OrotonGroup Limited (ASX: ORL) is a company firmly on The Motley Fool‘s radar.

Plenty has been said and written recently about the challenges facing traditional retailers, both here and overseas. Consumer confidence is shaky at best, and when we do spend, we’re increasingly turning to internet sites in Australia and overseas, the latter boosted by a historically high Australian dollar.

Even if it has fallen back below parity versus the US dollar in recent weeks, the Aussie is still sitting comfortably above its long term average.

Tough times in retail
In recent days we’ve seen both David Jones (ASX: DJS) and Myer (ASX: MYR) report sales declines, and the always forthright Gerry Harvey predict a subdued Christmas for his Harvey Norman (ASX: HVN) retail empire. Even the once untouchable JB Hi-Fi (ASX: JBH)  has seen its share price crunched over the past two years as it (understandably) struggles to maintain the levels of same-store sales growth that investors had become used to.

In fact, there is barely a major listed retail business that hasn’t reported either disappointing sales results or subdued forecasts in the last six months.

With stories like these, it’s a brave person who takes up the mantle of running a retail business, that’s for sure.

Winning the battle
One retail business holding its head high despite the gloom is OrotonGroup. Oroton hasn’t escaped the downturn unscathed, with negative same-store sales for its namesake brand in the first half of the 2011 fiscal year, but a strong rebound in the second half, to record same-store sales growth of 4% for the full year.

OrotonGroup is the owner, wholesaler and retailer of the Oroton brand of men’s and women’s fashion and accessories, as well as holding the Australian and New Zealand licence for the Polo Ralph Lauren fashion business.

A business Peter Costello could love
For a business in the cut-throat retail industry, Oroton continues to turn in what Peter Costello might call ‘a beautiful set of numbers’.

The company recorded revenue of $164m in 2011, up 12% from the prior year, and delivered a net profit of almost $25m, up 8%.

That the company continued to grow despite tough economic conditions speaks volumes for the strength of the brands and the company’s management, as does returns on capital employed of well over 80% for both the most recent and immediate past financial years.

Even more impressively, OrotonGroup has achieved these returns using negligible amounts of debt, with less than $10m of bank debt at the end of the 2011 financial year.

A couple of watch-outs
If there is a slight blemish on the company’s copybook, it’s that inventory is growing faster than sales – never a good sign for a retail business – and that the top line sales are growing faster than bottom line profit. It’s always good to see a strong revenue performance, but even more important that management turn that sales momentum into bottom line outperformance.

Neither metric is cause for concern at this stage, with management putting inventory growth down to gearing up for sales growth and increasing store count, but these are important numbers for retailers, and ones investors should be keeping an eye on.

Retail is detail
The company has studiously exited low-potential businesses, and just as importantly has resisted entering new businesses where it cannot improve shareholder returns. That reluctance hasn’t stopped them expanding, however, with new stores being opened in Australia and a careful expansion into Asia that is showing promise.

It has also entered the online space with gusto, actively engaging in social media, and utilising online ‘outlet’ sales to clear merchandise and build engagement with their database of customers.

On almost all metrics, OrotonGroup is a well run, high performing business with strong brands that are resilient to drops in consumer confidence.

Tell ‘em the price, son
For current and potential investors, that performance goes a long way to recommending this company, but there can be a difference between a great business and a great investment – and the difference is price.

It is possible to overpay for even the best business, but in this case a great business is being offered to us at a pretty good price. The business is trading on a trailing price/earnings ratio of a tick over 13.5 times, which is not screamingly cheap, but not tough either, considering the track record and growth potential, and even more reasonable considering the business has effectively no debt.

On top of that, a 6.3% fully-franked trailing dividend yield is particularly attractive. It’s one of the reasons we included it in our ultimate high yield dividend portfolio.

Foolish take-away
OrotonGroup is one business that you would expect to be suffering in the current gloom, but a run through the numbers suggests anything but.

When you add in quality brands, impressive management, a conservative balance sheet and a shareholder-friendly long-term mindset, OrotonGroup is one business that you should consider adding to your portfolio, or at least putting on your watchlist.

Are you looking for more quality stock ideas? Motley Fool  readers can click here to request a new free report titled The Motley Fool’s Top Stock For 2012.

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Scott Phillips is The Motley Fool’s feature columnist. Scott owns shares in OrotonGroup, Harvey Norman and David Jones. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

 

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