UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

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)

 

Registrant’s telephone number, including area code:

(404) 659-2424

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

As of December 2, 2005, the aggregate market value of the voting stock held by non-affiliates of the registrant (based upon the closing price for the common stock on the New York Stock Exchange on that date) was approximately $847,284,108. For purposes of this calculation only, shares of voting stock directly and indirectly attributable to executive officers, directors and holders of 10% or more of the registrant’s voting stock (based on Schedule 13G filings made as of or prior to December 2, 2005) are excluded. This determination of affiliate status and the calculation of the shares held by any such person are not necessarily conclusive determinations for other purposes. There are no non-voting shares of the registrant.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

Portions of our definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the Annual Meeting of Shareholders of Oxford Industries, Inc. to be held on October 10, 2006, are incorporated by reference in Part III of this Form 10-K. We intend to file such proxy statement with the Securities and Exchange Commission not later than 120 days after our fiscal year ended June 2, 2006.

 

 

Table of Contents

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

 

Our Securities and Exchange Commission filings and public announcements often 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 such forward-looking statements contained herein, the entire contents of 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 (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 demand for our products, expected pricing levels, raw material costs, the timing and cost of planned capital expenditures, expected outcomes of pending litigation and regulatory actions, competitive conditions, general economic conditions and expected synergies in connection with acquisitions and joint ventures. 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 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 and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission.

 

We caution that one should not place undue reliance on forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission. 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” and “we” mean Oxford Industries, Inc. and its consolidated subsidiaries. Also, the terms “FASB,” “SFAS” and “SEC” mean the Financial Accounting Standards Board, Statement of Financial Accounting Standards and the U.S. Securities and Exchange Commission, respectively. Additionally, the terms listed below reflect the respective period noted:

 

 

BUSINESS AND PRODUCTS

 

Introduction and Background

 

Oxford Industries, Inc. was founded in 1942. We are a producer and marketer of branded and private label apparel for men, women and children and an operator of retail stores and restaurants. We provide retailers and consumers with a wide variety of apparel products and services to suit their individual needs.

 

We categorize our sales as “branded” or “private label.” Where we sell products under a brand that we own to one or more customers or where we sell products under a brand that is owned by a third party to two or more customers, we consider such sales to be branded sales.

 

Our owned brands include the following:

 

 

As discussed in the intellectual property section below, we hold licenses to produce and sell certain product categories to more than one customer for the following brands:

 

 

Alternatively, where we sell products under a brand name exclusively to one customer and the brand is not owned by us, we consider such sales to be private label sales. For example, we produce L.L. Bean products only for L.L. Bean Inc. and consider such sales to be private label.

 

Our customers are found in every major channel of distribution including:

 

 

Our business is operated through the following segments:

 

 

As discussed in note 3 of our consolidated financial statements included in this report, we sold our Womenswear Group operations in fiscal 2006. Our Womenswear Group produced private label women’s sportswear separates, coordinated sportswear, outerwear, dresses and swimwear.

For more details on each of our segments, see note 13 of our consolidated financial statements and Part I, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in this report.

 

On June 13, 2003, we acquired all of the outstanding capital stock of Viewpoint International, Inc., which we operate as the Tommy Bahama Group. The purchase price for the Tommy Bahama Group consisted of $240 million in cash, $10 million in our common stock and up to $75 million in contingent payments that are subject to the Tommy Bahama Group achieving certain performance targets during the four years subsequent to the acquisition, as described in note 2 to our consolidated financial statements contained herein. The contingent payments have been earned in full for each of the first three years as the performance targets were achieved in each year. The transaction was financed by a $200 million private placement of senior unsecured notes completed on May 16, 2003 and a $275 million secured revolving credit facility closed on June 13, 2003, each as discussed in note 8 of our consolidated financial statements contained in this report.

 

On July 30, 2004, we acquired Ben Sherman Limited, which we operate as part of our Menswear Group. Ben Sherman is a London-based designer, distributor and marketer of branded sportswear and footwear, which also licenses the right to design, distribute and market Ben Sherman accessories. The purchase price for Ben Sherman was £80 million, or approximately $145 million, plus associated expenses. The acquisition was primarily financed with cash on hand and borrowings under our secured revolving credit facility and certain seller notes, each as described in note 8 to our consolidated financial statements contained in this report. In conjunction with the acquisition of Ben Sherman, our secured revolving credit facility was amended and restated on July 28, 2004 and increased to $280 million with a syndicate of eight financial institutions. The maturity date was extended to July 28, 2009.

 

We are a Georgia corporation and our principal executive offices are located at 222 Piedmont Avenue, NE, Atlanta, Georgia 30308. Our telephone number is (404) 659-2424. Our website address is www.oxfordinc.com. Information on our website does not constitute part of this report.

 

SALES AND MARKETING

 

In continuing operations, we sold our products to more than 11,000 active customers in fiscal 2006. Our 10 largest customers accounted for 44%, 45% and 53% of our net sales in fiscal 2006, 2005 and 2004, respectively. No individual customer accounted for greater than 10% of our consolidated net sales during fiscal 2006. We believe that our long-standing relationships with all of our major customers are good.

 

We maintain apparel sales offices and showrooms in several locations, including Atlanta, New York, Seattle, London, Hong Kong and Dusseldorf. Our wholesale operations employ a sales force consisting of salaried and commissioned sales employees and independent commissioned sales representatives. Approximately 70% of our net sales in fiscal 2006 were generated by our salaried employees. The remaining portion of our net sales were generated by independent commissioned sales representatives. More than 85% of our net sales in fiscal 2006 were to customers located within the United States.

 

Several of our product lines are designed and manufactured in anticipation of orders for sale to department and specialty stores and certain specialty chain and catalog customers. We make commitments for fabric and production in connection with these lines. These commitments can be up to several months prior to the receipt of firm orders from customers. These lines include both popular and better price merchandise sold under brand and designer names or customers’ private labels. If orders do not materialize, we may incur expenses to terminate our fabric and production commitments and dispose of excess inventories.

 

We work closely with many customers in the national chain and mass merchant tiers of distribution to develop product programs and secure orders prior to the commencement of production. The large volume orders typical in these tiers of distribution enable us to take advantage of relative efficiencies in planning raw materials purchasing and utilization of production facilities. These programs generally relate to private label merchandise.

As is customary in our industry, we carry levels of inventory necessary to meet anticipated delivery requirements of our customers. Also, as is customary in our industry, we extend credit terms to our customers, the majority of which range from 30 to 60 days.

 

In addition to our wholesale operations, our Tommy Bahama Group operates retail stores and restaurants in the United States, and our Menswear Group also operates Ben Sherman retail stores in the United Kingdom and the United States.

 

MANUFACTURING, RAW MATERIALS, SOURCES OF SUPPLY AND LOGISTICS

 

Manufacturing and Raw Materials

 

We acquire our products by sourcing from third party producers, and to some degree we manufacture a portion of our products in our owned manufacturing facilities and through our joint venture partners. In fiscal 2006, we sourced approximately 97% of our products from third party producers. For fiscal 2006, package purchases represented approximately 92% and Cut-Make-Trim (CMT) purchases represented approximately 8% of our third party sourced units. Less than 1% of our products were sourced from contractors in the United States.

 

Package purchases are purchases which include both raw materials and cut, sew and finish labor. We do not take ownership of package purchases until the goods are shipped. CMT contract purchases are purchases in which we supply the raw materials and purchase cut, sew and finish labor from third party producers. In CMT purchases, we retain ownership of the raw materials throughout the manufacturing and finishing process.

 

We typically conduct business with our producers on an order-by-order basis. Our third party producers perform cutting, sewing and/or related operations to produce finished apparel products to the specifications and quality standards approved by us in advance. We inspect fabric and finished goods throughout the manufacturing process as part of our quality control program to ensure that consumers receive products that meet our high standards.

 

The use of third party producers enables us to reduce working capital relating to work-in-process inventories. To place orders and monitor production, we maintain buying offices in Hong Kong, Singapore and India. We monitor production in our offshore manufacturing locations by sending employees from our buying offices, employing local nationals and using unaffiliated buying agents. In any given offshore location, we may use one or more of these methods of monitoring production.

 

The use of a large number of manufacturers enables us to maintain a stable, efficient and flexible manufacturing network. For some manufacturers, we are the primary or only customer and have significant influence of the facility’s capacity to cover our core, ongoing production needs. This core manufacturing capacity is supplemented by an extensive network of contract manufacturers for which we are not the primary customer. This second tier of manufacturing capacity enables us to handle short-term increases in demand for production created by the seasonality of our business in certain products and other manufacturing demand that cannot be met by our core capacity.

 

We require all third party producers who manufacture or finish products for us to abide by a stringent code of conduct that sets guidelines for employment practices such as wages and benefits, working hours, health and safety, working age and disciplinary practices, and for environmental, ethical and legal matters. In addition, many of our customers and licensors require compliance with their codes of conduct which may be more stringent than our code of conduct. We regularly assess manufacturing and finishing facilities to ensure that they are complying with our code of conduct as well as the code of conduct of any customer or licensor. Our monitoring program includes periodic on-site facility inspections and continuous improvement activities. We also hire independent monitors to supplement our efforts.

Sources of Supply

 

Our products are manufactured from cotton, linen, wool, silk, other natural fibers, synthetics and blends of these materials. The majority of the materials used in our manufacturing operations are purchased in the form of woven or knitted finished fabrics directly from numerous offshore fabric mills or from intermediary firms that purchase unfinished or greige fabric from mills and then re-sell such fabric after dyeing and finishing it. In addition, many of our buttons, zippers, thread and other trim items are also purchased from offshore suppliers. We do not have long-term raw materials contracts with any of our principal suppliers.

 

We regard our access to offshore sources of raw materials, finished goods and outside production as adequate for our needs. We are not dependent on any single source or third party contract manufacturer as no single manufacturer accounts for a material portion of our purchases. There are occasions when we are unable to take customer orders on short notice because of the minimum lead time required to produce a garment that is acceptable to the customer with respect to cost, quantity, quality and service. We are unable to quantify the value of potential orders declined due to the inability to meet the required lead time. We believe that our required lead times are competitive by industry standards.

 

Logistics

 

We operate a number of dedicated distribution centers in the United States and we also outsource distribution activities to third party logistics providers. Distribution center activities include receiving finished goods from our plants and contractors, inspecting those products and shipping them to our customers. We continually explore opportunities to improve efficiencies in our logistics activities.

 

INTELLECTUAL PROPERTY

 

Owned Brands

 

We market our apparel collections under the following primary brands:

 

Tommy Bahama

 

Tommy Bahama is an aspirational lifestyle brand that defines elegant island living with men’s and women’s sportswear, swimwear and accessories.

 

Indigo Palms

 

Indigo Palms is a collection of denim-related sportswear that is infused with an island attitude. Appealing to a modern, sophisticated, quality conscious customer, Indigo Palms offers the finest fabrics, treatments and styling in a luxurious yet casual collection for men and women.

 

Island Soft

 

Island Soft takes a sophisticated, more fashion-minded approach to sportswear. This upscale men’s collection offers a more dressed up alternative, featuring a group of innovative jacket/blazer hybrids, as well as trousers, shirts, sweaters and outerwear.

 

Ben Sherman

 

The Ben Sherman collection was established in 1963. It targets 19 to 35-year-old men and women. The Ben Sherman collection has a long heritage as a modern, young men’s shirt brand that has evolved into its current irreverent global lifestyle brand for youthful-thinking men and women.

 

Oxford Golf

 

The Oxford Golf line was launched in the Fall of 2003 by the Menswear Group. It appeals to a sophisticated golf apparel customer with a taste for high quality, attention to detail and classic styling.

Ely & Walker brands

 

Brands in this line include Ely, Cattleman, Ely Casuals^®, and Cumberland Outfitters, which are targeted toward a western-style shirt and sportswear consumer.

 

Solitude

 

Solitude is a California lifestyle brand created by world champion surfer Shaun Tomson and his wife Carla. Solitude is inspired by the casual, beach lifestyle of Santa Barbara and blends the elements of surf, sand and sun into a full collection of casual and dress sportswear.

 

Arnold Brant

 

Arnold Brant is a tailored collection of men’s clothing which blends the modern elements of style with affordable luxury.

 

Licenses

 

We have the right to use trademarks under license and design agreements with the trademark owners. The following are principal trademarks we have the right to use:

 

 

In addition to the above licenses, we have an exclusive distribution agreement in the United States and Canada for Evisu apparel and accessories.

 

Although we are not dependent on any single license or design agreement, we believe our license and design agreements in the aggregate are of significant value to our business.

 

The license and design agreements mentioned above will expire at various dates through our fiscal year 2012. Many of our licensing agreements are eligible for renewal or extension.

 

As shown in the table below, we offer numerous products through license arrangements with companies to use our Tommy Bahama and Ben Sherman trademarks. Certain of these licensed products are sold in our retail stores. Such licenses are generally for limited geographic areas, such as the United States or the United Kingdom. The licenses expire at various dates and in some cases may be renewed or extended by the licensee at their option as long as they have met certain obligations and goals provided in the agreements.

 

 

Trademarks

 

We own trademarks, which are very important to our business. Our trademarks are subject to registrations and pending applications throughout the world for use on a variety of items of apparel, apparel-related products, accessories, home furnishings and beauty products, as well as in connection with retail services. We continue to expand our worldwide usage and registration of related trademarks. In general, trademarks remain valid and enforceable as long as the trademarks are used in connection with the products and services and the required registration renewals are filed. We regard the license to use the trademarks and our other proprietary rights in and to the trademarks as valuable assets in marketing our products and, on a worldwide basis, continuously seek to protect them against infringement. As a result of the appeal of our trademarks, our products have been the subject of counterfeiting. We have an enforcement program to control the sale of counterfeit products in the United States and in major markets abroad.

 

In markets outside of the United States, our rights to some or all of our trademarks may not be clearly established. We may experience conflicts with various third parties which have acquired ownership rights in certain trademarks, which may impede our use and registration of our trademarks in international markets. While such conflicts are common and may arise again from time to time as we continue our international expansion, we generally intend to resolve such conflicts through both legal action and negotiated settlements with third-party owners of the conflicting trademarks.

 

SEASONAL ASPECTS OF BUSINESS AND ORDER BACKLOG

 

Seasonal Aspects of Business

 

Although our various product lines are sold on a year-round basis, the demand for specific products or styles may be highly seasonal. For example, the demand for golf and Tommy Bahama products is higher in the spring and summer seasons. Products are sold prior to each of the retail selling seasons, including spring, summer, fall and holiday. As the timing of product shipments and other events affecting the retail business may vary, results for any particular quarter may not be indicative of results for the full year. The percentage of net sales from continuing operations by quarter for fiscal 2006 was 24%, 25%, 25% and 26%, respectively, and the percentage of operating income from continuing operations by quarter for fiscal 2006 was 25%, 22%, 23% and 30%, respectively, which may not be indicative of the distribution in future years.

Order Backlog

 

As of June 2, 2006 and June 3, 2005, we had booked orders relating to our continuing operations amounting to $272.5 million and $282.6 million, respectively, substantially all of which we expect will be or were shipped within six months after each such date. Once we receive a specific purchase order, the dollar value of such order is included in our booked orders. A portion of our business consists of at-once EDI “Quick Response” programs with large retailers. Replenishment shipments under these programs generally have such an abbreviated order life as to exclude them from the order backlog completely. We do not believe that this backlog information is necessarily indicative of sales to be expected for future periods.

 

COMPETITION

 

We sell our products in highly competitive domestic and international markets in which numerous United States-based and foreign apparel firms compete. No single apparel firm or small group of apparel firms dominates the apparel industry. We believe we are one of the largest designers, manufacturers, marketers and wholesalers of consumer apparel products in the United States, but there are other apparel firms with greater sales and financial resources.

 

Competition within the apparel industry is based upon styling, marketing, price, quality, customer service and, with respect to branded and designer product lines, consumer recognition and preference. We believe we compete effectively with other members of the industry with regard to all of these factors. Successful competition in styling and marketing is related to our ability to foresee changes and trends in fashion and consumer preference and to present appealing products to our customers. Successful competition in price, quality and customer service is related to our ability to maintain efficiency in sourcing and distribution. Successful competition with respect to branded and designer product lines is related to the high consumer recognition and loyalty that our owned and licensed brands enjoy.

 

Substantially all of the apparel sold by us and our principal competitors is produced outside the United States. Most of the apparel sold by us and some of our competitors is sold to customers on a landed, duty-paid basis after it is imported into the United States, while other apparel is sold on a direct basis in which the customer takes ownership in the country of production. In this direct selling scenario, the customer handles the in-bound logistics and customs clearance. Direct selling represented approximately 5% of our net sales in fiscal 2006.

 

Direct sourcing by our customers presents a competitive challenge to us in our private label business as our customers purchase apparel directly from the third party producers instead of from us. We are not able to quantify the impact that direct sourcing has had on our net sales or margins, but as many of our major customers purchase an increasing percentage of their apparel on a direct sourcing basis the opportunities to sell on a delivered, duty paid basis are reduced.

 

We believe that the relative price advantage to retailers of direct sourcing is offset, to some extent, by several factors. First, our long-term relationships with foreign facilities enables us to offer the retailers better and more consistent quality, better adherence to delivery schedules and a more reliable flow of more accurate information than that which is available to them from many of the facilities that offer them direct sourcing. In addition, we believe the services we provide in the areas of product development, design and supply chain management offset, to some extent, the relative price advantage of direct sourcing.

 

We believe that choosing the most competitive countries for the production of our products is critical to our competitiveness. The most competitive location to produce or source a particular product depends on a variety of factors. These factors include availability of globally competitive fabric and other raw materials, labor and manufacturing costs, ability to meet quality standards, required lead times, logistics and the impact of international trade rules and trade preference agreements and legislation on apparel exports from that country to the United States.

TRADE REGULATION

 

International trade agreements, trade preference arrangements and trade legislation are important because most apparel imports into the United States are highly restricted. There are two key types of restrictions. First, there are duties levied on the value of imported apparel. The duty rates on the cotton and wool product categories that cover the majority of our products range from 15 to 20%. Silk products represent a major portion of our Tommy Bahama line and are generally subject to duty rates less than 5%. Second, until January 1, 2005, the United States had implemented restrictive quotas on the importation of many classifications of textiles and apparel products from most of the major apparel-producing countries, including most of the countries where we produce apparel and including the cotton and wool product categories that cover the majority of our products. These quota restraints placed numerical limits on the quantity of garments permitted to be imported into the United States in a given year on a by country and by product category basis. The effect of these quotas was to limit the amount of apparel that could be sourced in the countries that offered the most competitive fabrics and most competitive apparel manufacturing. As a result, a substantial portion of cotton and wool apparel imported into the United States was sourced, prior to January 1, 2005, from countries that would not be the most competitive producers in the absence of quotas. Silk products were not subject to quota restraints. Pursuant to authority granted by China’s World Trade Organization (WTO) accession agreement, both the United States and the European Union have re-imposed quotas on a number of key product categories from China.

 

Absent the non-market restrictions created by quotas and absent duty saving advantages available with respect to the products of certain countries under the terms of various free trade agreements and trade preference arrangements, we believe that generally the most competitive fabrics and apparel manufacturing, are in Asia and the Indian sub-continent. Consequently, the elimination of quotas has resulted in a reduction in our western hemisphere sourcing and manufacturing activities and an increase in our sourcing and manufacturing activities in Asia and the Indian sub-continent. The trend away from western hemisphere sourcing and manufacturing may be slowed to some extent by various current and proposed free trade agreements and trade preference programs. We believe that by selecting the locations where we produce or source our products based in part on trade regulations, we are effective and will continue to be effective in using various trade preference agreements and legislation to our competitive advantage.

 

We believe that with respect to most of our production, we will continue to be able to source from the most competitive countries because of the flexibility of our manufacturing and sourcing base. This flexibility is provided by the fact that while we have long-term relationships with many of our contract manufacturers, we do not have long-term contractual commitments to them and are able to move our production to alternative locations if competitive market forces so dictate. In addition, it would be relatively inexpensive for us to shut down one or more of our owned factories if such action is required to meet the competitive demands of the marketplace. The relative ease with which we can exit our currently owned and contract manufacturing facilities, if necessary, provides us with the ability to shift our production relatively quickly as different countries become more productive.

 

EMPLOYEES

 

As of June 2, 2006, we employed approximately 4,800 persons, of whom approximately 67% were employed in the United States. Approximately 33% of our employees were retail store and restaurant employees. We believe our employee relations are excellent.

 

CODE OF ETHICAL CONDUCT

 

Our board of directors has adopted a code of ethical conduct for our Principal Executive Officer, our Principal Financial Officer, and other designated key financial associates. Additionally, our board of directors has adopted a conflict of interest and business ethics policy for all of our employees. Our employees are expected to adhere at all times to these policies, as applicable. We have posted both of these codes on our website. We will also disclose any amendments or waivers to our code of ethical conduct on our website.

AVAILABLE INFORMATION

 

Our internet address is www.oxfordinc.com. Under “Investor Info” on the home page of our website, we have provided a link to the website of the SEC where among other things, our annual report on Form 10-K, proxy statement, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available once we electronically file such material with, or furnish it to, the SEC. Additionally, our Corporate Governance Guidelines, as well as the charters of our Audit Committee and the Nominating, Compensation and Governance Committee of our Board of Directors, are available under “Corporate Governance” on the home page of our website. Copies of these documents will be provided to any shareholder who requests a copy in writing.

 

In addition, we will provide, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to:

 

Investor Relations Department
Oxford Industries, Inc.
222 Piedmont Avenue, N.E.
Atlanta, GA 30308
info@oxfordinc.com
(404) 659-2424

 

The information on the website listed above is not and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference in this document.

 

Our business faces certain risks, of which many are outside of our control. The following factors, as well as factors described elsewhere in this report or in our other filings with the SEC, which could materially affect our business, financial condition or operating results should be carefully considered. The risks described below are not the only risks facing our company. If any of the following risks, or other risks or uncertainties not currently known to us or that we currently deem to be immaterial, actually occur, our business, financial condition or operating results could suffer.

 

The apparel industry is heavily influenced by general economic cycles.

 

The apparel industry is cyclical and dependent upon the overall level of discretionary consumer spending, which changes as domestic and international economic conditions change. Overall economic conditions that affect discretionary consumer spending include, but are not limited to, employment levels, energy costs, interest rates, tax rates, personal debt levels and stock market volatility. Uncertainty about the future may also impact the level of discretionary spending or result in shifts in consumer spending to products other than apparel. Any deterioration in general economic or political conditions, acts of war or terrorism or other factors that create uncertainty or alter the discretionary consumer habits in our key markets, particularly the United States and the United Kingdom, could have an adverse impact on our business, financial condition or operating results.

 

The apparel industry is highly competitive and we face significant competitive threats to our business from various third parties.

 

The apparel industry is highly competitive and fragmented. Our competitors include numerous apparel designers, manufacturers, distributors, importers, licensors and retailers, some of which may also be our customers. The level and nature of our competition varies and the number of our direct competitors and the intensity of competition may increase as we expand into other markets or as other companies expand into our markets. Retailers that are our customers may pose our most significant competitive threat by sourcing their products directly or marketing their own private label brands. Some of our competitors have greater financial and marketing resources than we have, which may place us at a competitive disadvantage.

The apparel industry is subject to rapidly evolving fashion trends, and we must continuously offer innovative and upgraded products.

 

We believe that the principal competitive factors in the apparel industry are design, brand image, preference, price, quality, marketing and customer service. Although certain of our products carry over from season to season, the apparel industry in general is subject to rapidly changing fashion trends and shifting consumer demands. Accordingly, we must anticipate, identify and capitalize upon emerging as well as proven fashion trends. We believe that our success depends on our ability to continuously develop, source, market and deliver a wide variety of innovative, fashionable, saleable brands and products. These products must be offered at competitive prices in the respective distribution channels.

 

Revenue growth from our brands will depend largely upon our ability to continue to maintain and enhance the distinctive brand identities. Many other companies offer products that resemble and/or compete with our branded products. They may offer these products at significantly lower price points in order to directly compete with our branded merchandise sold at higher prices. To the extent such competitors are successful, we may not be able to maintain the premium price points that our branded products have traditionally commanded.

 

Although we try to manage our inventory risk through early order commitments by our wholesale customers, we may place production orders with manufacturers before we have received all of a season’s orders and orders may be cancelled by our wholesale customers before shipment. To the extent actual demand exceeds forecasted demand, we may not have an adequate supply of products to meet consumer needs.

 

Due to the competitive nature of the apparel industry, there can be no assurance that the demand for our products will not decline or that we will be able to successfully evaluate and adapt our products to align with consumers’ preferences and fashion trends. Any failure on our part to develop appealing products and update core products could limit our ability to differentiate our products. Additionally, such a failure could leave us with a substantial amount of unsold excess inventory, which we may be forced to sell at lower price points. Any of these risk factors or a shift in consumer demographics could result in the deterioration in the appeal of our brands and products, adversely affecting our business, financial condition and operating results.

 

Our future success is dependent upon our ability to implement our business strategy.

 

Our success depends on our ability to implement our business strategy. We face many challenges in implementing our strategy of shifting from primarily a private label apparel company to a branded apparel company. Important aspects of this strategy include our ability to maintain and grow our existing lines of business, acquire additional businesses in the future and selectively dispose of or discontinue certain operations that are not in line with our strategy, each of which has certain inherent risks. As changes occur in our industry, it may be necessary for us to alter our strategy. There can be no guarantees that our strategy, at any given time, will be the optimal strategy for our company or that we will be able to implement the strategy effectively due to various factors, some of which are beyond our control. An inappropriate strategy or ineffective implementation of our strategy could result in a material adverse affect on our business, financial condition and operating results.

 

In order to maintain our existing business and offer new product lines, we may incur substantial costs which may not be recoverable.

 

We intend to continue to maintain and grow our existing business through our current customer base as well as the growth of our retail business, which may require a substantial amount of fixed costs, long term leases, capital improvements and marketing and advertising costs. Additionally, we intend to offer new product lines in the future. As is typical with new products, market acceptance of new designs and products we may introduce is subject to uncertainty. In addition, the introduction of new lines and products often require substantial costs in design, marketing and advertising, which may not be recovered if the products are not successful. In the event that the products or brands that we internally develop are not successful, our image and operating results may be negatively impacted.

The acquisition of new businesses has certain inherent risks, including, for example, strains on our management team, unexpected acquired costs, and, in some instances, earn-out payments.

 

We intend to continue to acquire new business in the future if appropriate investment opportunities are available. Our sales growth may be limited if we are unable to find suitable acquisition candidates at reasonable prices in the future or if the acquisitions do not achieve the anticipated results. These acquisitions may strain our administrative, operational and financial resources and distract our management from our other businesses. The integration process could create a number of challenges and adverse consequences for us, including the unexpected loss of key employees, suppliers, customers, and sales or an increase in other operating costs. Further, we may not be able to manage the combined operations and assets effectively or realize all or any of the anticipated benefits of the acquisition.

 

As a result of acquisitions that have occurred or may occur in the future, we may become responsible for unexpected liabilities that we failed to discover in the course of performing due diligence in connection with the acquired businesses. We cannot be assured that any indemnification to which we may be entitled from the sellers will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business acquired.

 

Similar to the terms of the Tommy Bahama acquisition, the terms of any future acquisitions may require us to make substantial payments to the sellers in performance-based contingent payments for a number of years after the acquisition. The earnings upon which these payments are contingent may not be determined by actual cash flows and consequently may not reflect our ability to make such payments. Additionally, certain of the sellers may be key members of management. It is possible that their interests with respect to the contingent payments will differ from the interests of our company as a whole. Such differences may occur if they have incentives to maximize the profitability of the acquired business during the contingent payment term, which may be to the detriment of the longer term prospects for the business.

 

When dispositions occur, we may be required to find alternative uses for our resources to reduce excess capacity and replace those operations.

 

As we did in fiscal 2006 with respect to our Womenswear operations, we may determine that it is appropriate to dispose of certain operations. Dispositions of certain businesses that do not align with the strategy of our company as a whole or the discontinuation of certain product lines which may not provide the returns that we expect may result in excess capacity (such as under-utilized financial or production resources) to some degree in the event that the operations are not replaced with new lines of business either internally or through acquisition. There can be no guarantee that we will be able to replace the sales and profits related to these businesses, which may result in a decline in our operating results.

 

The success of our operations depends on our ability to maintain an appropriate organization structure.

 

As we continue to expand into new product categories, markets and lines of business or discontinue certain operations, it is necessary for us to continue to assess the appropriate organizational structure within our company as a whole. We must integrate complementary practices and processes in order to achieve synergies or other anticipated benefits. In the past, we have consolidated various operational processes in order to reduce costs or achieve related synergies. If we are unable to effectively organize our operations and manage our product lines in the future or, if we do not achieve expected cost reductions or synergies, our business, financial condition and operating results may be negatively impacted.

 

We rely on key management, the loss of whom may have an adverse effect on our business, financial condition and operating results.

 

Our success depends upon disciplined execution at all levels of our organization. This execution requires experienced and talented management in our design, sourcing, distribution, merchandising, advertising, and support functions. The loss of J. Hicks Lanier, Chairman and Chief Executive Officer, Michael J. Setola, President, S. Anthony Margolis, Group Vice President, or any of our other executive officers or key

employees, without an appropriate succession plan, or our inability to attract or retain qualified personnel could negatively impact our business, financial condition and operating results.

 

The apparel industry has experienced price deflation in recent years, and price reductions in our products in the future could have an adverse impact on our business, financial condition and operating results.

 

The average net selling price of apparel continues to decrease in the apparel industry. The decline is primarily attributable to increased competition, excess worldwide manufacturing capacity, increased product sourcing in lower cost countries, growth of the mass merchant and discount channels of distribution, consolidation in the retail industry, excess capacity of retail space, reduced relative spending on apparel and increased value consciousness on the part of consumers. All of these impacts may continue in the future.

 

To remain competitive, we may need to reduce our prices from time to time in response to these deflationary pressures. If one or more of our competitors is able to reduce their production or sourcing costs in any manner, we may experience additional pricing pressures and may be forced to reduce our prices or face a decline in sales. Our inability to lower costs in response to these pricing pressures could have an adverse impact on our business, financial condition and operating results. In addition, these deflationary pressures, even if met with reduced costs that do not adversely impact our sales volume, could reduce the revenues attributable to such sales and have an adverse impact on our business, financial condition and operating results.

 

We depend on a group of key customers for a significant portion of our sales.

 

We generate a significant percentage of our sales from a few major customers, to whom we extend credit without requiring collateral, resulting in a large amount of receivables from just a few customers. For fiscal 2006, sales to our ten largest customers accounted for approximately 44% of our total net sales from continuing operations. In addition, the net sales of our individual business segments may be concentrated among several large customers. Continued consolidation in the retail industry may increase the concentration of our customers, and therefore our risks in the United States and other markets. This consolidation could result in a decrease in the number of stores that carry our products, restructuring of our customers’ operations, more centralized purchasing decisions, direct sourcing and greater leverage by customers, potentially resulting in lower prices, realignment of customer affiliations or other factors which could negatively impact our business, financial condition or operating results.

 

We do not have long-term contracts with any of our customers, instead relying on long-standing relationships with these customers and our position within the marketplace. As a result, purchases generally occur on an order-by-order basis, and each relationship can generally be terminated by either party at any time. We face the risk that a decision by one or more major customers, whether motivated by competitive considerations, quality or style issues, financial difficulties, economic conditions or otherwise, could impact their desire or ability to purchase our products or change their manner of doing business with us. An unanticipated decline in sales to one or more major customers could adversely affect our profitability as it would be difficult to immediately, if at all, replace this business with new customers or increase sales volumes with other existing customers.

 

We are subject to risks associated with changes in prices and availability of raw materials and other costs.

 

We and our third party suppliers rely on the availability of raw materials at reasonable prices. Any decrease in the availability of raw materials could impair our ability to meet production requirements in a timely manner. The principal fabrics used in our business are cotton, linens, wools, silk, other natural fibers, synthetics and blends of these materials, some of which are heavily dependent on the cost of petroleum. The prices paid for these fabrics depend on the market price for raw materials used to produce them. The price and availability of certain raw materials has in the past fluctuated, and may in the future fluctuate, significantly depending on a variety of factors, including crop yields, weather, supply conditions, government regulation, economic climate and other unpredictable factors. Additionally, costs of our third party providers or our

transportation costs may increase due to a variety of factors including weather, supply conditions, government regulation, economic climate, energy costs and other unpredictable factors. We have not historically entered into any futures contracts to hedge commodity prices. Any significant raw material price or transportation cost increases could materially adversely affect our business, financial condition and operating results.

 

We are dependent upon our third party producers’ and sourcing agents’ ability to meet our requirements.

 

We source substantially all of our products from non-exclusive third party producers and sourcing agents located in foreign countries. We have not entered into long-term contracts with any of these producers and sourcing agents. Therefore, we compete with other companies for the production capacity of independent manufacturers. We regularly depend upon the ability of third party producers to secure a sufficient supply of raw materials, adequately finance the production of goods ordered and maintain sufficient manufacturing and shipping capacity. We cannot be certain that we will not experience operational difficulties with our manufacturers, such as the reduction of availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines or increases in manufacturing costs. Such difficulties may negatively impact our business, financial condition and operating results.

 

As more participants in the apparel industry continue to move towards sourcing from third parties, the competition for quality contractors has intensified. Some of these contractors have long-standing relationships with our competitors. To the extent we are not able to secure or maintain relationships with third party producers that are able to fulfill our requirements, our business, financial condition and operating results may be adversely impacted.

 

We, and some of our customers, require third party producers to meet certain standards in terms of working conditions, environmental protection and other matters before placing business with them. As a result of higher costs relating to compliance with these standards, we may pay higher prices than some of our competitors for products. In addition, the labor and business practices of independent apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by us or our independent manufacturers to adhere to labor or other laws or business practices accepted as ethical in our key markets, and the potential litigation, negative publicity and political pressure relating to any of these events, could disrupt our operations or harm our reputation and impact our business, financial condition and operating results.

 

Our dependence on foreign supply sources could result in disruptions to our operations in the event of disruptions in the global transportation network (including strikes and work stoppages at port facilities); political instability or other international events; economic disruptions; foreign currency fluctuations; labor disputes at factories; the imposition of new or adversely adjusted tariffs, duties, quotas, import and export controls, taxes and other regulations; changes in U.S. customs procedures concerning the importation of apparel products; changes in domestic or foreign governmental policies; actual or threatened acts of war or terrorism; or the occurrence of an epidemic. These and other events beyond our control could interrupt our supply chain and delay receipt of our products in the United States or United Kingdom, which could result in higher costs, including product and transportation costs, unanticipated inventory accumulation, or the loss of revenues, customer orders and customer goodwill, each of which could negatively impact our business, financial condition and operating results.

 

Our business is subject to regulatory risks associated with importing products.

 

As we source substantially all of our products from foreign countries, we are at risk to changes relating to the laws and regulations governing the importing and exporting of apparel products into and from the countries in which we operate. Substantially all of our import operations are subject to tariffs and other charges imposed on imported products. In addition, the countries in which our products are manufactured or countries into which our products are imported may impose additional or new quotas, duties, tariffs, taxes or other restrictions or adversely modify existing restrictions.

 

Our operations are also subject to international trade agreements and regulations such as the North American Free Trade Agreement and the WTO. Trade agreements can impose requirements that adversely affect our

business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported into the United States from a particular country.

 

Our or any of our supplier’s failure to comply with customs or similar laws could restrict our ability to import product or lead to fines or other penalties. We cannot guarantee that future trade agreements will not provide our competitors with a material advantage over us, which may negatively impact our business, financial condition and operating results.

 

We may be unable to protect our trademarks and other intellectual property or may otherwise have our brand names harmed.

 

We believe that our registered and common law trademarks and other intellectual property, as well as other contractual arrangements, including licenses and other proprietary intellectual property rights, have significant value and are important to our continued success and our competitive position due to their recognition by retailers and consumers. Therefore, our success depends to a significant degree upon our ability to protect and preserve our intellectual property. We rely on laws in the United States and other countries to protect our proprietary rights. However, we may not be able to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States. Infringements upon our intellectual property may negatively impact our business, financial condition and operating results.

 

From time to time, we discover products in the marketplace that are unauthorized reproductions of certain of our branded products or that otherwise infringe upon our trademarks and other intellectual property. Such counterfeiting typically increases as brand recognition increases. Despite any precautions we may take to protect our intellectual property, policing unauthorized use of our intellectual property is difficult, expensive and time consuming and we may be unable to determine the extent of any unauthorized use. There can be no assurance that the actions that we have taken to establish and protect our trademarks and other intellectual property will be adequate to prevent the creation of counterfeits, knock-offs, imitations or infringement of our products or trademarks by third parties. In the future, we may have to rely on litigation and other legal action to enforce our intellectual property rights or contractual rights. If litigation that we initiate is unsuccessful, we may not be able to protect the value of our intellectual property and, in any case, any litigation or other legal action to enforce our intellectual property rights or contractual rights, whether successful or unsuccessful, could result in substantial costs to us and diversion of our management and other resources.

 

Additionally, there can be no assurance that the actions that we have taken will be adequate to prevent others from seeking to block sales of our products as violations of proprietary rights. Although we have not been materially inhibited from selling products in connection with trademark disputes, as we extend our brands into new product categories and new product lines and expand the geographic scope of our marketing, we could become subject to litigation based on allegations of the infringement of intellectual property rights of third parties. In the event a claim of infringement against us is successful, we may be required to pay damages, royalties or license fees to continue to use intellectual property rights that we had been using or we may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable time. Any litigation and other legal action of this type, whether successful or unsuccessful, could result in substantial costs to us and diversion of our management and other resources.

 

We make use of debt to finance our operations, which exposes us to risks that could adversely affect our business, financial position and operating results.

 

Our levels of debt vary as a result of the seasonality of our business, investments in acquisitions and working capital and divestitures. As we continue to grow our business, and potentially make acquisitions in the future, our debt levels may increase under our existing facilities or potentially under new facilities, which may increase our exposure to the items discussed below.

 

Our indebtedness includes certain obligations and limitations, including the periodic payment of principal and interest, maintenance of certain financial covenants and certain other limitations related to additional debt, dividend payments, investments and dispositions of assets. Our ability to satisfy these obligations will be

dependent upon our business, financial condition and operating results. These obligations and limitations may increase our vulnerability to adverse economic and industry conditions, place us at a competitive disadvantage compared to our competitors that have less indebtedness and limit our flexibility in carrying out our business plan and planning for, or reacting to, changes in the industry in which we operate. Such limitations may negatively impact our business, financial condition and operating results.

 

At the maturity of our indebtedness, we will be required to extend or refinance such indebtedness, sell assets to repay the indebtedness or raise equity to fund the repayment of the indebtedness. Additionally, a breach of any of the covenants relating to our indebtedness could result in an event of default under those instruments, allowing the holders of that indebtedness to declare all outstanding indebtedness immediately due and payable. If we are unable to refinance our debt, we would most likely be unable to pay our outstanding indebtedness at maturity or if our debt was declared immediately due and payable. We would, therefore, be required to seek alternative sources of funding, which may not be available on commercially reasonable terms or at all, or face bankruptcy. If we are unable to refinance our indebtedness or find alternative means of financing our operations, we may be required to curtail our operations or take other actions, which may adversely affect our business, financial condition and operating results.

 

Also, borrowings under our credit facilities are at variable rates of interest and expose us to interest rate risk, and we generally do not engage in hedging activities with respect to our interest rate risk. These amounts are borrowed under such facilities in order to provide us with the necessary flexibility to adjust our debt levels as appropriate to provide us with sufficient liquidity to operate our business, including as a result of the impact of seasonality on our business. In the event that interest rates increase, we may have to revise or delay our business plans, reduce or delay capital expenditures or otherwise adjust our plans for operations. An increase in interest rates may require us to pay a greater amount of our cash flow towards interest even if the amount of borrowings outstanding remains the same, which could negatively impact our business, financial condition and operating results.

 

The apparel industry is heavily influenced by weather patterns and natural disasters, and our business may be adversely affected disproportionately by unseasonable weather conditions or natural disasters.

 

Like others in our industry, our business, financial condition and operating results may be adversely affected by unseasonable weather conditions or certain natural disasters which may cause consumers to alter their purchasing habits or result in a disruption to our operations. Because of the seasonality of our business, the occurrence of such events at certain times could disproportionately impact our business, financial condition and operating results.

 

Our foreign sourcing operations as well as the sale of products in foreign markets result in an exposure to fluctuations in foreign currency exchange rates.

 

As a result of our international operations, we are exposed to increased inherent risks in conducting business outside of the United States. Substantially all of our contracts to have goods produced in foreign countries are denominated in U.S. dollars. Purchase prices for our products may be impacted by fluctuations in the exchange rate between the U.S. dollar and the local currencies of the contract manufacturers, such as the Chinese Yuan, which may have the effect of increasing our cost of goods sold in the future. If the value of the U.S. dollar decreases relative to certain foreign currencies in the future, then the prices that we negotiate for products could increase, and it is possible that we would not be able to pass this increase on to customers, which would negatively impact our margins. If the value of the U.S. dollar increases between the time a price is set and payment for a product, the price we pay may be higher than that paid for comparable goods by any competitors that pay for goods in local currencies, and these competitors may be able to sell their products at more competitive prices. Additionally, currency fluctuations could also disrupt the business of our independent manufacturers that produce our products by making their purchases of raw materials more expensive and difficult to finance.

 

We received U.S. dollars for greater than 85% of our product sales during fiscal 2006. The sales denominated in foreign currencies primarily relate to Ben Sherman sales in the United Kingdom and Europe

and to a lesser extent sales of certain products in Canada. An increase in the value of the U.S. dollar compared to these other currencies in which we have sales could result in lower levels of sales and earnings in our consolidated statements of earnings, although the sales in foreign currencies could be equal to or greater than amounts in prior periods.

 

We generally do not engage in hedging activities with respect to our exposure to foreign currency risk except that, on occasion, we do purchase foreign currency forward exchange contracts for our goods purchased on U.S. dollar terms that are expected to be sold in the United Kingdom and Europe. Any fluctuations in foreign currency exchange rates in the markets that we operate could negatively impact our business, financial condition and operating results.

 

We are dependent on a limited number of distribution centers, and if one becomes inoperable, our business, financial condition and operating results could be negatively impacted.

 

Our ability to meet customer expectations, manage inventory and achieve objectives for operating efficiencies depends on the proper operation of our primary distribution facilities, some of which are owned and others of which are operated by third parties. Finished garments from our contractors are inspected and stored at these distribution facilities. If any of these distribution facilities were to shut down or otherwise become inoperable or inaccessible for any reason, we could have a substantial loss of inventory and incur significantly higher costs and longer lead times associated with the distribution of our products during the time it takes to reopen or replace the facility. This could negatively affect our business, financial condition and operating results.

 

We license the right to use certain of our brand names under various agreements.

 

Certain of our brands, such as Tommy Bahama and Ben Sherman, have a reputation of outstanding quality and name recognition, which makes the brands valuable as a royalty source. We are able to license complementary products and obtain royalty income from the use of our brands’ names. While we take significant steps to ensure the reputation of our brands is maintained through our license agreements, there can be no guarantee our brands will not be negatively impacted through our association with products outside of our core apparel products. The actions of a licensee may not only result in a decrease in the sales of our licensee’s products but also could significantly impact the perception of our brands.

 

Additionally, while we believe that our relationship with our principal licensees are favorable and the termination of any single licensing agreement would not have a material adverse effect on our business as a whole, our long-term prospects will depend in part on the continuation of a significant percentage of existing licensing arrangements and the addition of other license agreements in the future, as well as ongoing consumer acceptance of the products sold under those license agreements. If the licensees’ products are not acceptable to consumers, if licensee’s actions are detrimental to our brands or if we do not add new license agreements, our business, financial condition and operating results may be negatively impacted.

 

We hold licenses for the use of other parties’ brand names, and we may not be able to guarantee our continued use of such brand names or the quality or salability of such brand names.

 

We have entered into license and design agreements to use well-known trademarks and trade names, such as Nautica, Tommy Hilfiger and Oscar de la Renta to market our products. These license and design agreements will expire at various dates in the future. Although we believe our relationships with our principal licensors are generally favorable, we cannot guarantee that we will be able to renew these licenses on acceptable terms upon expiration or that we will be able to acquire new licenses to use other popular trademarks. If any one or more of these licenses expires or is terminated, we will lose the sales and profits generated pursuant to such license. The loss of such sales and profits could negatively impact our business, financial condition and operating results if not replaced with new license agreements.

 

In addition to certain compliance obligations, all of our significant licenses provide minimum thresholds for royalty payments and advertising expenditures for each license year which we must pay regardless of the level of our sales of the licensed products. If these thresholds are not met due to a general economic downturn

or otherwise, our licensors may be permitted contractually to terminate these agreements or seek payment of minimum royalties even if the minimum sales are not achieved. In addition, our licensors produce their own products and license their trademarks to other third parties, and we are unable to control the quality of goods that others produce. If licensors or others do not maintain the quality of these trademarks or if the brand image deteriorates, our sales and profits generated by such brands may decline and our business, financial condition and operating results may be negatively impacted.

 

We operate retail stores and restaurants which are subject to certain inherent risks.

 

An integral part of our strategy is to develop and operate retail stores and restaurants for certain of our brands, including Tommy Bahama and Ben Sherman. In addition to the general risks associated with the apparel industry, risks associated with our retail operations include our ability to find and select appropriate retail locations. Other risks include our ability to negotiate acceptable lease terms; build-out the stores; source sufficient levels of consumer desirable inventory; hire, train and retain competent store personnel; install and operate effective retail systems; and apply appropriate pricing strategies. Retail stores involve a significant capital investment and incur significant fixed operating expenditures, including obligations under long term leases. We cannot be sure that current stores will be profitable or that we can successfully complete our planned expansion. Also, as we expand the number of our retail stores, we run the risk that our wholesale customers will perceive that we are increasingly competing directly with them, which may lead them to reduce or terminate purchases of our products.

 

The restaurant industry is highly competitive and requires compliance with a variety of federal, state and local regulations. In particular, our restaurants typically serve alcohol and, therefore, maintain liquor licenses. Our ability to maintain our liquor licenses depends on our compliance with applicable laws and regulations. The loss of a liquor license would adversely affect the profitability of a restaurant. Additionally, as a participant in the restaurant industry, we face risks related to food quality, food-borne illness, injury and health inspection scores. The negative impact of adverse publicity relating to one restaurant may extend beyond the restaurant involved to affect some or all of the other restaurants, as well as the image of the brand as a whole.

 

We operate in various countries with differing laws and regulations, which may impair our ability to maintain compliance with regulations and laws.

 

In the ordinary course of business, we are party to certain claims, litigation or other regulatory actions. Such matters are subject to many uncertainties and we cannot predict with assurances the outcomes and ultimate financial impacts. There can be no guarantees that actions that have been or may be brought against us in the future will be resolved in our favor. Additionally, although we attempt to abide by the laws and regulations in each jurisdiction in which we operate, the complexity of the laws and regulations to which we are subject, including customs regulations, domestic and international tax legislation and environmental legislation, makes it difficult for us to ensure that we are currently, or will be in the future, compliant with all laws and regulations. In the event of an unfavorable resolution to litigation or a violation of applicable laws and regulations, our business, financial condition and operating results could be negatively impacted.

 

Our operations are reliant on information technology, and any interruption or other failure in our information technology systems may impair our ability to provide services to our customers.

 

The efficient operation of our business is dependent on information technology. Information systems are used in all stages of our operations from design to distribution and are used as a method of communication between our domestic and foreign employees, as well as our customers and suppliers. We also rely on information systems to provide relevant and accurate information to management in order to allocate resources and forecast our operating results. System failures or service interruptions may occur as a result of a number of factors, including computer viruses, hacking or other unlawful activities by third parties, disasters or failures to properly install, upgrade, integrate, protect, repair or maintain systems. Any interruption, or other failure, of critical business information systems may impair our ability to provide services to our customers and have a material adverse affect on our business, financial condition and operating results.

 

None.

 

Our administrative and sales functions are conducted in approximately 0.5 million square feet of owned and leased space in various locations in the United States, the United Kingdom and Hong Kong. We utilize approximately 1.9 million square feet of owned and leased facilities in the United States, Mexico and Honduras in conducting our distribution and manufacturing functions. We also lease approximately 0.4 million square feet located in the United States and the United Kingdom for retail and outlet stores and restaurants, each of which is less than 17,500 square feet per location. We believe that our existing administrative, sales, distribution, manufacturing, retail store and restaurant facilities are well maintained, in good operating condition and will be adequate for our present level of operations. We anticipate that we will be able to extend our leases to the extent that they expire in the near future on terms that are satisfactory to us, or if necessary, locate substitute properties on acceptable terms. Details of our principal administrative, sales, distribution and manufacturing facilities are as follows:

 

 

From time to time, we are a party to litigation and regulatory actions arising in the ordinary course of business. We are not currently a party to any litigation or regulatory actions that we believe could reasonably be expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

None.

 

Market Information

 

Our common stock is listed and traded on the New York Stock Exchange under the symbol “OXM.” As of June 2, 2006, there were 499 record holders of our common stock. The following table sets forth the high and low sale prices and quarter-end close price of our common stock as reported on the New York Stock Exchange for the quarters indicated.

 

 

Dividends

 

Dividends per share declared on shares of our common stock by our board of directors during fiscal 2006 and 2005 were as follows:

 

 

Additionally, on August 3, 2006, our board of directors declared a cash dividend of $0.15 per share payable on September 5, 2006 to shareholders of record on August 16, 2006, which is the 185th consecutive quarterly dividend we have paid since we became a public company in July 1960.

 

For details about limitations on our ability to pay dividends, see note 8 of our consolidated financial statements and Part I, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in this report.

 

Recent Sales of Unregistered Securities

 

We did not sell any unregistered securities during fiscal 2006.

Purchases of Equity Securities by the Issuer and Affiliated Purchases

 

We have certain stock incentive plans as described in note 10 to our consolidated financial statements included in this report, all of which are publicly announced plans. Under the plans, we can repurchase shares from employees to cover the employee tax liabilities related to the exercise of stock options or the vesting of previously restricted shares. The table below summarizes stock repurchases under these programs for the fourth quarter of fiscal 2006.

 

 

Additionally, we repurchased 731 shares on September 30, 2005 for an average price of $46.59 per share and 377 shares on January 20, 2006 for an average price of $53.00 per share. Each share repurchase during fiscal 2006 related to previously restricted shares repurchased from certain terminated employees to cover each such employee’s tax liabilities. We did not repurchase any other shares during fiscal 2006.

 

On August 3, 2006, our board of directors approved a stock repurchase authorization for up to 1 million shares of our common stock. In accordance with the authorization, we expect to repurchase our common shares from time to time in privately negotiated or open market transactions.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The information concerning equity compensation plans is incorporated in Item 12 hereof by reference to the information contained under the heading “Equity Compensation Plan Information” in our definitive Proxy Statement to be filed with the SEC not later than 120 days after our fiscal year ended June 2, 2006.

 

Our selected financial data below reflects the impact of our fiscal 2004 acquisition of Tommy Bahama and our fiscal 2005 acquisition of Ben Sherman. In addition, the selected financial data below reflects the divestiture of our Womenswear Group operations in fiscal 2006, resulting in those operations being classified as discontinued operations for all periods presented.

 

 

The following discussion and analysis of our operations, cash flows, liquidity and capital resources should be read in conjunction with our consolidated financial statements contained in this report.

 

OVERVIEW

 

We generate revenues and cash flow through the design, sale, production and distribution of branded and private label consumer apparel and footwear for men, women and children and the licensing of company-owned trademarks. Our principal markets and customers are located primarily in the United States. We source more than 95% of our products through third party producers. We primarily distribute our products through our wholesale customers which include chain stores, department stores, specialty stores, specialty catalog and mass merchants. We also sell our products for some brands in our own retail stores.

 

We operate in an industry that is highly competitive. Our ability to continuously evaluate and respond to changing consumer demands and tastes across multiple market segments, distribution channels and geographic regions is critical to our success. Although our approach is aimed at diversifying our risks, misjudging shifts in consumer preferences could have a negative effect on future operating results. Other key aspects of competition include quality, brand image, distribution methods, price, customer service and intellectual property protection. Our size and global operating strategies help us to successfully compete by providing opportunities for operating synergies. Our success in the future will depend on our ability to continue to design products that are acceptable to the markets we serve and to source our products on a competitive basis while still earning appropriate margins.

 

The most significant factors impacting our results and contributing to the change in diluted earnings from continuing operations per common share of $2.88 in fiscal 2006 from $2.53 in fiscal 2005 were:

 

 

RESULTS OF OPERATIONS

 

The following tables set forth the line items in our consolidated statements of earnings data both in dollars and as a percentage of net sales. The tables also set forth the percentage change of the data as compared to the prior year. We have calculated all percentages based on actual data, but percentage columns may not add due to rounding. Individual line items of our consolidated statements of earnings may not be directly comparable to those of our competitors, as statement of earnings classification of certain expenses may vary by company. The results of operations of Ben Sherman and the Tommy Bahama Group are included in our consolidated statements of earnings from the respective dates of the acquisitions.

 

 

SEGMENT DEFINITION

 

In our continuing operations, we have two operating segments for purposes of allocating resources and assessing performance. The Menswear Group produces branded and private label dress shirts, sport shirts, dress slacks, casual slacks, suits, sportcoats, suit separates, walkshorts, golf apparel, outerwear, sweaters, jeans, swimwear, footwear and headwear, licenses its brands for accessories and other products and operates retail stores. The Tommy Bahama Group produces lifestyle branded casual attire, operates retail stores and restaurants, and licenses its brands for accessories, footwear, furniture and other products. The head of each operating segment reports to the chief operating decision maker.

 

Corporate and Other is a reconciling category for reporting purposes and includes our corporate offices, substantially all financing activities, LIFO inventory accounting adjustments and other costs that are not allocated to the operating groups. LIFO inventory calculations are made on a legal entity basis which does not correspond to our segment definitions. Therefore, LIFO inventory accounting adjustments are not allocated to the operating segments. Total assets for corporate and other includes the LIFO inventory reserve of $38.0 million and $37.3 million at June 2, 2006 and June 3, 2005, respectively.

 

As discussed in note 3 in our consolidated financial statements included in this report, we sold our Womenswear Group operations in fiscal 2006. Our Womenswear Group produced private label women’s sportswear separates, coordinated sportswear, outerwear, dresses and swimwear. The operating results of the Womenswear Group have not been included in segment information as all amounts were reclassified to discontinued operations, except for $1.9 million, $1.8 million and $2.1 million of corporate overhead costs for fiscal 2006, 2005 and 2004, respectively, that were previously allocated to the Womenswear Group that have been reclassified to Corporate and other.

 

The information below presents certain information about our segments.

 

 

 

For further information regarding our segments, see note 13 to our consolidated financial statements included in this report.

 

FISCAL 2006 COMPARED TO FISCAL 2005

 

The discussion below compares our results of operations for fiscal 2006 to fiscal 2005. Each percentage change provided below reflects the change between these periods unless indicated otherwise.

 

Net sales increased by $52.3 million, or 5.0%, in fiscal 2006. The increase was primarily due to an increase in the average selling price per unit of 2.3% and an increase in unit sales of 2.2%.

The Menswear Group reported a 6.6% increase in net sales in fiscal 2006. The increase was due to the unit sales increase of 3.4% in the historical Menswear business from new marketing initiatives in tailored clothing and dress, knit and woven shirts, as well as the inclusion of Ben Sherman for twelve months of fiscal 2006 versus ten months of fiscal 2005. Ben Sherman brand net sales were $166.6 million in fiscal 2006 and $154.1 million in fiscal 2005. The average selling price per unit for the historical Menswear business increased 2.6% primarily due to a change in product mix.

 

The Tommy Bahama Group reported a 2.4% increase in net sales in fiscal 2006. The increase was due to an average selling price per unit increase of 3.3%, excluding the private label business, resulting from increased retail sales and higher average selling price per unit on branded wholesale business. The increase in retail sales was primarily due to an increase in the number of retail stores from 53 at the end of fiscal 2005 to 59 at the end of fiscal 2006. The higher average selling price per unit on branded wholesale business was due to lower levels of off-price merchandise during fiscal 2006. The net sales increase was partially offset by exiting the private label business, which accounted for $10.0 million of sales in fiscal 2005 and virtually no sales in fiscal 2006.

 

Gross profit increased 7.1% in fiscal 2006. The increase was due to higher sales and higher gross margins. Gross margins increased from 38.2% of net sales in fiscal 2005 to 38.9% of net sales in fiscal 2006. The increase was primarily due to the increased margins of the Tommy Bahama Group discussed below partially offset by the sales increases in the lower margin businesses in the Menswear Group and the one-time costs associated with the closure of four manufacturing facilities in our Menswear Group.

 

Our gross profit may not be directly comparable to those of our competitors, as income statement classifications of certain expenses may vary by company.

 

Selling, general and administrative expenses, or SG&A, increased 7.8% during fiscal 2006. SG&A was 29.8% of net sales in fiscal 2005 compared to 30.6% of net sales in fiscal 2006. The increase in SG&A was primarily due to:

 

 

Amortization of intangible assets decreased 11.4% in fiscal 2006. The decrease was due to certain intangible assets acquired as part of our acquisitions of Tommy Bahama and Ben Sherman, which have a greater amount of amortization in the earlier periods following the acquisition than later periods. This decline was partially offset by recognizing amortization related to the intangible assets acquired in the Ben Sherman transaction for the entire period during the twelve months of fiscal 2006 compared to only ten months in the prior year.

 

Royalties and other operating income increased 9.0% in fiscal 2006. The increase was primarily due to the benefit of licensing related to our Ben Sherman brand for the entire twelve months of fiscal 2006, as well as higher royalty income from existing and additional licenses for the Tommy Bahama brand.

 

Operating income increased 6.3% in fiscal 2006.

 

The Menswear Group reported a 27.4% decrease in operating income in fiscal 2006. The decrease in operating income was primarily due to the decline in operating income at Ben Sherman and in our historical Menswear business. The decline in operating income in our Ben Sherman business was primarily due to markdowns, allowances and returns resulting from poorly performing product lines and aggressive sales plans in the second half of fiscal 2006. The decline in operating income in our historical Menswear business was

primarily due to the closure of the manufacturing facilities, consolidation of support functions and streamlining of operations mentioned above.

 

The Tommy Bahama Group reported an increase of 32.1% in operating income in fiscal 2006. The increase in operating income was primarily due to:

 

 

The Corporate and other operating loss decreased $4.4 million, or 21.8%, in fiscal 2006. The decrease in the operating loss was primarily due to decreased parent company expenses, including a decrease in incentive compensation.

 

Interest expense, net decreased 8.3% in fiscal 2006. The decrease in interest expense was primarily due to the non-recurring $1.8 million charge recognized in the first quarter of fiscal 2005 related to the refinancing of our U.S. revolving credit facility in July 2004 and lower debt levels in fiscal 2006, partially offset by higher interest rates during fiscal 2006.

 

Income taxes were at an effective tax rate of 30.9% for fiscal 2006 compared to 33.5% for fiscal 2005. The change was primarily due to the impact of the repatriation of earnings of certain of our foreign subsidiaries during fiscal 2006.

 

Discontinued operations resulted from the disposition of our Womenswear Group operations on June 2, 2006, leading to all Womenswear Group operations being reclassified to discontinued operations for all periods presented and diluted earnings from discontinued operations per common share of $1.08 in fiscal 2006 and $0.34 in fiscal 2005. The increase in earnings from gain on sale and discontinued operations was primarily due to the gain on the sale of our Womenswear Group operations and higher sales in fiscal 2006.

 

FISCAL 2005 COMPARED TO FISCAL 2004

 

The discussion below compares our results of operations for fiscal 2005 to fiscal 2004. Each percentage change provided below reflects the change between these periods unless indicated otherwise.

 

Net sales increased $238.1 million, or 29.1%, in fiscal 2005 as a result of the sales increases in our Menswear Group and Tommy Bahama Group discussed below.

 

The Menswear Group reported a $207.8 million, or 46.3%, increase in net sales in fiscal 2005. The change was primarily due to the acquisition of Ben Sherman, which added sales of $154.1 million to our net sales in fiscal 2005 after our acquisition during that year and the unit sales increase of 13.5% in our historical Menswear business from new marketing initiatives in dress shirts and sport shirts, tailored clothing and the licensed Nick(it) sportswear collection. These sales increases were partially offset by an average selling price per unit decline of 1.4%, in our historical Menswear business, due to a change in product mix.

 

The Tommy Bahama Group reported an increase of $30.5 million, or 8.3%, in net sales in fiscal 2005 despite a reduction in net sales of $29.2 million due to exiting the private label business. The increase was primarily due to:

 

 

Gross profit increased 33.0% in fiscal 2005. The increase was due to higher sales and higher gross margins. Gross margins increased from 37.0% during fiscal 2004 to 38.2% during fiscal 2005. The increase was primarily due to:

 

 

Our gross profit may not be directly comparable to those of our competitors, as income statement classifications of certain expenses may vary by company.

 

Selling, general and administrative expenses increased 37.7% in fiscal 2005. SG&A was 29.8% of net sales in fiscal 2005 compared to 27.9% in fiscal 2004. The increase in SG&A was primarily due to:

 

 

Amortization of intangible assets increased 29.3% in fiscal 2005. The change was primarily the result of the amortization of intangible assets acquired as part of the Ben Sherman acquisition, partially offset by lower amortization amounts related to the Tommy Bahama Group acquisition.

 

Royalties and other operating income increased 135.8% in fiscal 2005. The increase was due to an increase in royalties earned from existing licenses as well as new licenses for the Tommy Bahama and Ben Sherman brands.

 

Operating income increased 25.8% in fiscal 2005.

 

The Menswear Group reported a 38.9% increase in operating income in fiscal 2005. The increase in operating income was primarily due to the acquisition of Ben Sherman during fiscal 2005 and stronger results in our tailored clothing business. Operating income growth was partially offset by losses related to the start-up of new marketing initiatives, weaker performance in our licensed golf business and weaker performance in our private label sportswear and casual slacks business.

 

The Tommy Bahama Group reported a 6.9% increase in operating income in fiscal 2005. The increase was primarily due to:

 

 

The increased operating income mentioned above was partially offset by higher marketing expenses, including $3.4 million related to our title sponsorship in the PGA Tommy Bahama Challenge Golf Tournament and increased SG&A related to opening new retail stores.

 

The Corporate and Other operating loss increased 4.6% in fiscal 2005. The increase in the operating loss was primarily due to increased parent company expenses partially offset by LIFO inventory accounting.

 

Interest expense, net increased 11.1% in fiscal 2005. The increase in interest expense was due to the interest on debt incurred to finance the acquisition of Ben Sherman and the non-cash write-off of $1.8 million

of deferred financing costs resulting from the modification of our U.S. revolving credit facility in the first quarter of fiscal 2005 associated with the Ben Sherman acquisition.

 

Income taxes were at an effective tax rate of 33.5% for fiscal 2005 compared to 36.8% for fiscal 2004. Variations in the effective tax rate were primarily attributable to the acquisition of Ben Sherman during fiscal 2005. Additionally, we received refunds of prior year state taxes, recorded a decrease in certain contingent tax liabilities and had a change in the relative distribution of pre-tax earnings among the various taxing jurisdictions in which we operate.

 

Discontinued operations resulted from the disposition of our Womenswear Group operations on June 2, 2006, leading to all Womenswear operations being reclassified to discontinued operations for all periods presented and diluted net earnings from discontinued operations per common share of $0.34 in fiscal 2005 and $0.49 in fiscal 2004. The lower earnings from discontinued operations was primarily due to lower sales in fiscal 2005 compared to fiscal 2004.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

Our primary source of revenue and cash flow is our operating activities in the United States and to some extent the United Kingdom. When cash inflows are less than cash outflows, subject to their terms, we also have access to amounts under our U.S. Revolver and U.K. Revolver, each of which are described below. We may seek to finance future capital investment programs through various methods, including, but not limited to, cash flow from operations, borrowings under our current or additional credit facilities and sales of equity securities.

 

Our liquidity requirements arise from the funding of our working capital needs, which include inventory, other operating expenses and accounts receivable, funding of capital expenditures, payment of quarterly dividends, repayment of our indebtedness and acquisitions, if any. Generally, our product purchases are acquired through trade letters of credit 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 when issued.

 

Cash and cash equivalents on hand was $10.5 million at June 2, 2006 compared to $6.5 million at June 3, 2005.

 

Operating Activities

 

During fiscal 2006, our continuing operations generated $81.0 million of cash. The increase in operating cash flows was primarily a result of the earnings from continuing operations for the period adjusted for non-cash activities such as depreciation, amortization and stock compensation for restricted stock awards and changes in working capital accounts. The changes in working capital accounts included lower amounts of inventories, slightly lower amounts of receivables, higher amounts of non-current liabilities including deferred rent and deferred compensation and decreases in current liabilities.

 

During fiscal 2005, we generated cash flows from continuing operations of $41.2 million. This cash was generated primarily from revenues from the sale of our products net of cash paid for the cost of goods sold, general and administrative operating expenses and interest expense adjusted for non-cash activities such as depreciation, amortization and stock compensation for restricted stock awards and changes in working capital accounts. The changes in working capital accounts included higher levels of inventory, accounts receivable, other non-current assets, current liabilities and other non-current liabilities.

 

Our working capital ratio, which is calculated by dividing total current assets by total current liabilities, was 1.98:1 and 1.85:1 at June 2, 2006 and June 3, 2005, respectively. The improvement was due to the significant reduction of current liabilities related to continuing operations (primarily accounts payable and additional acquisition cost payable) partially offset by a decrease in current assets related to continuing operations due to the decrease in inventories between periods, each as discussed below.

Receivables were $142.3 million and $145.9 million at June 2, 2006 and June 3, 2005, respectively, representing a decrease of 2%. Days’ sales outstanding for our accounts receivable related to continuing operations, excluding retail sales, was 54 days and 57 days at June 2, 2006 and June 3, 2005, respectively.

 

Inventories were $123.6 million and $145.9 million at June 2, 2006 and June 3, 2005, respectively. This decrease was primarily a result of a reduction of inventory in our Tommy Bahama Group as we had minimal levels of excess inventory on hand at June 2, 2006 compared to June 3, 2005. Additionally, inventory in our historical Menswear Group decreased compared to June 3, 2005 primarily due to reductions in levels of replenishment program inventory. Our days supply of inventory on hand related to continuing operations, calculated on a trailing twelve month average using a FIFO basis, was 96 and 103 days at June 2, 2006 and June 3, 2005, respectively.

 

Prepaid expenses were $22.0 million and $20.4 million at June 2, 2006 and June 3, 2005, respectively. The increase in prepaid expenses was primarily due to us having more retail stores and higher prepaid advertising at June 2, 2006 compared to the prior year.

 

Current assets related to discontinued operations were $59.2 million and $74.7 million at June 2, 2006 and June 3, 2005, respectively. The decrease in current assets related to discontinued operations is a result of the disposition of the Womenswear Group inventory, except for inventory in transit, as of June 2, 2006. We anticipate that substantially all of these current assets will be converted into cash for us during the first quarter of fiscal 2007.

 

Current liabilities, which primarily consist of payables arising out of our operating activities, were $180.3 million and $212.4 million at June 2, 2006 and June 3, 2005, respectively. The decrease in liabilities related to continuing operations is primarily due to a change in the payment terms of certain of our suppliers during fiscal 2006, the reduction of the earn-out liability for fiscal 2006 compared to fiscal 2005 based on the terms of the agreement and the timing of certain payments, including income taxes and inventory purchases, compared to the prior year. Additionally, included in these amounts are current liabilities related to discontinued operations of $30.7 million and $15.9 million at June 2, 2006 and June 3, 2005, which increased primarily as a result of certain costs associated with our disposition of our Womenswear Group business, including payments to employees of the Womenswear Group, transaction costs and the tax liability related to the disposition.

 

Deferred income tax liabilities were $76.6 million and $77.2 million at June 2, 2006 and June 3, 2005, respectively. The decrease was primarily a result of changes in property, plant and equipment basis differences, amortization of acquired intangibles, deferred rent and deferred compensation balances.

 

Other non-current liabilities, which primarily consist of deferred rent and deferred compensation amounts, were $30.0 million and $23.6 million at June 2, 2006 and June 3, 2005, respectively. The increase was primarily due to the recognition of deferred rent during fiscal 2006 as well as the deferral of certain compensation payments to our executives in accordance with our deferred compensation plans.

 

Investing Activities

 

During fiscal 2006, investing activities used $34.6 million in cash. We paid $11.5 million for acquisitions in fiscal 2006 consisting of the earn-out payment in the first quarter of fiscal 2006 related to the fiscal 2005 Tommy Bahama Group earn-out and the payments for the acquisition of the Solitude and Arnold Brant trademarks and related working capital. Additionally, approximately $25.0 million of capital expenditures were incurred, primarily related to new Tommy Bahama and Ben Sherman retail stores.

 

During fiscal 2005, investing activities used $166.7 million in cash, consisting of approximately $138.3 million (net of cash acquired) for the acquisition of Ben Sherman as well as payments in the first quarter of fiscal 2005 of approximately $5.5 million related to the Tommy Bahama Group acquisition. Additionally, we incurred capital expenditures of $23.4 million primarily related to new Tommy Bahama retail stores, capital expenditures for computer equipment and software and capital expenditures associated with our leased headquarters for our Tommy Bahama Group in Seattle, Washington and our Ben Sherman U.S. operations in New York.

Non-current assets including property, plant and equipment, goodwill, intangible assets and other non-current assets increased primarily as a result of the fiscal 2006 earn-out related to the Tommy Bahama acquisition, capital expenditures for our retail stores and the impact of changes in foreign currency exchange rates. These increases were partially offset by depreciation of our fixed assets and amortization of our intangible assets.

 

Financing Activities

 

During fiscal 2006, financing activities used approximately $98.0 million in cash. The cash flow generated from our operating activities in excess of our investments as well as the proceeds from the disposition of the Womenswear Group operations were used to repay amounts on our lines of credit during fiscal 2006. We also received $4.0 million of cash provided from the exercise of employee stock options. These amounts were partially offset by the payment of $9.5 million of dividends on our common shares during fiscal 2006.

 

During fiscal 2005, financing activities generated $74.0 million in cash. Substantially all of these proceeds represent the funding from the U.S. Revolver to finance the Ben Sherman acquisition on July 30, 2004, partially offset by the $2.8 million paid in the first quarter of fiscal 2005 related to our refinancing of our U.S. revolving credit facility. Additionally, $2.5 million of cash was provided by the exercise of employee stock options. These cash proceeds were partially offset by the use of cash to pay $8.2 million of dividends on our common stock.

 

On June 5, 2006, we paid a cash dividend of $0.15 per share to shareholders of record as of May 15, 2006. Additionally, on August 3, 2006, our board of directors declared a cash dividend of $0.15 per share payable on September 5, 2006 to shareholders of record on August 16, 2006. That dividend is the 185th consecutive quarterly dividend we have paid since we became a public company in July 1960. We expect to pay dividends in future quarters. However, we may decide to discontinue or modify the dividend payment at any time if we determine that other uses of our capital, including, but not limited to, payment of debt outstanding or funding of future acquisitions, may be in our best interest, if our expectations of future cash flows and future cash needs outweigh the ability to pay a dividend or if the terms of our credit facilities limit our ability to pay dividends. We may borrow to fund dividends in the short term based on our expectations of operating cash flows in future periods. All cash flow from operations will not necessarily be paid out as dividends in all periods.

 

Debt decreased by $92.3 million at June 2, 2006 compared to June 3, 2005 primarily as a result of the decrease in the borrowings under the U.S. Revolver due to proceeds from our disposition of the operations of our Womenswear Group on June 2, 2006 and the excess of cash flow from operations over investments during fiscal 2006.

 

Cash Flows from Discontinued Operations

 

During fiscal 2006 and 2005 our Womenswear Group generated cash flow of $55.8 million and $10.2 million, respectively. These cash flows were primarily due to the earnings of the Womenswear Group, adjusted for any changes in working capital accounts during the year and the proceeds from the disposition of the Womenswear Group operations in fiscal 2006.

Liquidity and Capital Resources

 

The table below provides a description of our significant financing arrangements (in thousands) at June 2, 2006:

 

 

The U.S. Revolver, the U.K. Revolver and the Senior Unsecured Notes each include certain debt covenant restrictions that require us or our subsidiaries to maintain certain financial ratios that are customary for similar facilities. The U.S. Revolver also includes limitations on certain restricted payments such as earn-outs, payment of dividends and prepayment of debt. As of June 2, 2006, we were compliant with all financial covenants and restricted payment provisions related to our debt agreements.

 

The U.S. Revolver and U.K. Revolver are used to finance trade letters of credit and standby letters of credit as well as provide funding for other operating activities and acquisitions. As of June 2, 2006, approximately $117.5 million of trade letters of credit and other limitations on availability were outstanding against the U.S. Revolver and the U.K. Revolver. The aggregate net availability under our U.S. Revolver and U.K. Revolver agreements was approximately $183 million as of June 2, 2006.

 

Our debt to total capitalization ratio was 33% and 49% at June 2, 2006 and June 3, 2005, respectively. The change in this ratio was primarily a result of cash flows from operations during fiscal 2006 and the disposition of the operations of the Womenswear Group on June 2, 2006. We anticipate that the amount of debt, as well as the ratio of debt to total capitalization, will remain comparable to the balance at June 2, 2006 in future periods, unless we make additional acquisitions or investments.

 

We anticipate that we will be able to satisfy our ongoing cash requirements, which generally consist of working capital needs, capital expenditures (primarily for the opening of Tommy Bahama and Ben Sherman retail stores) and interest payments on our debt during fiscal 2007, primarily from cash on hand and cash flow from operations supplemented by borrowings under our lines of credit, as necessary. Our need for working capital is typically seasonal with the greatest requirements generally existing from the late second quarter to early fourth quarter of each year as we build inventory for the spring/summer season. Our capital needs will depend on many factors including our growth rate, the need to finance increased inventory levels and the success of our various products.

 

If appropriate investment opportunities arise that exceed the availability under our existing credit facilities, we believe that we will be able to fund such acquisitions through additional or refinanced debt facilities or the issuance of additional equity. However, our ability to obtain additional borrowings or refinance

our credit facilities will depend on many factors, including the prevailing market conditions, our financial condition and our ability to negotiate favorable terms and conditions. There is no assurance that financing would be available on terms that are acceptable or favorable to us, if at all. At maturity of the U.K. Revolver, the U.S. Revolver and the Senior Unsecured Notes, we anticipate that we will be able to refinance the facilities and debt with terms available in the market at that time.

 

The following table summarizes our contractual cash obligations, as of June 2, 2006, by future period:

 

 

The above table does not include our interest payments for our U.S. Revolver as the interest rate and the amount that will be outstanding during any fiscal year will be dependent upon future events which are not known at this time.

 

Our anticipated capital expenditures for fiscal 2007 are expected to approximate $30 million. These expenditures will consist primarily of the continued expansion of our retail operations of the Tommy Bahama Group and Ben Sherman brand, including the opening of additional retail stores.

 

Off Balance Sheet Arrangements

 

We have not entered into agreements which meet the SEC’s definition of an off balance sheet financing arrangement, other than operating leases, and have made no financial commitments to or guarantees with any unconsolidated subsidiaries or special purpose entities.

 

CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to receivables, inventories, intangible assets, income taxes, contingencies and litigation and other accrued expenses. We base our estimates on historical experience and on various other assumptions that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that we have appropriately applied our critical accounting policies. However, in the event that inappropriate assumptions or methods were used relating to the critical accounting policies below, our consolidated statements of earnings could be misstated.

 

The detailed summary of significant accounting policies is included in note 1 to our consolidated financial statements contained in this report. The following is a brief discussion of the more significant accounting policies and methods we use.

Revenue Recognition and Accounts Receivable

 

Our revenue consists of sales to wholesale customers, retail store and restaurant revenues and royalties. We consider revenue realized or realizable and earned when the following criteria are met: (1) persuasive evidence of an agreement exists, (2) delivery has occurred, (3) our price to the buyer is fixed and determinable, and (4) collectibility is reasonably assured.

 

For sales within our wholesale operations, we consider a completed purchase order or some form of electronic communication from the customer requesting the goods persuasive evidence of an agreement. For substantially all our wholesale sales, our products are considered delivered at the time that the products are shipped as substantially all products are sold based on FOB shipping point terms. This generally coincides with the time that title passes and the risks and rewards of ownership have passed to the customer. For certain transactions in which the goods do not pass through our distribution centers and title and the risks and rewards of ownership pass at the time the goods leave the foreign port, revenue is recognized at that time. In certain cases in which we retain the risk of loss during shipment, revenue recognition does not occur until the goods have reached the specified customer.

 

In the normal course of business we offer certain discounts or allowances to our wholesale customers. Wholesale operations’ sales are recorded net of such discounts, allowances, advertising support not specifically relating to the reimbursement for actual advertising expenses by our customers and provisions for estimated returns. As certain allowances and other deductions are not finalized until the end of a season, program or other event which may not have occurred yet, we estimate such discounts and allowances on an ongoing basis considering historical and current trends, projected seasonal results and other factors. We record the discounts, returns and allowances as a reduction to net sales in our consolidated statements of earnings.

 

In circumstances where we become aware of a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts is taken as a reduction to accounts receivable to reduce the net recognized receivable to the amount reasonably expected to be collected. Such amounts are written off at the time that the amounts are not considered collectible. For all other customers, we recognize reserves for bad debts and uncollectible chargebacks based on our historical collection experience, the financial condition of our customers, an evaluation of current economic conditions and anticipated trends. We record such charges and write-offs to selling, general and administrative expenses in our consolidated statements of earnings.

 

Retail store and restaurant revenues are recorded, net of estimated returns, at the time of sale to consumers. Retail store and restaurant revenues are recorded net of applicable sales taxes in our consolidated statements of earnings.

 

Royalties, which are generally based on a percentage of the licensee’s actual net sales or minimum net sales, are recorded based upon contractually guaranteed minimum levels and adjusted as sales data is received from licensees. We may receive initial payments for the grant of license rights, which are recognized as revenue over the term of the license agreement. Royalty income is included in royalties and other income in our consolidated statements of earnings.

 

Inventories

 

For segment reporting, inventory is carried at the lower of FIFO cost or market, with all adjustments being charged to operations in the period in which the facts giving rise to the adjustments become known. We continually evaluate the composition of our inventories for identification of distressed inventory. For wholesale inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods. For retail inventory, we provide an allowance for shrinkage and goods expected to be sold below cost. Each of these estimates are based on our historical experience as well as an assessment of the inventory quantity, quality and mix, consumer and retailer preferences and the current market conditions.

 

For consolidated financial reporting, significant portions of our inventories are valued at the lower of LIFO cost or market. LIFO inventory calculations are made on a legal entity basis which does not correspond to our segment definitions. Therefore, LIFO inventory accounting adjustments are not allocated to the

respective operating segments. As part of LIFO accounting, markdowns for inventory valued at LIFO cost are deferred until the period in which the goods are sold. However, in non-routine circumstances, such as discontinuance of a product line, markdowns below the allocated LIFO reserve are not deferred. Both the LIFO reserve and the markdown deferral are reflected in our corporate and other financial information in note 13 to our consolidated financial statements included in this report and in the results of operations in our Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Goodwill, net

 

Goodwill is recognized as the amount that the cost to acquire a company or group of assets exceeds the fair value of assets acquired less any liabilities assumed at acquisition. Such goodwill is allocated to the respective reporting unit at the time of acquisition. Goodwill is not amortized but instead evaluated for impairment annually or more frequently if events or circumstances indicate that the goodwill might be impaired. The evaluation of the recoverability of goodwill includes valuations of each applicable underlying business using fair value techniques and market comparables which may include a discounted cash flow analysis or an independent appraisal. If this analysis indicates an impairment of goodwill balances, the impairment is recognized in the consolidated financial statements.

 

Intangible Assets, net

 

At acquisition, we estimate and record the fair value of purchased intangible assets, which primarily consist of trademarks and trade names, license agreements and customer relationships. The fair values of these intangible assets are estimated based on management’s assessment as well as independent third party appraisals in some cases. Such valuation may include a discounted cash flow analysis of anticipated revenues or cost savings resulting from the acquired intangible asset.

 

Amortization of intangible assets with finite lives, which consist of license agreements, customer relationships and covenants not to compete, is recognized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Asset lives used for our intangible assets range from 0 to 15 years. Intangible assets with finite lives are reviewed for impairment periodically if events or changes in circumstances indicate that the carrying amount may not be recoverable. If expected future undiscounted cash flows from operations are less than their carrying amounts, an asset is determined to be impaired and a loss is recorded for the amount by which the carrying value of the asset exceeds its fair value.

 

Trademarks and other intangible assets with indefinite lives are not amortized but instead evaluated for impairment annually or more frequently if events or circumstances indicate that the intangible asset might be impaired. The evaluation of the recoverability of intangible assets with indefinite lives includes valuations based on a discounted cash flow analysis. The fair values of trademarks are estimated on an annual basis utilizing the relief from royalty method. If this analysis indicates an impairment of an intangible asset with an indefinite useful life, the amount of the impairment is recognized in the consolidated financial statements.

 

Income Taxes

 

We recognize deferred tax liabilities and assets based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the period in which such amounts are expected to be realized or settled. Our policy is to recognize net deferred tax assets, whose realization is dependent on taxable earnings in future years, when a greater than 50% probability exists that the tax benefits will actually be realized sometime in the future. Also, we provide for a reserve for items when a greater than 50% probability exists that a tax deduction taken would be disallowed under examination by the taxing authority. No material valuation allowances have been recognized in our financial statements.

 

At June 2, 2006, we have undistributed earnings of foreign subsidiaries of approximately $13.4 million which have been provided for in our income tax provision as the earnings are not considered permanently invested outside of the United States. If the earnings were repatriated to the United States, the earnings will be subject to United States taxation at that time. The amount of deferred tax liability recognized associated with

the undistributed earnings was approximately $3.2 million at June 2, 2006, representing the approximate excess of the United States tax liability over the creditable foreign taxes paid that would result from a full remittance of undistributed earnings.

 

We receive a United States income tax benefit upon the exercise of the majority of our employee stock options. The benefit is equal to the difference between the fair market value of the stock at the time of the exercise and the option price, times the approximate tax rate. We record the benefit associated with the exercise of employee stock options as a reduction to current income taxes payable and a credit directly to shareholders’ equity in our consolidated balance sheets.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

See note 1 to our consolidated financial statements included in this report for a description of recent accounting pronouncements.

 

SEASONALITY

 

Although our various product lines are sold on a year-round basis, the demand for specific products or styles may be highly seasonal. For example, the demand for golf and Tommy Bahama products is higher in the spring and summer seasons. Products are sold prior to each of the retail selling seasons, including spring, summer, fall and holiday. As the timing of product shipments and other events affecting the retail business may vary, results for any particular quarter may not be indicative of results for the full year. The percentage of net sales from continuing operations by quarter for fiscal 2006 was 24%, 25%, 25% and 26%, respectively, and the percentage of operating income by quarter for fiscal 2006 was 25%, 22%, 23% and 30%, respectively, which may not be indicative of the distribution in future years.

 

Interest Rate Risk

 

We are exposed to market risk from changes in interest rates on our indebtedness, which could impact our financial condition and results of operations in future periods. Our objective is to limit the impact of interest rate changes on earnings and cash flow, primarily through a mix of fixed and variable rate debt. This assessment also considers our need for flexibility in our borrowing arrangements resulting from the seasonality of our business, among other factors. We continuously monitor interest rates to consider the sources and terms of our borrowing facilities in order to determine whether we have achieved our interest rate management objectives.

 

As of June 2, 2006, approximately $1.0 million of debt outstanding (or 0.5% of our total debt) was subject to variable interest rates, with a weighted average rate of approximately 7.8%. Our average variable rate borrowings for fiscal 2006 were $97.5 million, with an average interest rate of 6.3% during the period. Our lines of credit are based on variable interest rates in order to take advantage of the lower rates available in the current interest rate environment and to provide the necessary borrowing flexibility required. To the extent that the amounts outstanding under our variable rate lines of credit change, our exposure to changes in interest rates would also change. If our average interest rate for fiscal 2006 increased by 100 basis points, our interest expense would have been approximately $0.6 million higher during the fiscal year. Due to the disposition of our Womenswear Group operations on June  2, 2006, we anticipate having lower levels of debt in future periods than we had during the course of fiscal 2006, unless we acquire additional businesses.

 

At June 2, 2006, we had approximately $199.2 million of fixed rate debt and capital lease obligations outstanding with substantially all the debt, consisting of our Senior Unsecured Notes, having an effective interest rate of 9.0% and maturing in June 2011. Such agreements may result in higher interest expense than could be obtained under variable interest rate arrangements in certain periods, but are primarily intended to provide long-term financing of our capital structure and minimize our exposure to increases in interest rates. A change in the market interest rate impacts the fair value of our fixed rate debt but has no impact on interest incurred or cash flows.

None of our debt was entered into for speculative purposes. We generally do not engage in hedging activities with respect to our interest rate risk and do not enter into such transactions on a speculative basis.

 

Trade Policy Risk

 

Pursuant to the 1994 Agreement on Textiles and Clothing, quotas among World Trade Organization, or WTO, member countries, including the United States, were eliminated on January 1, 2005. As a result, the international textile and apparel trade is undergoing a significant realignment which is changing our sourcing patterns, could disrupt our supply chain and could put us at a disadvantage to our competitors.

 

In addition, notwithstanding quota elimination, under the terms of China’s WTO accession agreement, the United States and other WTO members may re-impose quotas on specific categories of products in the event it is determined that imports from China have surged or may surge and are threatening to create a market disruption for such categories of products (so called “safeguard quota”). Pursuant to this authority, both the United States and the European Union re-imposed quotas on several important product categories from China during calendar 2005. Subsequent to the imposition of safeguard quotas, both the United States and China negotiated bilateral quota agreements that cover a number of important product categories and will remain in place until December 31, 2008 in the case of the U.S.-China bilateral agreement and until December 31, 2007 in the case of the European Union-China bilateral agreement. The establishment of these quotas could cause disruption in our supply chain.

 

Furthermore, under long-standing statutory authority applicable to imported goods in general, the United States may unilaterally impose additional duties: (i) when imported merchandise is sold at less than fair value and causes material injury, or threatens to cause material injury, to the domestic industry producing a comparable product (generally known as “anti-dumping” duties); or (ii) when foreign producers receive certain types of governmental subsidies, and when the importation of their subsidized goods causes material injury, or threatens to cause material injury, to the domestic industry producing a comparable product (generally known as “countervailing” duties). The imposition of anti-dumping or countervailing duties on products we import would increase the cost of those products to us. We may not be able to pass on any such cost increase to our customers.

 

Foreign Currency Risk

 

To the extent that we have assets and liabilities, as well as operations, denominated in foreign currencies that are not hedged, we are subject to foreign currency transaction gains and losses. We view our foreign investments as long-term and as a result we generally do not hedge such foreign investments. We do not hold or issue any derivative financial instruments related to foreign currency exposure for speculative purposes.

 

We receive United States dollars for most of our product sales. Less than 15% of our net sales during fiscal 2006 were denominated in currencies other than the United States dollar. These sales primarily relate to Ben Sherman sales in the United Kingdom and Europe and sales of certain products in Canada. With the United States dollar trading at a weaker position than it has historically traded versus the pound sterling and the Canadian dollar, a strengthening United States dollar could result in lower levels of sales and earnings in our consolidated statements of earnings in future periods, although the sales in foreign currencies could be equal to or greater than amounts as previously reported. Based on our fiscal 2006 sales denominated in foreign currencies, if the dollar had strengthened by 5% in fiscal 2006, we would have experienced a decrease in sales of approximately $6.5 million.

 

Substantially all of our inventory purchases from contract manufacturers throughout the world are denominated in United States dollars. Purchase prices for our products may be impacted by fluctuations in the exchange rate between the United States dollar and the local currencies, such as the Chinese Yuan, of the contract manufacturers, which may have the effect of increasing our cost of goods sold in the future. Due to the number of currencies involved and the fact that not all foreign currencies react in the same manner against the United States dollar, we cannot quantify in any meaningful way the potential effect of such fluctuations on future costs. However, we do not believe that exchange rate fluctuations will have a material impact on our inventory costs in future periods.

We may from time to time purchase short-term foreign currency forward exchange contracts to hedge against changes in foreign currency exchange rates, but at June 2, 2006, we have not entered into any such agreements that have not been settled. When such contracts are outstanding, the contracts are marked to market with the offset being recognized in our consolidated statement of earnings or other comprehensive income if the transaction does not or does, respectively, qualify as a hedge in accordance with accounting principles generally accepted in the United States.

 

Commodity and Inflation Risk

 

We are affected by inflation and changing prices primarily through the purchase of raw materials and finished goods and increased operating costs to the extent that any such fluctuations are not reflected by adjustments in the selling prices of our products. Also, in recent years, there has been deflationary pressure on selling prices in our private label businesses. While we have been successful to some extent in offsetting such deflationary pressures through product improvements and lower costs, if deflationary price trends outpace our ability to obtain further price reductions, our profitability may be adversely affected. Inflation/deflation risks are managed by each business unit through selective price increases when possible, productivity improvements and cost containment initiatives. We do not enter into significant long-term sales or purchase contracts and we do not engage in hedging activities with respect to such risk.

 

OXFORD INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except
per shares amounts)

 

 

See accompanying notes.

OXFORD INDUSTRIES, INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)