Oxford Industries Can Still Squeeze Some Growth Out Of Its Largest Brands

CLSA started coverage of Oxford Industries Inc OXM with an Outperform rating and $78 price target as its underpenetrated brands should drive mid- to high-single-digit EPS growth.

Key reasons for the bullish thesis on Oxford include the strong momentum of Lilly Pulitzer that should drive sales and margin expansion and the recently acquired Southern Tide brand whose initial brand reception has been strong with healthy margins.

The brokerage expects Lilly to become Oxford's largest earnings contributor in the long run as it sees Lilly Pulitzer driving high-single-digit to double-digit sales growth via higher comps and double-digit growth in square footage.

"We estimate that reaching 175 stores, below Tommy's target footprint, would generate ~US$1.00 of incremental EPS," analyst Rick Patel wrote in a note.

Patel noted that the market undervalues growth in wholesale as Lilly is underrepresented in major department stores, such as Nordstrom.

"While the concept is only 21% of sales, it accounts for 36% of operating profit (ex-corporate) given its strong 20% operating margins," Patel continued.

Meanwhile, Patel sees Tommy Bahama, Oxford's largest brand, contributing through modest comps, new store expansion and narrowing losses in Asia.

Patel noted that if Tommy expands to 200 locations, it would imply about $0.20 of incremental EPS, and sees potential for Tommy to exit Asia over the next year or so, which would be a boon to EPS.

"The biggest risks are volatile comps for Tommy Bahama, a slowdown at Lilly, an assortment that skews heavily towards spring/summer brands and department-store exposure. We see modest stock gains ahead as its already premium valuation limits upside," Patel added.