Oxford Industries designs, produces, distributes and retails both branded and private label apparel. This past summer the company had unusually poor performance in one of its divisions. The stock’s been halved and downgraded by two analysts. Management sees a turnaround but Wall Street hasn’t priced that in yet. Actually, Wall Street doesn’t seem to care that each division of the company is being repositioned/restructured very seriously. Management appears conservative in its prognostications, aggressive in its inventory management and they own lots of stock. Two weeks ago, the company entered into an accelerated stock buyback program for 14% of total market cap ($60mm). The shares trade at 7.7x normalized EV/EBIT and at a post-buyback P/E of 9.6x

Oxford has successfully created value via acquisitions & divestitures over the years. Hicks Lanier has been Chairman & CEO since 1981 and President since 1977. He owns 9% of the stock. The company now has 4 divisions. Two divisions are proprietary brands (acquired three and four years ago, respectively) that do both retail and wholesale. These divisions also license their brands for accessories, footwear, furniture, and other products. Then there are two legacy divisions that do more private label wholesale. Manufacturing is basically offshore and sales are mostly US + UK but global expansion is under way. Over the past few years, all four divisions have gone through restructurings. The following trends are nearing completion: shutting low-margin operations in the legacy divisions; switching from domestic manufacturing to outsourcing; shifting from prominent licensed trademarks to proprietary trademarks; moving higher up the value chain. I will go through each division and sum up the parts at the end.

 

Tommy Bahama was purchased in 2003. It does both wholesale and retail and is now expanding online. There are 74 stores system-wide including 9 “compound stores” which are 10,000sq.ft store-restaurant combos.

 

In calendar Q3, TB’s sales were soft in FL, CA, NV & AZ, which accounts for roughly 2/3 of the company’s retail sales. Also, some big customers have been taking delivery of product later than expected. The company responded by significantly reducing its inventory exposure; it views the quarter as an aberration and is seeing signs of a rebound.

 

Macro perspective: from a macro point of view they do not see, nor do they price in, a rebound. Still, they don’t except it to get much worse either. I think it’s safe to say that sales receipts in California + other data suggest that the 4 big housing bubble states are basically entering recession. If that recession doesn’t worsen, management is right on. However, if the situation turns in a “consumption depression”, the Tommy Bahama division will under-perform for longer.

 

On the conference call management said that the last week of September and first two weeks of October were looking good. An increase in gross margins is also helping to cushion macro blows. Last but not least, the company’s been working on brand awareness, organic growth & new store growth and will likely continue to capture market share. I think they can grow sales by 10% on a run-rate basis.

 

Valuation: past two fiscal years had operating margin of 17% and management indicated it should trend back up to that level. In FY2007 the retail/wholesale mix was 50/50. As retail takes over, the margins should surpass17%. Despite wholesale being reported as stabilized, I assume more wholesale declines – enough to offset all retail growth. So we keep the top line and the op. margins identical to FY07.

 

Operating income = 82mm.

 

Ben Sherman was acquired in 2004. Established in 1963 and based in London, this division designs and distributes branded sportswear and footwear and tailored clothing and accessories. Approximately 75% of top line is in the UK and Europe; 90% is wholesale. Over the past two years Oxford’s management repositioned Ben Sherman higher up by restricting distribution to upscale accounts and attaining higher price points. This turnaround is already proving itself but is ongoing. Customers have been buying slowly, but going forward into the spring there is visibility and results should show up in the numbers. As per the latest quarterly results and also common sense, this division has tremendous operating leverage and sensitivity to the top-line, so their April 10Q should be one of the catalysts to move the stock back up.

 

Ben Sherman’s retail strategy is to open a small number of stores, in upscale locations - just enough to shape the brand (3 in US, 4 in UK, 6 outlets in UK, 7 licensed stores).

 

Internationally, Ben Sherman has a manager who just moved to Hong Kong to develop the Middle East and Asia. There are retail partners lined up in almost every country in Europe and in major Far East centers. The company expects a dramatic rollout of Ben Sherman stores over the next 2-3 years. My estimate assumes no such growth, sales at 160mm and operating margins consistent with the past two fiscal years.

 

Operating income = 160mm * 6% = 9.6mm

 

Lanier Clothes designs and markets branded and private label men’s suits, sport coats, suit separates and dress slacks across a wide range of price points. They also make tailored clothing, namely through Arnold Brant which is an upscale tailored brand. The mix is nearly 50/50 between private label and branded products. Five customers represented approximately 70% of Lanier Clothes’ net sales in fiscal 2007: Macy’s, JC Penney, Sears, Men’s Warehouse and Nordstrom.

 

This division is not doing well. Demand for tailored clothing seems to be in a protracted downturn, particularly at chain stores and department stores. Operating income has been going down hard for a couple of years and the company is responding by increasingly curtailing production. They say this past year has been uncharacteristically terrible (and this is somewhat logical because one of the trouble-causing factors was the Macy’s-May merger) but still, they’re currently reviewing strategic options for that segment and I’ll value it at zero for the sake of simplicity.

 

Operating income = 0

 

Oxford Apparel is the second legacy division. In FY07, 63% of business was private label and the rest branded. The company has decided to aggressively cut underperforming lines of business which should take sales to 1/3 of what they used to be. They’ve cut out the first 1/3 (i.e. half of the work) and the other half should be done within a couple of quarters. Operating margins have already gone up from ~4% to 7% and eventually they should be left over with double digit margins. They also think the business can grow from that final basement-level. I assume they’re left over with 110mm in annualized revenues at 12% op. margin.

 

Operating income 110 * 12% = 13.2mm

 

The company has announced an accelerated buyback program for 60mm worth of market cap, which they plan to finance with their barely used revolving credit facility. You will find below the P/E for both pre & post the share buyback. Also, the company has a dividend.

 

 


Risks
-  Consumer recession turns into depression
-  Some customer concentration (15% of Tommy Bahama sales are to Nordstrom, 11% of Ben Sherman sales to Debenhams).