and other operating income was primarily due to lower royalty income in the Ben Sherman and Tommy Bahama businesses during the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011.

 

Operating income (loss)

 

		Second Quarter
		Fiscal 2012			Fiscal 2011				$ Change			% Change
Tommy Bahama		$	16,581		$	16,987			$	(406	)	(2.4)	%
Lilly Pulitzer		7,409			5,612				1,797			32.0	%
Ben Sherman		(1,463		)	(1,756		)		293			16.7	%
Lanier Clothes		2,397			2,263				134			5.9	%
Corporate and Other		(4,606		)	(5,395		)		789			14.6	%
Total operating income		$	20,318		$	17,711			$	2,607		14.7	%
LIFO charges (credits) included in operating income		$	(258	)	$	388
Charge for increase in fair value of contingent consideration included in operating income		$	600		$	600

 

Operating income, on a consolidated basis, increased to $20.3 million in the second quarter of fiscal 2012 from $17.7 million in the second quarter of fiscal 2011. The 14.7% increase in operating income was primarily due to higher net sales in Lilly Pulitzer and Tommy Bahama partially offset by the SG&A increases in Tommy Bahama discussed below. Changes in operating income by operating group are discussed below.

 

Tommy Bahama:

 

		Second Quarter
		Fiscal 2012			Fiscal 2011				$ Change			% Change
Net sales		$	127,463		$	109,143			$	18,320		16.8	%
Operating income		$	16,581		$	16,987			$	(406	)	(2.4)	%
Operating income as % of net sales		13.0		%	15.6		%

 

The decrease in operating income for Tommy Bahama was primarily due to increased SG&A associated with (1) operating additional retail stores, (2) certain infrastructure, pre-opening retail store rent and other costs associated with Tommy Bahama’s international expansion, (3) higher SG&A to support the growing Tommy Bahama business, and (4) the rent charge associated with our Tommy Bahama New York location, which in accordance with U.S. GAAP is required to be recognized as an ongoing expense of the store from the time we took possession of the space. The second quarter of fiscal 2012 included operating losses of approximately $3.5 million related to the Tommy Bahama international expansion and the Tommy Bahama New York store scheduled to open in November 2012. The $3.5 million operating loss related to the Tommy Bahama international expansion and the Tommy Bahama New York store reflect approximately $4.0 million of costs partially offset by approximately $0.5 million of gross margin related to sales in our international stores during the second quarter of fiscal 2012. The additional costs and operating losses were partially offset by increased net sales of Tommy Bahama products in the second quarter of fiscal 2012.

 

Lilly Pulitzer:

 

		Second Quarter
		Fiscal 2012			Fiscal 2011				$ Change			% Change
Net sales		$	30,903		$	24,823			$	6,080		24.5	%
Operating income		$	7,409		$	5,612			$	1,797		32.0	%
Operating income as % of net sales		24.0		%	22.6		%
Charge for increase in fair value of contingent consideration included in operating income		$	600		$	600

 

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