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Are acquisitions a mistake for Oroton?

There is a great interview available on the Business Spectator website with the Chief Executive Officer (CEO) of plasma products manufacturer CSL (ASX: CSL) Mr Paul Perreault.

In response to a question on whether the newly installed CEO will be pursuing a growth by acquisition strategy at CSL, Perreault responded: “Think about when people do acquisitions. Look at how and why they do acquisitions. It’s usually done from a position of weakness, not from a position of strength.”

In light of Oroton Group’s (ASX: ORL) trading update, which confirms that the board and management are “assessing specific acquisitions and/or new licensed brand opportunities”, Perreault’s comments are particularly timely. While Oroton is undoubtedly a well-managed company and has the potential to apply its skills to other brands, the fact that the company is somewhat ‘forced’ to do this, due to the loss of the Ralph Lauren license, suggests it runs the risk of making an acquisition from a position of weakness.

Management also used the trading update to provide investors with an outlook for financial year 2014, guiding the market toward a consistent dividend of 50 cents per share and earnings before interest and tax (EBIT) of $14 million. This shows the extent of the Ralph Lauren loss, as in contrast EBIT in 2012 was $37.8 million.

Looking across the branded apparel sector, investors’ expectations for earnings growth is already reasonably low. Oroton’s update included the observation that “overall trading in the Oroton brand in Australia has been softer than expected in the second half of FY13 in what continues to be a challenging and discounted retail market”. This observation will provide little solace to investors.

The struggling Billabong International (ASX: BBG) has been the most high profile example of the headwinds facing the branded goods sector. However one glimmer of light has been Country Road (ASX: CTY), which recently announced that it expects to report comparable store sales growth of 11% year on year.

Foolish takeaway

The retail sector as a whole has been struggling for some time. On occasion management teams will rightly use an acquisition to help improve a company’s outlook but at other times an acquisition is the wrong strategy.

Using the prism described by Perreault to view acquisitions will allow investors to be more sceptical and cautious regarding the merits of an acquisition, rather than the usual adrenaline rush and ‘bigger must be better’ instinct which all too often occurs.

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Motley Fool contributor Tim McArthur owns a share in Billabong International.

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