This article covers Oxford Industries (NYSE:OXM) 1Q24 results and earnings call.

The results were not out of line in absolute terms, with revenues down 5% and operating margins falling because of cost deleveraging. This has been the state of many retail companies for 2022 and 2023. On a comparable basis, though, the company's results are a little more worrying, especially for some of its brands, like Johnny Was.

I started covering the company in March 2024 with a Hold rating based on the company's valuation compared to its current negative cycle. The stock is down 10% from my last article and currently trades at a P/E of 12x compared to management's expected earnings for FY24. This level seems relatively fair, considering that apparel is undergoing a cyclical downturn and that Oxford's style seems to be suffering from a negative fashion cycle too. However, I would not say that the stock is opportunistic at these prices and would reconsider below $90.

Challenging comparable results

Oxford's 1Q24 results were not out of line with the general situation of the apparel industry. Sales were down 5%, with gross margins flat and operating margins down 5 percentage points, given the fixed cost deleveraging.

However, things are a little more challenging when we look under the hood.

The first point is that comparable sales are down more than 5%, although the company does not disclose comparable figures. For example, Lilly Pulitzer, which did not increase its store count between 1Q23 and 1Q24, had sales down 9.5%. Johnny was posted 3.5% growth, but the brand's store count grew by 17% YoY (78 in 1Q24 vs 67 last year), meaning comparable sales are down. The same happened in the Emerging Brands segment, down 4% despite doubling its store count from last year (12 to 24) and adding one acquired brand (Jack Rogers) to the segment.

The lackluster performance of the Emerging Brands and Johnny Was segments is particularly concerning because these are the latest acquired businesses. Their productivity should have increased thanks to Oxford's management synergies, but these brands are struggling.

The decrease in store productivity led all segments to post lower operating margins, driving the consolidated operating margin down 5 percentage points.

Another concerning data point is the lack of improvement in gross margins. Many apparel companies have been posting higher gross margins in 2024 despite lower sales because they were overly promotional in 2023 and because 2022 input costs (which affected 2023 margins) were much higher. In the case of Oxford, the company benefited from the input cost reduction, as indicated on its 10-Q, but used that gross margin improvement to finance more promotions in sales, leaving the margin unchanged.

Higher promotions are concerning for various reasons: they train customers to expect future promotions, destroy brand equity, and mask other problems (for example, with merchandise).

Two negative cycles

Like most apparel, Oxford is not immune to economic challenges. The company's relatively high price tag, high(er) income, and old(er) customer targets shield it from the worst discretionary spending curtailment, but it is still affected.

The company is also probably suffering from the negative influence of the fashion cycle. Oxford's brands have a colorful style, with motives related to beaches, vacations, and nature. In the call, management commented that their assortment is geared towards occasion and leisure. My take is that these styles are not in line with current trends like quiet luxury, basic colors, denim, baggy, or techy/gorpcore. Of course, many customers find their style reflected in Oxford's brands and remain loyal, but the less loyal customers are probably choosing other brands more.

The above means that Oxford's results should be read in the context of this double negative cycle. It is difficult to predict when and if any or both of the cycles will turn positive, but we can rest assured that Oxford's current performance is not lackluster despite a positive context, but rather because of it, at least in part.

Valuation is more compelling but not opportunistic

Oxford's management maintained the year's guidance, with a small correction to topline growth. The company expects yearly revenues to grow between 1% and 4% compared to FY23 (reaching $1.59 to $1.63 billion). This growth is driven by the opening of 25 stores and 6 bars (or an expansion of about 8% from 2023). Management also expects flat gross margins and lower operating margins, driven by lower store productivity. The end result is expected FY24 EPS of $8 to $8.4, or $8.9 when adding back intangibles amortization.

A current stock price of about $100 sounds relatively fair compared to the above. It is a P/E ratio of 11x to 12x, which is not low, but considering a company that is suffering from two negative cycles. If any or both of the cycles turn positive, the company can probably post much better earnings, thanks to cost leveraging.

As I generally like to do for apparel retailers, below is a simple model using CoGS as a proxy for variable costs (and sales volumes) and SG&A as a proxy for fixed costs. Further, I'm adjusting CoGS up 5% and SG&A up 8% to accommodate for the new stores expected by year-end. The model provides results based on different gross margin and sales volume scenarios.

As we can see, the company is well protected from loss scenarios thanks to its large size, high gross margins, and low debt. If it maintains its margins, the company could post a significant comparable decline (10%) and still generate operating profits, albeit very low ones.

Compared with the above, the current market cap of $1.57 billion seems fair in my opinion. It is a relatively high multiple of between 12x and 15x (based on stable margins and sales flat to up 5%). However, the multiple is based on the negative portion of the economic and fashion cycle. A recovery could lead to much higher profits, for example with margin and sales growth (green scenarios above).

However, fairness is not enough to justify an opportunity. The company still risks posting worse comparable sales if the cycles continue worsening, and the current stock price does not provide a margin of safety against those scenarios. Further, the fair consideration above implies certain optimism for a potential recovery in a relatively short period of time (say one year). I prefer that a stock's valuation reflects no optimism and, in fact, some pessimism so as to be more protected.

For that reason, I continue to consider Oxford a Hold.