Oxford Changes Its Major

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Give executives at Oxford Industries (NYSE: OXM) credit; they're not simply sitting on their duffs and playing the hand they were dealt. They've sold the company's womenswear business, and they're reorienting products away from commodity categories and toward potentially valuable brands. With these moves, the company is definitely making a play for better growth and margins.

Of course, that effort will take time to bear fruit. For this quarter, sales dropped 6%, as the menswear group saw a 10% sales decline offset flat performance in the Tommy Bahama category. Operating performance was likewise mixed; overall operating income matched the revenue decline, as menswear income dropped sharply (down 71%) and TB income rose nicely (up 20%).

If you use TB as a reasonable proxy for what a valuable branded product can do, and the menswear group as a proxy on a more commodity-oriented business, you can see why building brands can be valuable. In this quarter, the menswear group posted an operating margin of less than 3%, while TB was at 23%. Last year, the difference was 9.1% versus 19.3%.

With the womenswear business out of the picture, Oxford Industries can focus more on the likes of customers like Nordstrom (NYSE: JWN) and Saks (NYSE: SKS), and less on Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). There's nothing inherently wrong with either of those huge discounters, and you could argue that they'll pick up business in an economic slowdown. But dealing with them is not an ideal way to build chic brands with robust margins. Nordstrom can reward design and marketing savvy; Wal-Mart tends to reward sheer production volume and cost efficiency.

If the company can replicate the early returns of Tommy Bahama with other brand lines, this could be an interesting stock to watch (or own). By my calculations, each incremental 1% of compound growth in the next five years means close to $1.50 in the fair value of the stock. Whether that growth comes from revenue, margin improvements, or a mixture of the two, there's definitely underlying power in moving upscale.

For more fashionable Foolishness:

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).