oxford Industries oxm
May 07, 2003 - 8:49pm EST by
2003 2004
Price: 36.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 290 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Oxford is a manufacturer of branded (licensed) and private label apparel. some of their brands include nautica, tommy hilfiger, izod, etc. Revenues are in the neighborhood of $750 million. This is a highly competitive business with significant international competition a key factor. Oxford has remained competitive by locating most of its manufacturing facilities overseas. A somewhat larger and better known (since it has coverage)competitor and comp is KWD. prior to last week, OXM was trading at 8-9x eps and KWD was trading at about 11x.

The real story here is the acquisition the company announced last week. OXM has been sitting on a very good balance sheet thanks to generating a lot of cash with little capex requirements for several years. The company has finally stepped up to the plate and made a major change to the company's profile, purchasing the company which owns the tommy bahama brand. This is an upscale men's clothing wholesaler/retailer.

I believe the acquisition will be significantly additive and will also result in multiple expansion for the combined entity even without new analyst coverage and especially so if new coverage is initiated. I also believe this will be the case, even though the stock has already appreciated in the wake of this news by about 40%.

If interested in this idea, you should refer to the recent 8-K where pro forma results are presented. however, the pro forma results are significantly understated for at least three reasons:
1) they are given for the 2002 fiscal year, which for OXM was a May year and for tommy bahama was a March year.
2)the interest expense will be lower since the recent debt deal was done at a lower interest rate than that assumed in the pro forma
3) no synergies are assumed in the pro forma numbers.

If you adjust the pro forma numbers given in the 8-k to get a number for F03 (which ends May for OXM and March for tommy bahama) you get $4.50/share. If you factor in top line growth (about 15% for tommy bahama and 5% for OXM), a couple million in synergies and a million in interest cost savings versus the pro forma, you can easily get over $5/share in eps for calendar '03

OXM PF earnings $21M (May'03)
Tommy bahama PF earnings: $26M (March '03)
added aftertax int costs : $10M/year

net pf earnings: 37M
shares out post acq: 8.0M

this calculation adds nothing for int expense savings of about $1M from doing the deal more cheaply, adds nothing for synergies and nothing from additional growth in the business for calendar '03. Since Oxm will also be generating a significant amount of cash (operating cahs flow is about 100million with capex requirements only 20m and dividend of $6m), this calculation also assumes no debt paydown, which will occur (though will fluctuate with seasonal working cap needs).

i believe they could pay back the cost of this acqusition from internally generated funds in roughly 3 years time, assuming no growth in the business.

the new company will be about 2/3 revenues OXM and 1/3 tommy bahama. I would think that the new entity could trade up to a 12x multiple. keep in mind that KWD is getting an 11x multiple. PVH (another comparable is getting a 13x multiple). the tommy bahama brand is grwoing its top line 15% and has a huge opportunity in front of it on both the wholesale and retail sides as well as in licensing.

oxm will leave the tommy bahama as a wholly owned sub. their is no integration to be done. this limits the amount of synergies to be had, but also should limit the risk of any "integration" foul-ups.

at 7x my estimate of roughly $5/share, even after the 40% runup, i believe there is little downside. the upside over the next 12-18 months could be 12x $5/share or $60 or even more as the $5 eps should grow nicely.

Merril and suntrust did the recent debt deal and management made an effort with both to get equity coverage from them. no guarantees, but this is at least a possibility. the deal closes soon-- early June.

1)like with alll acquisitions, there is the risk that it does not go smoothly
2)either the base business or tommy bahama's business softens due to overall retail environment softening.
3) 5-year earn-out will eat up some of the free cash.


Increasing awareness of Acquisition and its potential
possible equity coverage from merril or suntrust or others
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