Oroton looks to fill The Gap

It has been a year of significant changes for high-end retailer OrotonGroup (ASX: ORL). In August 2012, Oroton announced that its Ralph Lauren license would expire in June 2013 and not be renewed. The news sent shudders through the stock price with its share price immediately dropping from around $7.70 to $6.30.

Since then Oroton has announced a joint venture with Brooks Brothers to develop the brand in Australia, the resignation of CEO Sally Macdonald and then yesterday Oroton announced it was in discussions with the iconic retailer The Gap (NYSE: GPS) regarding an exclusive franchise agreement.

With The Gap having a very minor presence in Australia the potential for a substantial store roll out is possible. As research organisation IBISWorld’s findings highlight in its October newsletter, international retailing giants are creating intense competition for Australian retailers – particularly department stores David Jones (ASX: DJS) and Myer (ASX: MYR).

The IBISWorld report identifies H&M, Uniqlo, Zara and TopShop as key competitors that are making sales growth for the department stores near impossible to achieve and which leads the research organisation to state that “the future looks gloomy for both Myer and David Jones, as moves by international fashion retailers into the Australian market are expected to dent their core earnings.” The Gap may soon have to be added to that list of international competitors!

In September Oroton’s management provided guidance for earnings before interest and tax (EBIT) in financial year (FY) 2014 in the range of $16 million to $18 million. In comparison EBIT in FY 2013 was $35 million including earnings from Ralph Lauren but excluding a one-off gain. So while shareholders will likely cheer a potential deal with The Gap, it is important to remember the hole that needs to be filled.

Foolish takeaway

Retail is a very tough sector at present and many investors are rightly wary. However Oroton’s beaten down share price and the potential to roll out The Gap stores across Australia is enticing, but of course it is not a done deal yet.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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