Be Careful Trying To Time A Bottom At Oxford Industries

| About: Oxford Industries (OXM)
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Apparel retailer Oxford Industries has struggled to find profit growth in FY2014, hurt by rising promotional activity and greater overhead costs required to support its expanding store base.

The company's relatively weak financial performance has led to a sell-off for its stock price in 2014.

With a forward P/E multiple of roughly 21, Oxford Industries seems to have more downside risk than upside potential at current prices and investors should probably avoid the story.

Shareholders in apparel retailer Oxford Industries (NYSE: OXM) have likely not been too happy with the company's stock price trajectory in 2014, down more than 20%. The company has been hurt by a decline in adjusted operating profitability in FY2014, down roughly 70 basis points, a trend that management partially blamed on an increasingly promotional selling environment in both retail and wholesale distribution channels.

On the upside, though, Oxford Industries has continued to post solid top-line growth, led by a 23.2% gain for its Lilly Pulitzer brand, providing hope for better profit growth and a higher market valuation in the future. So, at its discounted price, is the company a good bet for investors.

What's the value?

Oxford Industries is a growing player in the specialty retailing sector, operating a network of roughly 150 stores, mostly under its Tommy Bahama and Lilly Pulitzer upscale apparel brands. The company has anecdotally taken advantage of the rising popularity of its core brands, which has led to higher customer traffic volumes and favorable top-line growth over the past five fiscal years. The net result for Oxford Industries has been a strong increase in adjusted operating profit, fueling a more than doubling of its stock price during that time period.

In its latest fiscal year, it was a continuation of the growth story for Oxford Industries, highlighted by a 7.2% top-line gain that was aided by double-digit sales increases for its Tommy Bahama and Lilly Pulitzer brands. More importantly, the company's gross margin was positively impacted by a continued shift away from wholesale sales and toward higher-margin retail sales, up roughly 70 basis points. Not surprisingly, Oxford Industries enjoyed a solid 7.7% gain in adjusted operating income during the period, providing more capital to pursue its growth initiatives, including a further push in international markets.

Looking into the crystal ball

The question for investors is whether Oxford Industries can continue to post profit growth in the future, thereby providing a foundation for a higher market valuation. Unfortunately, things aren't looking so good on that score, judging by the company's 1.8% decline in adjusted operating income in FY2014. Oxford Industries was negatively impacted by greater promotional activity in its retail and wholesale segments, as well as from higher overhead costs required to support its growing global store base, which led to a drop in its operating profitability during the period.

Of course, Oxford Industries isn't the only apparel retailer struggling with diminishing profit growth in the current selling environment. Like Oxford Industries, Ralph Lauren (NYSE: RL) has been weighed down by the rising overhead costs of its strategic push to build a larger retail business, thereby reducing its reliance on its wholesale partners. While the company has posted a modest top-line gain in the current fiscal year, thanks to solid growth in its retail segment, the aforementioned cost increases have led to lower overall operating profitability, culminating in a 3.8% decline in operating income. More importantly, management is forecasting the margin pressures to continue going forward, a trend that will likely make profit growth a challenging goal for Ralph Lauren to achieve in the near term.

The bottom line

Oxford Industries is certainly cheaper than it was at the start of the year, after a double-digit decline to-date in 2014. That being said, the company is not exactly cheap at a forward P/E multiple of roughly 21, given its inability to produce operating profit growth in the current fiscal year. As such, Oxford Industries seems to have more downside risk than upside potential at current prices and investors should probably avoid the story.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.