Lifestyle fashion brand manufacturer Oxford Industries ( OXM 0.83% ) recorded its ninth consecutive quarter of positive comparable-sales growth in its fiscal first quarter of 2019. The owner of popular clothing labels like Tommy Bahama and Lilly Pulitzer also exceeded its own revenue and earnings guidance in results released on June 12.
Part of the company's success lies in dodging mistakes which have plagued fellow clothing retailers. During Oxford's first-quarter earnings conference call, CEO Thomas Chubb discussed company strategies for avoiding the ongoing risk of selling product in physical stores. Chubb also provided insight into Oxford's brand-specific approaches to successfully disposing of clearance inventory. Let's discuss three of his comments on these topics below.
1. A selective real estate strategy decreases store risk
Our selection of brick-and-mortar locations has been very carefully curated, and across the enterprise, we operate only 230 stores worldwide. The locations we select reflect the very nature of our Tommy Bahama and Lilly Pulitzer brands. They are generally in lifestyle centers that offer beautiful open-air shopping and dining experiences, on streets and boulevards that are destinations in and of themselves, and in resorts which epitomize the essence of our brands.
-- CEO Thomas Chubb
In addition to the details on Oxford's real estate approach above, Chubb noted that less than half of the company's domestic branded stores are located in regional shopping malls. Oxford aims to place its flagship stores in healthier, higher-end malls that attract more affluent customers. Chubb asserted that Oxford continues to embrace selective physical-store expansion. This will include additional Tommy Bahama Marlin Bar locations (which include a restaurant concept within stores), and westward expansion of Lilly Pulitzer stores, which are now primarily on the East Coast.
While physical stores generate 40% of Oxford's revenue, e-commerce sales constitute the company's fastest-growing channel, and now account for 21% of its consolidated top line. The ability to blend a successful store strategy with online sales has helped management generate the current string of comps growth.
2. Curbing a portion of wholesale growth is healthy in the long run
On the wholesale front, we have been equally strategic in taking measures that strengthen our brands for the long term. We have developed meaningful partnerships with specialty retailers, signature stores, and select department stores that demonstrate their ability to support our strong pricing discipline and cadence.
The wholesale channel represents a growth opportunity for Oxford's brands, but it also entails the risk of brand dilution as the company extends product availability outside of its own locations. In addition, management believes that an overreliance on this channel isn't wise, as physical retailers continue to struggle with the explosion of e-commerce.
This caution is particularly strong in the department-store segment of the wholesale channel. Oxford has purposefully reduced its department-store exposure in recent quarters. In fiscal 2017, department-store business accounted for 14% of total company sales; this decreased to 12% in 2018. During the earnings call, Chubb stated that as of the first quarter of 2019, department-store sales now account for just 10% of consolidated net sales.
3. Optimizing clearance inventory is critical to success
As with anyone in our business, a successful end-of-season clearance strategy is essential. We focus on ensuring the integrity of our brands with a well-controlled approach that limits the availability of our products at reduced prices. At Tommy Bahama, we operate 130 full-price retail locations and only 37 outlet stores worldwide.
Of Oxford Industries' four segments -- Tommy Bahama, Lilly Pulitzer, Lanier Apparel, and Southern Tide -- the Tommy Bahama and Lilly Pulitzer brands together account for 86% of the manufacturer's $1.1 billion in annual sales. Both brands generate gross margins of roughly 61%, considerably higher than either Lanier's 29% or Southern Tide's 50%.
Given the two segments' importance to the overall earnings picture, Oxford's management exercises tight control over the liquidation of Tommy Bahama and Lilly Pulitzer unsold merchandise.
As Chubb alludes to above, just over a fifth of all Tommy Bahama locations are outlet stores. During the call, the CEO stated that the sole function of these outlet units is to clear out unsold inventory from the previous year.
A different strategy is employed at Lilly Pulitzer, which has developed a very successful e-commerce operation (accounting for 36% of total brand sales annually). Lilly Pulitzer uses its online sales channel to execute flash clearance sales, to unload its discontinued and unsold inventory.
Management sets a minimum gross margin of 40% on these sales. By design, Lilly Pulitzer offers only five flash clearance sale days each year, thus raising anticipation among loyal customers and ensuring enough sales volume to move the targeted merchandise. These five sale days represented 46% of Lilly Pulitzer's e-commerce sales last year.
In sum, while the Tommy Bahama and Lilly Pulitzer divisions employ very different methods for selling outmoded inventory, both approaches are designed to optimize margin and dispose of obsolete product without cannibalizing the organization's bread-and-butter sales.