Change can be painful, and while Oxford Industries' (NYSE:OXM) move to a more proprietary and aspirational product assortment has produced solid gains for long-term shareholders, there has been a lot of volatility along the way (shares went from over $50 in 2007 to below $5 in 2009). Oxford's third quarter is perhaps a microcosm of some of those challenges - top-tier brands like Tommy Bahama and Lilly Pulitzer continue to grow well, but the Ben Sherman and legacy Lanier businesses are struggling and it's taking a lot of money to support the company's hybrid direct retail/wholesale model.

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OK, but Noisy, Third Quarter Results
The performance of Oxford is a little challenging to slot this quarter, as the company posted better revenue growth than PVH (NYSE:PVH), but the earnings comparison was not nearly so strong. Likewise, relative to other retailers targeting a similar demographic, including Nordstrom (NYSE:JWN) and Jos. A Bank (Nasdaq:JOSB), Oxford did OK on sales trends (particularly with the top brands), but the cost structure is not so impressive.

For the quarter, consolidated revenue rose more than 6%, but there were a lot of moving parts involved. Tommy Bahama sales were up 12%, while Lilly Pulitzer sales jumped 62%. The Ben Sherman brand saw a 21% sales decline, while the Lanier business saw sales fall 18%.

Margins were decidedly mixed. Gross margin improved 130bp from last year (and was within the range of most analyst expectations), but operating income was down 13% on high ongoing store opening expenses and costs tied to supporting the Tommy Bahama and Lilly Pulitzer brands.

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Is Oxford Going Overboard?
Similar to PVH and Ralph Lauren (NYSE:RL), Oxford pursues a hybrid sales model where the company sells through retailers like Macy's (NYSE:M) and Nordstrom, but also its own company-owned retail stores. While the basic approach makes sense, I do wonder about Oxford's particular strategy.

Oxford has 110 company-owned Tommy Bahama stores, with seven of those overseas. I happen to like the company's decision to target Asia with its overseas expansion, as I think too many other retailers have prioritized Europe over emerging Asia. On the other hand, I have to question decisions like opening up a Tommy Bahama bar/restaurant in New York City. That is the sort of high-risk gamble that I suppose could build the brand (remember when Hard Rock Cafe merchandise was everywhere?), but it's also the sort of bold move that could put the company on a future "what were they thinking?" list of bad corporate decisions.

I also wonder if the company really needs to roll out a completely separate store infrastructure for Lily Pulitzer. I understand the importance of branding (not unlike how PVH keeps Tommy Hilfiger and Calvin Klein separate), but it's going to require a lot of capital and redundant infrastructure to run two different retail concepts. Not to mention that many retailers (including American Eagle (NYSE:AEO), Chico's (NYSE:CHS) and Abercrombie & Fitch (NYSE:ANF) have had their challenges running multiple store concepts).

On the other side, I have generally thought that management at Oxford were straight-shooters. As an example, management openly talked about how Ben Sherman sales were hurt by their own merchandising mistakes (too much emphasis on the high-end assortments); many (if not most) other retailers would at least try a Jedi mind trick to convince investors that the sales shortfall was due to "market conditions" that they couldn't possibly have controlled or foreseen.

The Bottom Line
While Oxford Industries looks to be in pretty good shape with respect to inventories and the strength of its two leading brands, management nevertheless slashed guidance for the fourth quarter. Margin problems are now rearing their head, and while it is true that at least some of this is due to the company's aggressive store expansion plans, the fact remains that investors don't like to see profit expectations reset lower.

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As much as I appreciate the re-making of Oxford that I've watched over the past 10 years, I don't like the stock all that much here. The company's EV/EBITDA ratio is already on par with companies that have better-developed brands, including PVH and Ralph Lauren. What's more, even if Oxford can attain free cash flow margins on par with other retail/wholesale apparel hybrids, that stream of cash flows does not point to a compelling fair value today.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.