Oxford Industries: A high-margin company many haven't heard of
Oxford Industries is a clothing company that many haven't heard of. While it may be relatively unknown to most, it has recently performed well and now delivers higher operating margins than its peers, such as Ralph Lauren, V.F. Corporation, and PVH Corporation. In this analysis, I will investigate Oxford Industries and determine whether the stock should be added to my portfolio.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Oxford Industries. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in Oxford Industries' competitors either. Thus, I have no personal stake in Oxford Industries. If you want to purchase shares (or fractional shares) of Oxford Industries, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.
Oxford Industries was founded in Atlanta, USA in 1942 when the three founders purchased the Oxford Manufacturing Company, which was a manufacturer of military uniforms. The company no longer manufactures military uniforms but instead focuses on designing, sourcing, marketing, and distributing various lifestyle brands. These brands are Tommy Bahama, Lilly Pulitzer, Johnny Was, Southern Tide, The Beaufort Bonnet Company, and Duck Head. Tommy Bahama is their largest brand, contributing 57% of the revenue. It is followed by Lilly Pulitzer, which contributes 22% of the revenue, while Johnny Was contributes 13% of the revenue. The last three brands are grouped together in a segment called emerging brands, which contributes 8% of the revenue. Oxford Industries mainly sells its products directly to consumers. As of the end of fiscal 2023, 38% of sales are through their own stores (257 retail stores), 35% of sales are through e-commerce, and 20% are through wholesale. The last 8% of sales consist of food and beverage. Oxford Industries operates 21 food and beverage locations, including the brand Marlin Bars and full-service restaurants, which are located next to a Tommy Bahama retail store. The large portion of direct-to-consumer sales is the reason why Oxford Industries has managed to deliver high margins. Oxford Industries believes that its lifestyle brands have created an emotional connection with consumers, thus enabling them to command greater loyalty and higher price points. Hence, as Oxford Industries experiences higher customer loyalty and is able to command higher prices, I believe that Oxford Industries has a brand moat.
Their CEO is Thomas Chubb. He joined Oxford Industries in 1988 as a summer intern and became a full-time employee in 1989, working as an in-house attorney. He held various leadership positions within the company until he was appointed as the CEO in 2013. He holds a bachelor's degree in Economics from the University of North Carolina and a Doctor of Jurisprudence from the University of Georgia. It is difficult to find extensive information about Thomas Chubb, but I appreciate his extensive experience in both the company and the sector. I also appreciate that under his leadership, Oxford Industries has established specific criteria when exploring M&A opportunities. These include: the brand must have a clearly defined positioning driving emotional connections and capturing a loyal customers, capability to command premium pricing, profitable business model, strong longstanding leadership in price, sustainable profitable growth trajectory and being complementary to existing Oxford Industries portfolio. I believe that this checklist demonstrates that management conducts thorough research and analysis when making acquisitions. Thus, although we have limited information on Thomas Chubb, I remain confident that he can successfully guide Oxford Industries towards growth in the future.
I believe that Oxford Industries has a moat, and I also have a positive opinion of their management. Now, let us investigate the numbers to determine if Oxford Industries meets our criteria for having a strong competitive advantage. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. There have been some bumps along the way, but overall, Oxford Industries has delivered solid numbers. Fiscal 2021 was a challenging year for Oxford Industries due to the pandemic. However, they were able to achieve their highest numbers in the past decade in fiscal 2022 and fiscal 2023, which is highly encouraging. Overall, I'm satisfied with these numbers, despite Oxford Industries falling short of the 10% mark in a few years.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Oxford Industries has managed to deliver almost textbook numbers as they have increased their equity every year in the last decade, except for fiscal year 2021, which was impacted by the pandemic. It is very encouraging to see that the numbers from fiscal 2023 have surpassed the pre-pandemic numbers.
Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to enhance clarity and improve understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is not surprising to see that Oxford Industries has consistently generated positive free cash flow every year. However, the levered free cash flow margin is relatively low throughout the decade. On the other hand, the free cash flow yield has been relatively high in most years, indicating that Oxford Industries is trading at a low price. However, we will discuss this further in the analysis.
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on Oxford Industries, I found that the company has 0,72 years of earnings in debt. Thus, debt is not a concern when investing in Oxford Industries.
Based on my findings thus far, I believe that Oxford Industries is an intriguing company. However, no investment is without risk, and Oxford Industries also has its fair share of risks. One risk is low consumer confidence. Management has mentioned that customers have become more cautious with regard to discretionary purchases because of the current economic environment. It means that Oxford Industries has observed that consumers tend to make more purchases during promotional events. As a result, Oxford Industries has experienced more modest organic growth recently, while lower consumer confidence has also impacted margins. Wage inflation. Oxford Industries believes that its employees are its most valuable assets, and in order to retain them, they must be fairly compensated. Furthermore, Oxford Industries' business has outgrown the size of their staff, necessitating the need to hire additional personnel to ensure they are adequately staffed. Currently, we are experiencing high inflation in the United States, where Oxford Industries hires their staff. Thus, hiring new employees and increasing wages have led to decreased profit margins. If high inflation lasts for a long time, it will affect the results of Oxford Industries. Competition. Oxford Industries operates in a highly competitive industry, where reputation, brand name value and image, price, and quality are some of the key competitive factors. Furthermore, the apparel industry is characterized by low barriers to entry, which means that new competition regularly enters the marketplace. Thus, Oxford Industries competes with both established and emerging competitors across various factors, and will need to continue to execute effectively.
There are also numerous reasons to invest in Oxford Industries. One reason is that Oxford Industries is acquiring new customers and expanding its brand portfolio. Management has mentioned that the interest in their brands remains very high, as their active customer base and new ad rate are both growing, while the average order value is being held steady. Furthermore, management mentioned that they have observed increased traffic across their portfolio of brands in fiscal year 2024. Furthermore, management believes that there are ample opportunities to expand each of their brands in the future. The Johnny Was acquisition. Oxford Industries acquired Johnny Was in September 2022, and the management has high hopes for the brand. Oxford Industries plans to relaunch the Johnny Was website in 2023, with the expectation that the revamped site will generate additional growth for the Johnny Was e-commerce business. It should result in the Johnny Was brand continuing to grow while also expanding its operating margins moving forward, compared to the current 14% operating margin that Johnny Was delivers. Furthermore, the acquisition of Johnny Was means that Oxford Industries is less dependent on the Tommy Bahama brand, as Johnny Was already contributes 13% of the company's revenue. Investing in direct-to-consumer operations. Oxford Industries already has a high rate of direct-to-consumer sales, but management is investing in increasing direct-to-consumer sales. Some of these investments include a new fulfillment center, which will support their highly profitable e-commerce business across all of their brands. Management is also investing in new stores and believes that they will open another 25 stores by the end of fiscal 2024. These investments in high-margin direct-to-consumer sales should generate long-term benefits for the company as well as for shareholders.
Now it is time to calculate the price of shares in Oxford Industries. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 10,19, which is from fiscal year 2023. I have selected a projected future EPS growth rate of 14% (Management expects a 10-year EPS CAGR of 14%). Additionally, I have chosen a projected future PE ratio of 28, which is twice the growth rate. This decision is based on the fact that Oxford Industries has historically had a higher PE ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $261,46. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Oxford Industries at a price of $130,73 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 156 and capital expenditures were 54. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 38 in our calculations. The tax provision was 51. We have 15,78 outstanding shares. Hence, the calculation will be as follows: (156 – 38 + 51) / 15,78 x 10 = $107,10 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Oxford Industries' Free Cash Flow Per Share at $5,01 and a growth rate of 14%, if you want to recoup your investment in 8 years, the Payback Time price is $75,58.
I believe that Oxford Industries is an interesting company. And while we don't have much information about the management team, I feel confident that they are well-equipped to lead Oxford Industries moving forward. This confidence stems from their extensive experience in the industry and their thorough due diligence when it comes to acquisitions. There are some short-term risks when investing in Oxford Industries, as the current economic environment has led to lower consumer confidence and higher wages. If these economic headwinds persist for an extended period, they could have a long-lasting impact on Oxford Industries' businesses. Competition is a long-term risk that comes when operating in sector that Oxford Industries operates in. However, Oxford Industries has shown that they have managed to excel in the industry for many years and have recently delivered higher operating margins than their competitors. Furthermore, Oxford Industries is expanding its consumer base. If their investment in the direct-to-consumer business proves successful, as management anticipates, it will lead to increased profit margins in the future. This, in turn, will make Oxford Industries more profitable. I believe that Oxford Industries is a good long-term investment, especially if you can buy shares below the Ten Cap price of $107,10. This is because you would receive a 50% discount on two out of three investments.
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