A big plunge in full-year profit did little to stop shares in OrotonGroup Limited (ASX: ORL) from racing up to a near one-month high this morning.
Investors were willing to overlook the earnings drop because the luxury goods retailer is showing early signs of a turnaround as it emerges from a painful year-long transformation that saw it close overseas stores and exited its loss-making Brooks Brothers joint venture.
What is perhaps most pleasing is that management's new strategy for its core Oroton brand is paying off with like-for-like (LFL) sales jumping 8% in the first seven weeks of the new financial year after contracting 6% in the year ended July 25, 2015.
LFL sales growth only include stores that are open for more than a year and the sharp turnaround in this important sales metric comes despite a significant cut to discounting and a higher average price point for its new product range.
Its GAP stores are also gaining traction with LFL sales since the start of 2015-16 jumping 24% due to better inventory and strong promotions.
This is a big acceleration in sales given that LFL sales in 2014-15 were 0.2% and has come about in a competitive retail environment with fragile consumer confidence.
The lift in sales for the two brands bodes well for the broader economy that appears to be teetering on a recession. I am a little surprised to see a pick-up in sales given the highly discretionary nature of Oroton and GAP products. Perhaps consumers are not as wary about spending as some fear.
This good news comes on the back of pleasing results from other retailers like electronics and music chain JB Hi-Fi Limited (ASX: JBH) and furniture and electrical retailer Harvey Norman Holdings Limited (ASX: HVN) as they've benefited from the housing boom.
Investors should be keenly watching apparel retailing group Premier Investments Limited (ASX: PMV) as it hands in its profit results tomorrow to see if the strength in consumer spending is more widespread than what the pessimists believe.
Coming back to OrotonGroup, it isn't all good news. The group's international business weighed on the group's results with an underlying loss of $2.7 million, prompting management to shut three stores and close its Singapore office.
The weakening Australian dollar is also a drag on performance as OrotonGroup's sources merchandise in US dollar terms.
OrotonGroup posted a 6% increase in underlying sales to $132 million for 2014-15 but a 58% drop in net profit to $3.8 million.
Its topline was slightly ahead of consensus estimates of $130 million while its net profit met expectations.
It's a good result, but I believe other retail stocks like JB Hi-Fi offers better value.
