Oxford Industries Posts Strong Q1, Weak Q2 Guidance

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Oxford Industries Inc. (NYSE:OXM) is an apparel company that designs, sources, markets, and distributes apparel products of company-owned lifestyle brands, licensed, and private labels in the United States, the United Kingdom, the rest of Europe, and internationally. It has delivered some really impressive results from the four groups it operates in: Tommy Bahama, Lilly Pulitzer, Lanier Clothes, and Ben Sherman.

The company offers men’s and women’s sportswear and related products under the Tommy Bahama brand for men and women age 35 and older; women’s and girl’s dresses, sportswear, and related products under the Lilly Pulitzer brand; men’s sportswear and related products under the Ben Sherman brand for men ages 25 to 40; and golf apparel under the Oxford Golf brand. It also provides branded and private label men’s tailored clothing, including suits, sportcoats, suit separates, and dress slacks under licensed brands like Kenneth Cole, Dockers, Geoffrey Beene, and Ike Behar, as well as various apparel products under the Billy London, Arnold Brant, and Oxford Republic brands. Its results are striking, considering retail has been lagging of late. But can this momentum continue?

Looking at the most recent quarter, I am inclined to believe momentum is on Oxford Industries’ side. This in turn should reward shareholders going forward. Consolidated net sales grew by 10 percent to $257.6 million compared to $234.2 million in the first quarter of fiscal 2013, reflecting increases in all operating groups. For the first quarter of fiscal 2014, consolidated gross margin of 57.2 percent was comparable with the prior-year period. Gross profit for the first quarter of fiscal 2014 increased to $147.3 million from $134.1 million in the first quarter of fiscal 2013. Expenses were $123.2 million, or 47.8 percent of net sales, compared to $113 million, or 48.3 percent of net sales, in the prior-year quarter.

The increase in expenses was primarily due to incremental costs associated with operating additional retail stores, investments in infrastructure and systems, and increased compensation expense. Royalties and other income were $4.4 million in the first quarter of fiscal 2014 compared to $5.1 million the first quarter of fiscal 2013. The prior year included $0.4 million of royalty income from Tommy Bahama’s Canadian licensed business, which was acquired by the company in the second quarter of fiscal 2013. Overall, consolidated operating income increased 9 percent to $28.5 million compared to $26.1 million in the first quarter of fiscal 2013. But how is each part of the company performing?

Tommy Bahama delivered a 5 percent year-over-year net sales increase to $158.4 million. The increased sales were primarily due to the operation of additional stores and the 2013 acquisition of the Tommy Bahama Canadian business. Tommy Bahama had adjusted operating income of $20.3 million compared to $21.4 million in the first quarter of fiscal 2013. The decrease resulted primarily from increased expenses and a slight decrease in gross margin and the modest comparable store sales decrease. On a GAAP basis, Tommy Bahama’s operating income for the first quarter of fiscal 2014 was $19.9 million compared to $21.4 million in the first quarter of fiscal 2013.

Lilly Pulitzer’s net sales in the first quarter of fiscal 2014 rose 28 percent to $50.4 million, with strength across multiple product categories and increases in all channels of distribution, including a comparable store sales increase of 34 percent. Lilly Pulitzer’s adjusted operating income in the first quarter of fiscal 2014 increased 34 percent to $14.9 million, driven by increased sales and an increase in gross margin. On a GAAP basis, operating income was $14.8 million compared to $11 million in the same period of the prior year.

Net sales for Lanier Clothes increased to $28.7 million from $27.3 million in the first quarter of fiscal 2013. Operating income for the quarter was $2.7 million compared to $2.5 million in the first quarter of fiscal 2013.

Net sales for Ben Sherman were $15.1 million compared to $12.2 million in the first quarter of fiscal 2013. The sales growth was primarily due to the liquidation of certain aged inventory, the impact of foreign currency translation, and the improved performance of its retail stores and concessions in the U.K. and Europe. The operating loss for the first quarter of fiscal 2014 improved slightly to $4.7 million compared to $4.8 million in the prior year period, despite a $0.3 million unfavorable impact of foreign currency translation.

Thomas C. Chubb III, CEO and president, said: “We were quite pleased with our first quarter results. In particular, Lilly Pulitzer’s remarkable performance has continued with product assortments and a marketing campaign that are clearly resonating with consumers. Tommy Bahama, while impacted by lower traffic early in the quarter, saw a nice rebound in April and ultimately delivered a solid quarter in a very challenging market. Investment in the expansion of these great brands, Tommy Bahama and Lilly Pulitzer, remains our key strategic focus. At the same time, we continue to look to Lanier Clothes for strong cash flow and believe Ben Sherman is properly positioned to deliver improved results during the remainder of the year. We are confident that, as we execute our plans in each business, we will drive outstanding value to our shareholders.”

So where do we go from here? Well, looking ahead, the company initiated its guidance for the second quarter. The company expects net sales in a range from $245 million to $255 million compared to net sales of $235 million in the second quarter of fiscal 2013. Adjusted earnings per share are expected to be in a range of 85 cents to 95 cents, and GAAP earnings per share are expected to be in a range of 82 cents to 92 cents. This compares with second-quarter fiscal 2013 adjusted earnings per share of $1.01 and GAAP earnings per share of 96 cents. While Oxford Industries’ first quarter was quite strong in many regards, its second-quarter guidance is a bit weak. Thus, I would wait a few more quarters before making a decision to buy or sell this company.

Disclosure: Christopher F. Davis holds no position in Oxford Industries and has no plans to initiate a position in the next 72 hours. He has a hold rating on the stock and a $67 price target.

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