adminOxford Industries (NYSE:OXM) reported Q2 2024, and the market was disappointed. The company expected positive comps in its important second quarter and yet posted negative comps and wholesale revenues. The company blamed the macroeconomy, distracting political events, and not having more opening price point assortment. Its clients shopped more during sales events, leading to a fall in gross margins, although management commented they are not discounting more than before. The investment in stores and a new DC, coupled with lower sales, implied further deleverage and a fall of 400bps of operating margin YoY.
The company reduced guidance for the year, given that its strongest selling season is over and was below expectations. From comparable growth the company is guiding for LSD decline, with MSD declines in Tommy Bahama. Considering the company’s guided EPS (which seems not very risky given the busy season is over), the company continues to trade at an earnings yield of between 8/9%, which seems fair considering the company is undergoing cyclical challenges, but not particularly attractive. For that reason, I maintain my Hold rating on OXM despite the lower stock prices.
Q2 2024 results
Busy season is over: The majority of OXM’s brands are more related to warmer climates and warmer months. Therefore, the end of Q1, all of Q2 and the beginning of Q3 are the busiest season (with a pickup during the Holidays). The fact that OXM underperformed in this season implies the year is now difficult to recoup.
Change in trend: OXM had posted a challenging Q1 with sales down 5%, mostly from wholesale. However, the company had already warned about that in 4Q23, and had still guided for a strong FY24, with low to mid-single digit comp growth. Unfortunately, the company said that it saw a significant change in trend in June, worsening in July and maintained in August and September, leading to negative comps. This led the company to change guidance for the year to a decrease in comp sales.
The culprits: OXM blamed the situation on three factors. First, the macro economy is now hitting its customers. I do not really agree with this view because it’s the same macro under which other brands are growing, and even OXM was growing until last year. Second, the company blamed distracting events related to headlines. This is an euphemism probably for all that happened around the election (the Biden candidacy decline, the Trump assassination attempt, etc.). Again, I tend to believe this is a macro event that could have an impact but cannot be the most important. Third, the company considered that previously it had benefited a lot from Florida (where it has more than 50% of its B&M stores), and that now Florida is not comping so positively against the rest of the country. Finally, management recognized that it should have had more opening price points. This, I believe, is the main culprit. If the macro is challenging, then retailers should adapt, not just blame the macro.
Sales driven gross margin loss: The company’s gross margins decreased 100bps, because of more sales in its outlets (4% up YoY), and more sales during discount and promotional periods. Management clarified that the promotional cadence and degree is the same as last year, only that customers decided to shop more during those opportunities, therefore carrying the margins down.
SG&A deleverage: With almost 30 stores opened in the past twelve months (the majority in the emerging brand Southern Tide), plus the preparation for opening another 15 stores, and moving part of their distribution to a new DC in Georgia, the company had more SG&A expenses. Coupled with lower sales, these expenses clearly deleveraged. The company lost 4 percentage points of operating margin in its most important quarter.
Launching cool weather collection: OXM is clearly seasonally focused on the warmer climates and months. For that reason, it is salutary to see the company launching a new campaign focused on more cold weathers (not winter in the North of the US for sure, but cooler than summer). The Tommy Bahama Indigo Collection is focused on denim and complementary styles. I think this is a good move, although for the time being, the web store only has 5 bottoms, not a full-fledged collection.
Valuation
I have maintained a Hold rating on Oxford since March 2024, since when the stock is down more than 20%. After the earnings release, OXM opened close to down 5% more.
The company is now guiding for sales of $1.51 to $1.54 billion for the year, a decrease from last year. The company’s gross margins should also be challenged by about 100bps YoY, as well as its operating margins, given the aforementioned store expansion.
The company now expects EPS for the year to be around $7 adjusted ($6.5 when removing intangible amortization from the Johnny Was acquisition). I do not think there is a lot of risk to management’s guidance, given how important the first half already is for the company. Unless the company really misses on 2H24, a decrease from their forecast should not impact the yearly figures as much as the miss in 2Q24 did.
The stock’s multiple has not moved so much from the first time I covered OXM. At $80 per share, the stock trades at a P/E of 11.4x, compared to 12x back then (of higher earnings expected).
As commented back then, I believe such a multiple is fair for a company of Oxford’s characteristics: valuable brands, low leverage, generally good assortment strategies, not a great ability to grow the brands organically, and circumstantially or cyclically challenged.
The company’s margins are cyclically challenged but are still well above their historical mean, which implies that unless there is a return to same-store growth, they could become even more challenged in the future.
However, the 9% current earnings yield, or potentially a little higher if we assume a recovery to recent margins closer to 13%, is not particularly attractive. Oxford has not shown that it can grow organically so much, therefore not guaranteeing a permanent growth yield on top.
For that reason, I maintain a Hold rating on OXM.
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