OrotonGroup: Defying the retail trend

Despite a good result, OrotonGroup's shares were thrown out with the bathwater

a woman

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OrotonGroup Limited (ASX: ORL) released its first half 2012 numbers yesterday, and the results outshone other retailers such as David Jones Limited (ASX: DJS), Kathmandu Holdings Limited (ASX: KMD) and Myer Holdings Limited (ASX: MYR) – although you wouldn't know it from the movement in the share price, as my colleague Scott Phillips outlined in this article.

At close of trade, Oroton shares were down 3.6% to $8.70. Mr Market was having one of those days.

Revenues were up 13.4% to $99.1m, net profits were up 4% to $16.1m. Directors declared a fully franked dividend of 22 cents per share, the same as the previous corresponding period. Earnings per share were 39.4 cents, showing directors have plenty of room to grow dividends if they want to.

Like for like sales grew 9%, with the cost of doing business improving from 47.8% of sales in the 2011 financial year, to 46.8% this year. It shows management are focused on reducing costs as well as maintaining growth in sales and profits.

Return on capital employed (EBIT / Total Assets- Current Liabilities) was an amazing 81%, which is consistent with the past five years.

During the six months to end of January 2012, Oroton opened eight new stores, four with the Oroton brand, and another four stores under the Ralph Lauren / Polo brand. The four Ralph Lauren stores are actually women's wear 'concessions' within department stores.

The company now has 92 stores with six of those in Asia. Oroton has plans so far for one additional store to be opened in Kuala Lumpur, Malaysia in July 2012, and is reviewing new store opportunities in Asia.

Online sales growing

Online sales growth was over 60%, with the online store continuing to be the largest and fastest growing store for the company. Oroton intends to focus more heavily on the online sales, with rent costs and annual indexation becoming an issue for the retailer's bricks and mortar stores.

The company closed one store during the half when the lease expired. It's likely that there could be further store closings, as the company attempts to reduce its fixed costs base in Australia. Noni B Limited (ASX: NBL) is another retailer following the same strategy, as I mentioned previously.

On the downside, Net Debt grew from $3.2m to $7.7m, although the net debt to equity ratio is still a healthy 21.3%, and interest cover very comfortable at 32.8x.

The Outlook

Oroton is focused on investing in its Asian expansion strategy, but the outlook for the remainder of 2012 is cautious, with weak consumer sentiment expected to continue. The company likes to under-promise and over-deliver, and has performed consistently over the last 6-7 years, despite the many global and local issues.

The Foolish bottom Line

OrotonGroup shares are trading on a forecast P/E of 11.3, with a prospective fully franked dividend yield of 5.7%. With earnings per share growth averaging over 17% for the last four years – despite the tough retail conditions and returns on equity over 80%, the P/E appears undemanding, and Oroton is definitely a stock for the watchlist.

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Motley Fool contributor Mike King owns shares in OrotonGroup. 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. Click here to be enlightened by The Motley Fool's disclosure policy.

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