Oxford's Well-Tailored Look

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Oxford Industries (NYSE: OXM), primarily known as a menswear maker and retailer, is in the midst of a major makeover. It's been slowly de-emphasizing its private-line business, instead pushing its Tommy Bahama branded line of menswear clothing. From a margin perspective, the new look seems to be paying off.

I've never been much of a fashion plate, but I'll pay close attention to a business that's posting operating margins 10 percentage points fatter than those of its overall parent division. At a P/E of 12 times trailing earnings and less than 1 times sales, Oxford makes a compelling pitch for investors.

The company continued to make good progress this quarter. Revenues were up 5.8% to $284.1 million, while earnings dropped 21% year over year to $10.9 million. The results were ugly at first glance, because of the company's disposal of its womenswear business, which added $0.12 a share to earnings last year. However, the crown jewel Tommy Bahama brand increased sales 13.7% to $104.1 million, and operating margins came in at a sparkling 16%. Compare that with 6% operating margins in the company's menswear group, which also endured paltry 1% sales growth.

Fool contributor Rich Smith, who keeps an eagle eye on margins and inventories in his Foolish Forecast feature, will be pleased to note that inventories dropped 6.9% year over year to $139.4 million. Further details, like the breakout between finished goods and raw materials, will have to wait until the 10-Q is filed. While the decline in profitability in the menswear line of business bears watching, some gross-margin deterioration must be expected in a business with minimal barriers to entry.

I, for one, would be more concerned about fashion-conscious customers like Nordstrom (NYSE: JWN), Saks (NYSE: SKS), and Target (NYSE: TGT) being disappointed with Oxford's new threads. These stores are critical to build brand awareness and profits. Oxford's own network of 59 stores is still too small to have much of an effect on sales. Instead, the company must delicately negotiate with its customers -- who are now competitors as well.

Should these retailers feel threatened by Oxford? Not really. The company store network will take some time to build out, and the company's transition has been slow thus far. However, investors might want to note that the Tommy Bahama line generated the majority of the company's profits last quarter. Thanks to Tommy, the stock may be at a tipping point, where the Wall Street perception of the company changes from a "boring" business to a "hot" one. Whether or not it proves to be a Foolish investment, Oxford does seem to merit some due diligence from interested investors.

More casual Foolishness:

• Oxford Changes Its Major
• Oxford Not Quite a Custom Fit Yet
• Foolish Forecast: Oxford Commences

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Fool contributor Stephen Ellis doesn't hold shares in any companies mentioned. You can see his holdings for yourself. The Motley Fool has a cut to fit disclosure policy.