Oxford Industries: A high-margin company that many people haven't heard of.

Oxford Industries is a clothing company that many people are not familiar with. While it may be relatively unknown to most, this company 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 to 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.

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 get started on investing with as little as $50.

The Business

Oxford Industries was founded in Atlanta, USA in 1942 when the three founders purchased the Oxford Manufacturing Company, 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 include Tommy Bahama, Lilly Pulitzer, Johnny Was, Southern Tide, The Beaufort Bonnet Company, Duck Head, and Jack Rogers. 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 four 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 2024, 39% of sales are through their own stores (278 retail stores), 34% of sales are through e-commerce, and 20% are through wholesale. The last 7% of sales consist of food and beverages. Oxford Industries operates 22 food and beverage locations, including the Marlin Bars brand and full-service restaurants, which are situated adjacent to a Tommy Bahama retail store. The significant proportion of direct-to-consumer sales is the reason why Oxford Industries has been able to achieve high margins. Oxford Industries believes that its lifestyle brands have established an emotional connection with consumers, allowing them to foster greater loyalty and command 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.

Management

The 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 comprehensive information about Thomas Chubb, but I value his extensive experience in both the company and the sector. I also appreciate that under his leadership, Oxford Industries has established specific criteria for exploring M&A opportunities. These include: the brand must have a clearly defined positioning that drives emotional connections and captures loyal customers, the capability to command premium pricing, a profitable business model, strong longstanding leadership in pricing, a sustainable profitable growth trajectory, and be complementary to the existing Oxford Industries portfolio. I believe that this checklist demonstrates that management conducts thorough research and analysis when making acquisitions. Although we have limited information about Thomas Chubb, I am confident that he can effectively lead Oxford Industries towards future growth.

The Numbers

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 challenges along the way, but overall, Oxford Industries has delivered strong performance. Fiscal 2021 was a challenging year for Oxford Industries due to the pandemic. The company focused on embracing a resort lifestyle with themes such as coastal resort luxury and enjoyment. However, in the two years following the pandemic, Oxford Industries managed to deliver its highest Return on Invested Capital (ROIC) to date, with ROIC exceeding 20% in both fiscal 2022 and fiscal 2023. ROIC decreased significantly in fiscal 2024, which is slightly concerning, but this period was challenging for many companies due to macroeconomic factors. Hopefully, Oxford Industries will manage to increase its Return on Invested Capital (ROIC) once the macroeconomic factors improve. In the greater perspective, it is encouraging that Oxford Industries has managed to deliver a Return on Invested Capital (ROIC) above 10% in eight out of the last ten 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 consistently delivered strong financial performance, increasing their equity every year over the past decade. The only exception was fiscal year 2021, which was negatively impacted by the pandemic. It is very encouraging to see that the numbers from fiscal 2023 have surpassed the pre-pandemic figures. Equity increased in a challenging fiscal 2024, although the increase was not as significant year over year as it has been historically.

Finally, we will analyze 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. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Oxford Industries has consistently generated a positive free cash flow every year over the past decade, even amidst the challenges of fiscal 2021, which is a positive indicator. Free cash flow decreased in fiscal 2023 due to the acquisition of Johnny Was. Oxford Industries managed to grow free cash flow again in fiscal 2024, reaching an all-time high. The levered free cash flow margin in fiscal 2024 is higher than the historical average, which is another encouraging sign. The free cash flow yield is also high, indicating that the shares are trading at a low valuation. However, we will revisit this later in the analysis.

Debt

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 0,48 years of earnings in debt. Therefore, debt is not a concern when investing in Oxford Industries. It is also worth noting that management has prioritized using free cash flow to pay down debt since the acquisition of Johnny Was, which I believe is a positive strategy.

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Risks

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 macroeconomics. Oxford Industries is a consumer products company that heavily relies on consumer discretionary spending and retail traffic patterns, especially in the United States. The demand for apparel products changes as economic conditions fluctuate and may be significantly influenced by trends in consumer confidence and discretionary consumer spending patterns. These trends may be influenced by factors such as employment levels, recessions, inflation, elevated interest rates, fuel and energy costs. The factors influencing consumer confidence and discretionary consumer spending patterns are beyond Oxford Industries' control and challenging to predict. Moreover, the apparel industry frequently encounters extended periods of recession and more significant declines compared to the general economy. Management has mentioned that the muted consumer sentiment is manifesting itself in consumers who have the ability to spend but are being much more cautious in their spending on discretionary items such as fashion apparel, which is the core of Oxford Industries' business.

Competition. Oxford Industries operates in a highly competitive industry. The highly competitive apparel industry is characterized by low barriers to entry, with new competitors entering the marketplace regularly. There are numerous domestic and foreign apparel designers, distributors, importers, licensors, and retailers. Some of these companies may be significantly larger or more diversified than Oxford Industries and have significantly greater financial resources. Competition in the apparel industry is particularly intense in the digital marketplace, with new entrants, increased pricing pressure, and heightened customer expectations. Competitive pressures include customer engagement, delivery speed, shipping charges, and return policies. Furthermore, fast fashion, value fashion, and off-price retailers, along with the recent decrease in consumer spending within the retail sector, have added to the promotional pressure. These and other competitive factors within the apparel industry may result in reduced sales, increased costs, lower prices for Oxford Industries' products, and/or decreased margins.

The loss of key wholesale partners. Oxford Industries generates a significant portion of their wholesale sales, which accounted for 20% of net sales in Fiscal 2024, from a few key customers. Although their largest customer only represented less than 4% of net sales in Fiscal 2024, the failure to increase or maintain sales with key customers would have a negative impact on Oxford Industries' growth prospects. Any decrease or loss of these customers' business could result in a decline in net sales and operating income if Oxford Industries is unable to capture these sales through direct-to-consumer operations or other wholesale accounts. Over the last several years, department stores and other large retailers have faced increased competition from online competitors, declining sales and profitability, and tightened credit markets. This has led to store closures, bankruptcies, and financial restructurings, which could potentially impact Oxford Industries in the future. Management has mentioned that they expect wholesale sales to be challenged in fiscal 2025.

Reasons to invest

There are also numerous reasons to invest in Oxford Industries. One reason is acquisitions. Oxford has a successful track record of acquiring, nurturing, and profitably growing brands, with several examples over two decades, such as the acquisitions of Lilly Pulitzer and Southern Tide. In the past couple of years, Oxford Industries has acquired Johnny Was and Jack Rogers. Management has mentioned that they have now completed most integration activities following the acquisition of Johnny Was. Thus, the company will now focus on enhancing the profitability of the Johnny Was business by increasing store productivity and improving the effectiveness and efficiency of marketing activities. Last year, Johnny Was achieved a 10% operating margin. Management believes they can expand margins in 2024 and further in the years ahead. Oxford Industries acquired Jack Rogers in late 2023. Management has mentioned that Jack Rogers is a well-known brand centered around an iconic product, its single sandal. While Jack Rogers will experience a slight earnings dilution in fiscal 2025, management plans to utilize this year to concentrate on redefining the brand, optimizing inventory, and positioning the brand for future success and profitability.

The hospitality business. Management has mentioned that the hospitality business, including the new Tommy Bahama Miramonte Resort, the full-service restaurants and bars, and the unique, upscale, fast-casual Marlin bars, is a key part of the success of the Tommy Bahama brand. Hospitality helps to fulfill the vision of Tommy Bahama in the customer's perception, contributing to the brand's evolution, acquisition of new customers, retention of existing ones, and increase in the annual spending of the brand's guests. Management mentioned that stores connected to one of Oxford Industries' restaurants and bars almost uniformly do a higher percentage of business in women's apparel than the fleet average and have significantly higher sales per square foot than the fleet average. Thus, the hospitality business has been a significant factor in Oxford Industries' success in expanding its women's business over the past few years. As a result, the women's segment now accounts for 36% of the total Tommy Bahama direct-to-consumer business.

Opening more stores and bars. Oxford Industries believes that its retail stores provide them with the opportunity to offer a complete range of current season merchandise, all showcased in an aspirational brand-specific ambiance. They believe that retail stores provide high visibility for their brands and products, allowing them to stay close to their consumers. Furthermore, they believe that presenting products and operating retail stores with limited in-store promotional activities enhance the value and reputation of their lifestyle brands. Approximately half of the retail stores are situated in warm-weather resort or travel destinations and states. Management believes there are still opportunities for opening new stores in both warmer and colder climates. Management expects to open 25 new retail stores in fiscal 2025, which is anticipated to contribute to top-line growth. Management also expects to open six new Marlin bars in the fiscal year, which should help evolve the brand, acquire new customers, retain existing customers, and increase the annual spending of the brand's guests in the stores adjacent to the bars.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

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 3,82, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 15%. Oxford Industries has achieved a compound annual adjusted EPS growth rate of over 18% in the past five years, but I only consider 15% as the maximum. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on Oxford Industries' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $114,60. 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 $57,30 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 244, and capital expenditures were 74. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 51,8 in our calculations. The tax provision was 14. We have 15,629 outstanding shares. Hence, the calculation will be as follows: (244 – 51,8 + 14) / 15,629 x 10 = $131,93 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 $10,89 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $171,91.

Conclusion

I believe that Oxford Industries is an interesting company. Despite the limited information available about the management team, I am confident that they are well-equipped to lead Oxford Industries into the future. This confidence stems from their extensive experience in the industry and their thorough due diligence when it comes to acquisitions, while they have also prioritized paying off debt. Oxford Industries is currently facing some macroeconomic headwinds as macroeconomic factors have affected consumer confidence and discretionary consumer spending patterns. It particularly affects Oxford Industries as the apparel industry experiences longer periods of recession and greater declines than the general economy. Competition is a persistent risk for Oxford Industries, as the highly competitive apparel industry is characterized by low barriers to entry, leading to regular influx of new competitors. Furthermore, the recent declines in spending within the consumer and retail sector have contributed to additional promotional pressure. While nothing suggests that Oxford Industries will lose some of its key wholesale customers, the recent economic environment and competition have resulted in store closures, bankruptcies, and financial restructurings among wholesalers. Oxford Industries has made many successful acquisitions over the years and expects that the two newly acquired brands, Johnny Was and Jack Rogers, will be the next in line. If management succeeds, these brands could contribute to long-term growth. Oxford Industries has a unique business model with its hospitality sector that enhances the brand, attracts new customers, retains existing ones, and boosts the annual spending of the brand's guests. Thus, as Oxford Industries opens more bars and restaurants, it should increase sales in the stores next door. Oxford Industries continues to open new stores, which is expected to contribute to long-term growth. Management believes that there are still ample opportunities for new stores. I like Oxford Industries, but I will not be buying shares until I see an increase in ROIC and improvement in macroeconomics.

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