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Oxford Reaping The Rewards Of Transformation
Change just for the sake of change is a often a really bad idea, as is changing up a successful business plan. And yet, it looks as though a major shift in the business plan has been just the ticket for Oxford Industries (NYSE:OXM), as the company seems to be reaping better margins and a better valuation as it has shifted away from its traditional private label apparel manufacturing business.
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A Decent Beginning to the Fiscal Year
Oxford got its fiscal year off to a solid state. Revenue rose 27% on a reported basis and was more or less in line with the average analyst expectation. Revenue growth was fueled by the inclusion of sales from the Lilly Pulitzer business that Oxford acquired roughly six months ago and was therefore not part of year-ago sales. The inclusion of this revenue was responsible for two-thirds of the company's reported revenue growth, though the Tommy Bahama business was up nearly 13%. Unfortunately, the turnaround in the Ben Sherman business line continues to falter and revenue was down a further 13%.
Oxford once again reaped the benefits of operating leverage and its shift away from private label manufacturing. Gross margin improved almost two full points, while operating income more than doubled. Absent the contribution from Pulitzer, operating income growth would have still been impressive (well in excess of 50%).
Continuing Change Should Benefit the Business
Not only has Oxford repositioned itself to focus on its own proprietary brands (led by Tommy Bahama), the company is increasingly looking to control its own retail distribution as well. The company currently operates a relatively small number of retail stores, but expanding this number (and growing the online business) both look to be near-term priorities. At the same time, the company can likely continue to count on Nordstrom (NYSE:JWN) as a retail partner for the Tommy Bahama brand - while retailers don't typically appreciate their vendors competing with them, it would seem that Oxford is too small and focused at this point to be any real threat to Nordstrom.
Elsewhere, the company needs to get the Ben Sherman business moving. This brand has been a laggard for a while now, but the company seems committed to trying to make it work. Unlike Tommy Bahama and Pulitzer, Oxford seems relatively more content to have Ben Sherman sell through other retailers for now - including Nordstrom, Macy's (NYSE:M) and Urban Outfitters (Nasdaq:URBN). By the same token, management has not been shy about doing deals when it feels they are appropriate, so Ben Sherman may not be a permanent fixture in the company's plans.
Will Brands Provide Enduring Value?
There is ample evidence that the ownership/establishment of solid brands can be a major driver in the economic success and market valuation of a company. In retail apparel, though, it is a little harder to maintain that cache as yesterday's hot brand may become tomorrow's store-exclusive at a discount retailer like Target (NYSE:TGT). Still, companies like Polo Ralph Lauren (NYSE:RL) and Phillips-Van Heusen (NYSE:PVH) have shown that there is some durability if a brand is handled properly.
This is a new set of challenges for management, though. After all, private label manufacturing emphasizes product quality and manufacturing efficiency - not branding and retailing. Then again, it is not as though Oxford is new at this - Tommy Bahama has been an important part of the business for almost a decade and the company has made a lot of sound moves in expanding the reach and impact of the brand with consumers.
The Bottom Line
Oxford seemed perpetually undervalued and underappreciated for quite a period of time. With the stock almost doubling in the past year, though, that is no longer the case. That's not to say that the stock is expensive, particularly given its growth potential, but it does mean that it's not such ripe pickings as before. Buying any retailer right now seems a little dicey, given the impact of cotton prices and consumer sentiment, but Oxford is definitely a worthy candidate for investors looking for rejuvenated growth stories. (For additional reading, also check out Use Breakup Value To Find Undervalued Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
TUTORIAL: Five Minute Investing
A Decent Beginning to the Fiscal Year
Oxford got its fiscal year off to a solid state. Revenue rose 27% on a reported basis and was more or less in line with the average analyst expectation. Revenue growth was fueled by the inclusion of sales from the Lilly Pulitzer business that Oxford acquired roughly six months ago and was therefore not part of year-ago sales. The inclusion of this revenue was responsible for two-thirds of the company's reported revenue growth, though the Tommy Bahama business was up nearly 13%. Unfortunately, the turnaround in the Ben Sherman business line continues to falter and revenue was down a further 13%.
Oxford once again reaped the benefits of operating leverage and its shift away from private label manufacturing. Gross margin improved almost two full points, while operating income more than doubled. Absent the contribution from Pulitzer, operating income growth would have still been impressive (well in excess of 50%).
Continuing Change Should Benefit the Business
Not only has Oxford repositioned itself to focus on its own proprietary brands (led by Tommy Bahama), the company is increasingly looking to control its own retail distribution as well. The company currently operates a relatively small number of retail stores, but expanding this number (and growing the online business) both look to be near-term priorities. At the same time, the company can likely continue to count on Nordstrom (NYSE:JWN) as a retail partner for the Tommy Bahama brand - while retailers don't typically appreciate their vendors competing with them, it would seem that Oxford is too small and focused at this point to be any real threat to Nordstrom.
Will Brands Provide Enduring Value?
There is ample evidence that the ownership/establishment of solid brands can be a major driver in the economic success and market valuation of a company. In retail apparel, though, it is a little harder to maintain that cache as yesterday's hot brand may become tomorrow's store-exclusive at a discount retailer like Target (NYSE:TGT). Still, companies like Polo Ralph Lauren (NYSE:RL) and Phillips-Van Heusen (NYSE:PVH) have shown that there is some durability if a brand is handled properly.
This is a new set of challenges for management, though. After all, private label manufacturing emphasizes product quality and manufacturing efficiency - not branding and retailing. Then again, it is not as though Oxford is new at this - Tommy Bahama has been an important part of the business for almost a decade and the company has made a lot of sound moves in expanding the reach and impact of the brand with consumers.
The Bottom Line
Oxford seemed perpetually undervalued and underappreciated for quite a period of time. With the stock almost doubling in the past year, though, that is no longer the case. That's not to say that the stock is expensive, particularly given its growth potential, but it does mean that it's not such ripe pickings as before. Buying any retailer right now seems a little dicey, given the impact of cotton prices and consumer sentiment, but Oxford is definitely a worthy candidate for investors looking for rejuvenated growth stories. (For additional reading, also check out Use Breakup Value To Find Undervalued Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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