Oroton partners with Brooks Brothers, ditches Ralph Lauren

2013 results and announcement disappoint the market, but is this deserved?

a woman

Oroton (ASX: ORL) has released 2013 results, and highlights include:

  • Group sales were up 1% to $186.2 million – Oroton sales down 4%, Ralph Lauren sales up 7%.
  • Net margin declined slightly to 67.3%, attributed to promotional expenses and intense price competition, especially in the last half.
  • Net profit after tax was up 10% to $27.5 million – however this includes a gain of $5.2 million from the Ralph Lauren exit. Allowing for this, net operating profit is down 10%.
  • Earnings per share are up 9%, to 67.2 cents.
  • 2013 dividend per share is steady at 50 cents.

The balance sheet is strong, with $23 million in net cash and a $30 million bank facility in place. Cash flow is healthy and Oroton is in a good position to fund growth opportunities. Active investigation into further partnerships, licence agreements and/or acquisitions is continuing.

On 14 August 2013, Oroton announced a joint venture deal with the iconic American brand Brooks Brothers. The initial term is 10 years with a five-year renewal option. Oroton will hold 51% of the joint venture, and now has ACCC approval.

Brooks Brothers is a premium deep range clothing brand and its styling should have plenty of appeal in Australia. The first store is planned to open in February 2014 and there is potential for eight to be operating by financial year end. Negotiations regarding concessions are also believed to be underway with both David Jones (ASX: DJS) and Myer (ASX: MYR).

There are currently 68 Oroton stores, including seven based in Malaysia and Singapore. Six of the international stores are in the second year of operation, and achieving positive like for like growth. Management expresses confidence in the international strategy and new stores in Dubai, Hong Kong and Shanghai are planned to open in the near term. Following a distribution agreement, the Dubai store is the first of at least six Oroton stores to open in the United Arab Emirates and Qatar region in the next five years.

Online sales continue to exceed 10% of total revenues and this is expected to improve as a dedicated Chinese site commences this calendar year. Oroton has maintained its position as Australia’s most successful online fashion retailer.

2014 outlook

In the announcement management stated: “Whilst FY2014 earnings expectations will naturally depend on the timing and size of new potential deals and also assuming a continued challenging and discounted marketplace 2014 earnings before interest and tax would be expected to be in the range of $16m- $18m.” This would imply net earnings per share of 32-34 cents.

Foolish takeaway

Taking into account 2014 guidance (which appears conservative) Oroton is trading at around 18-20 times forward earnings. For a company that no longer has half its revenue base this isn’t necessarily onerous – provided you can attribute sufficient value to the deal with Brooks Brothers, the merits of the international expansion and the likelihood of new distribution / licensing arrangements. I do, and will be buying some more under $6.30.

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Motley Fool contributor Peter Andersen owns shares in Oroton and David Jones.

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