Not so long ago OrotonGroup Limited (ASX: ORL) was a cash generating, highly profitable company. Several years of growth under the mercurial leadership of Sally Macdonald meant that sales, profits and return on equity had grown consistently year over year, and investors were starting to believe that Oroton could be a truly international luxury goods brand.
In that time frame, Oroton pioneered the use of its online store as a sales channel for its high priced handbags and accessories, while also expanding beyond Australia into select Asian markets.
Speedbumps
But the extended period of growth ran into several hurdles around 2013. The first hit came when American fashion icon Ralph Lauren decided that it would end its long-term association with Oroton. Under the agreement between the companies, Oroton had the licence to exclusively distribute the well known and popular global brand in the Australian market.
The benefits of the arrangement included OrotonGroup being able to spread out their "back office" costs across two luxury brands and achieve significant cost savings while being able to grow sales.
But when Ralph Lauren ended the agreement, it left Oroton to bear those costs alone. Unfortunately, the cost savings from no longer having to distribute the Ralph Lauren brand were strongly outweighed by the sales and profitability reduction that also came with the new arrangement, as the operating leverage that OrotonGroup operated with decreased significantly.
Failed detours
In response, the management team sought to find a suitable international brand that could join the OrotonGroup stable in Australia to replace Ralph Lauren.
They settled on high-end tailor and suit retailer, Brooks Brothers, and mid-market GAP. Neither of those relationships have come close to matching the sales of the departed Ralph Lauren, and to make matters worse, Brooks Brothers recently announced that it will take back ownership of its local business.
That leaves OrotonGroup with only one partnership, and one that looks ill-suited to the current business. Oroton is a high margin, low volume, luxury goods and accessories brand appealing primarily to women. Meanwhile Gap is a low margin, high volume, value conscious retailer of affordable clothing and wardrobe staples to all demographics.
Spinning its wheels
After several years as a great investment proposition, OrotonGroup seems destined to struggle now and in the future as its sales decline due to reduced discounting, increased competition in Australia with global brands like Michael Kors and the inability to plug the earnings gap left by its previous partnerships.
