Clothier OrotonGroup Limited (ASX: ORL) has been on a bumpy ride recently. A profit downgrade in May saw the retailer expect just $4.5m in 'underlying EBIT' (Earnings Before Interest and Tax) compared to $13.3m in the previous year.
Shares in Oroton subsequently fell 30% to ~$2 and then declined further after Oroton ditched its 10-year partnership with Brooks Brothers just 23 months in.
Today investors have been handed a pleasant surprise after management announced that full-year profit would actually be around $6.7m rather than the $4.5m previously indicated. This is an increase of 48% and reflects the removal of losses from the Brooks Brothers partnership as well as strong sales in June and July.
Oroton stock leapt 18% so far today on the news, although its price is a bit of a tricky issue. Shares are now 20% lower than they were before May's profit downgrade, even though full year profit will come in 50% lower than last year. Oroton now appears to trade on a price to earnings (P/E) ratio of around 12.
However, the stock does not yet look like a buying opportunity. While the removal of a loss-making business from the balance sheet is a good thing, investors haven't yet seen any improvement to Oroton's underlying business which continues to suffer from higher than desired discounting and weak sales.
I would suggest that investors wait until Oroton's full-year report comes out on September 17 before making a decision on the company either way.
