Don't Worry, Be Happy

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Maybe Bob Marley was on the right track with his Caribbean-inspired music and laidback life philosophy.  Oxford Industries (NYSE: OXM) certainly thinks so, as the philosophy is at the heart of its Tommy Bahama apparel business.  Founded in 1941 as a private label manufacturer, Oxford has recently transformed itself into a branded apparel manufacturer through its ownership of the Tommy Bahama, Lilly Pulitzer, and Ben Sherman clothing lines.

Follow the leaders

Customers have decreased their purchases of tailored clothing over the past few decades, which has disproportionately affected Oxford due to its historical focus on the segment.  At the same time, U.S. customers have gravitated toward leading brands and international customers seem to be following the same pattern as their disposable incomes rise. 

After steep operating losses in 2008, Oxford’s management finally saw the need to refocus on the growing branded apparel business, a focus that has led to significant success for competitors Coach (NYSE: COH) and Ralph Lauren (NYSE: RL).

Founded as a family-run clothing workshop in 1941, Coach has built a multi-billion dollar business out of selling accessories, with leading market share in the U.S. and Japan. The company’s primary business is the sale of high-quality, premium-priced handbags, which generated 65% of its total sales in 2011. Despite the availability of much cheaper bags that fulfill the same purpose, Coach has created enviable loyalty to their products by unveiling a small number of collections each quarter and being selective in their merchandising partners.

In its latest fiscal year, Coach reported increases in revenues and operating income of 14.5% and 15.9%, respectively, versus the prior year. Sales growth benefited from an 11% increase in the number of company-owned stores and higher comparable sales. While the company gets 80% of its sales from the North American and Japanese markets, it has been pursuing growth in Asian markets through the consolidation of its licensees in order to better control its product distribution. Coach's sales growth has slowed in 2012 due to general economic pressures, but the company’s brand seems likely to continue expanding in the future as discretionary spending rises around the globe.

Similarly, Ralph Lauren has created a global apparel brand by convincing customers to purchase their premium-priced apparel and aspire to an American way of life.  Founded in 1967 by Ralph Lauren as a designer and manufacturer of ties, the company has grown into a $7 billion business that includes apparel, accessories, fragrances, and furnishings.  It was also an early adopter of the licensing model, with forays into fragrances in 1978 and into paint in 1995.

In its latest fiscal year, Ralph Lauren reported increases in revenues and operating income of 21.2% and 23.0%, respectively, compared to the prior year.  While the company’s historical business has been evenly split between the wholesale and retail trade, Ralph Lauren has increasingly focused on driving sales through its company-owned stores and websites. Sales in the retail channel grew 26.9% during the period, far surpassing growth in the wholesale and licensing segments. Despite similar challenges to Coach, the company’s brand seems capable of growing throughout economic cycles.

Don’t recreate the wheel

Oxford Industries is following the same script as its larger competitors by outsourcing all manufacturing to independent parties and focusing its resources on design and branding. The company competes in the premium priced category, which requires limiting itself to upscale malls and a selective group of merchandising partners. 

In its latest fiscal year, Oxford reported revenues and operating income of $758.9 million and $68.8 million, increases of 25.7% and 69.2%, respectively, versus the prior year. Its growth benefited from the addition of the Lilly Pulitzer business at the end of 2010 and higher comparable sales in the Tommy Bahama unit. Despite declining sales and profits in its smaller tailored clothing segment, the business still earns a decent return on investment and has benefited from fewer competitors participating in this area.

Looking ahead

In FY2012, Oxford has generated uneven growth, with increases in revenues and operating income of 10.7% and 6.9%, respectively, compared to the prior year period. Solid gains in the domestic brand sales have been offset by weakness in its British-inspired Ben Sherman line and in the tailored clothing business. 

While gross margins have held up well, operating margins have been hurt by the costs of building company-owned stores, especially flagship locations in New York and Chicago. However, the company sees these stores as high-profile launching pads for the company’s products around the globe. 

Despite Oxford’s relatively high 25 P/E multiple at current prices, investors should relax, order another pina colada, and enjoy the ride with this winner.

rghanley owns shares of Oxford Industries and Coach. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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