I last covered Oxford Industries, Inc. (NYSE:OXM) in February; I put out a Buy rating at the time based on discounted-earnings undervaluation and reasonably strong growth, including notes on a potential target market opportunity in upper-class luxury, a slight shift from management’s current focus on middle-class consumers.
Now, the company has had its Q2 2024 results, and the stock is down about 10% in pre-market hours as I write this due to a weak Q2 report. The total return since my last analysis of the company is -11.50%. Despite this short-term weakness, I do believe the long-term investment thesis is still sound. However, due to long-term growth that I do not expect to be exceptional in the future, I am downgrading my rating to a Hold at this time, especially due to negative near-term momentum and revisions factors that could persist.
Oxford Industries Q2 Earnings Insights
Oxford Industries had weak Q2 results, missing both its non-GAAP EPS and revenue estimates significantly. Its YoY revenue contracted by 0.1%. Furthermore, its net income showed a YoY decline of 21%.
Additionally, the company has lowered its guidance for FY24, with its net sales guidance was down approximately 5.28% since previously.
Despite overall contraction, its outlet sales increased by 4%, its direct-to-consumer sales and its retail sales increased by 1%, and its e-commerce sales and its food and beverage sales stayed flat. However, its wholesale sales saw a significant 5% decline. This is what largely contributed to flat revenue overall.
Additionally, the company reported increased SG&A expenses, rising by 5.7%, which is a big contributor to why there is such a big impact on its net income. In addition, management mentioned in the earnings call that more consumers had been seeking deals and promotions, which results in a negative impact on profitability due to high inventory churn at a lower cost. The company’s gross margin contracted to 63.3%, down from 63.9% a year ago.
Furthermore, management mentioned in the earnings call that it was seeking to consolidate its premium brand positioning. This outlines a thought from my previous analysis, where I mentioned the potential near-term pressures on the middle class from automation capabilities currently proliferating. By focusing on its affluent markets, management may be able to protect itself from some of its client-base erosion.
The company also mentioned it will be opening new stores. These earnings result really reflect a weak macroeconomic environment, specifically related to high inflation and interest rates. Still, management is taking time to focus on infrastructure development and target its market more effectively, hence the increase in SG&A expenses. I believe we could see further downward momentum this year, but as interest rates are hopefully cut in 2025, a near-term boost is likely for OXM stock, in my opinion, as it is well-positioned to capitalize on increased consumer demand.
Broader Operational Analysis
While the company is spending a lot on future development initiatives, it is also seeking ways to reduce its SG&A expenses, too. For example, it is relocating its Johnny Was distribution center from Los Angeles to Lyons, Georgia. This is expected to save approximately $4 million annually in operating costs by enhancing operational efficiency by reducing logistics and distribution expenses. Management mentioned that the company incurred $1 million in expenses in Q2, with an additional $1 million in expenses expected in H2, but these one-time expenses are conducive to long-term annual savings.
What I find admirable is that despite the current challenging macroeconomic environment, management is not making short-sighted reactions to these conditions. It is instead continuing to invest in its operational strength, but also consolidating the integrity and quality of its brands. As an example, management has invested in a marketing campaign for Johnny Was featuring Lily Aldridge, a well-known model, highlighting the brand’s collaboration with Sasson Denim. This is likely to be significantly accretive to Oxford Industries’ long-term market position. It enhances its brand, the desirability of its broader portfolio of products, and focuses on quality both in marketing and in craftsmanship and design in the Sasson Denim offerings. Strategies like this show a nuanced and long-term investment mindset from management, which I do believe indicates a reason to be bullish, despite recent financial weakness.
OXM Stock Valuation Analysis
As we can see in the following table, Oxford Industries is currently selling at a cheaper valuation on a P/E ratio basis compared to historically. However, this is certainly warranted in the near term due to significant contractions in its earnings. However, with growth estimated on consensus to resume robustly in 2025, this could be viewed as an opportunity to be greedy when others are fearful.
Five-year average forward non-GAAP PE ratio | 12.80 |
Current forward non-GAAP PE ratio | 9.70 |
Five-year average forward diluted EPS growth rate | 3.74% |
Current forward diluted EPS growth rate | -4.24% |
2024 normalized EPS growth rate estimate | -19.11% |
2025 normalized EPS growth rate estimate | 12.05% |
Furthermore, the market seems to have been relatively efficient in valuing OXM stock according to its recent slower revenue growth. Although its P/S ratio seems more reasonable based on its revenue growth rates contracting only slightly, its P/E non-GAAP ratio is still vulnerable to further contraction in the near term. This is due to a potentially weak H2 on the way. This is especially true as it relates to a potentially weak macroeconomic environment until after the election and into 2025 and to the infrastructure investments I mentioned above that are going to affect Oxford Industries’ profitability in the near term.
Five-year average forward PS ratio | 1.15 |
Current forward PS ratio | 0.80 |
Five-year average forward revenue growth rate | 7.84% |
Current forward revenue growth rate | 6.00% |
2024 revenue growth rate estimate | 0.84% |
2025 revenue growth rate estimate | 5.00% |
Despite further near-term downside that I consider likely, as well as weakness in revisions presently, this might be one falling knife worth catching for short-term alpha over the next 12 to 18 months if one can tolerate a few months of losses. Despite this, the long-term opportunity is much less promising, as the fundamental growth estimates do not create a compelling long-term thesis.
In 12 months, I believe the stock could trade at a higher P/E non-GAAP ratio of 10.5. If it then hits the January 2026 consensus normalized EPS estimate of $9.20, the stock will be worth approximately $96.60 if the market prices this into the stock a few months early. This indicates a near-term upside potential of 19.3%, as well as a dividend yield of 3.2% to further support returns. However, beyond this, I expect slow growth and not much valuation multiple expansion.
Therefore, Oxford Industries, Inc. is a near-term alpha opportunity, but likely to underperform the market over the long term, resulting in my revised Hold rating. My decision has also been informed by the potential for further near-term downside as it relates to downward revisions and a potential higher-for-longer interest rate strategy for the remainder of 2024 and into 2025.
Risk Analysis
Due to the rapidly changing nature of fashion trends and current shifts in economic conditions, including a shift toward digital brand engagement and social media communication, Oxford Industries is potentially vulnerable over the long term. It must adapt to changes in trends and preferences strategically. This is especially true because luxury powerhouses like LVMH (OTCPK:LVMUY, OTCPK:LVMHF) are much more capable than Oxford Industries of securing high-status endorsements from global celebrities.
Therefore, Oxford Industries might benefit from a more nuanced and micro-influencer approach, which could help it retain a substantial influence in the market for premium fashion while not being limited in scope due to the costs associated with top celebrities. I believe a strategy like that adopted by Lululemon (LULU) could work very well for Oxford Industries. However, to date, the company has largely worked through traditional marketing models, and a richer ecosystem of micro-influencer partnerships to boost sales could be beneficial, in my opinion.
Considering that the fashion industry comes with very low switching costs, this intensifies competition and leads to less established moats for most companies, apart from those with extremely strong heritage reputations and conglomerate diversification, particularly in super-prime luxury. There are numerous established luxury brands, including Ralph Lauren (RL), PVH Corp. (PVH), and Levi Strauss & Co. (LEVI), which challenge Oxford Industries both in the middle-class and upper-class markets. If Oxford Industries decides to take a stronger focus on the upper class due to pressure on and a narrowing of the middle class, I believe it could face competition that is stultifying and severe.
Therefore, the long-term growth thesis, even with careful planning from management, does not look to be exceptional. Instead, I believe Oxford Industries is likely to retain its position in niche upper-middle-class fashion. That is, unless management makes strategic divestitures and reallocates capital to acquiring already burgeoning luxury businesses to reinforce its position in higher-value fashion products. This could enhance its reputation if the strategy was effectively executed over a decade and beyond.
Conclusion
Oxford Industries reported relatively weak Q2 results, but this does not mean the company will not continue to succeed over the long term. While the current investment case is relatively risky, I believe that the stock could be undervalued, and I estimate a near-term upside total return of over 20%.
However, beyond this, I do not consider the stock likely to beat the market on an annualized basis over five to 10 years or more. The risks and its market position are too inhibiting to make it so, based on my analysis, unless management makes significant operational shifts. Therefore, as a long-term-oriented analyst, my rating for OXM stock is a Hold.
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