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Oroton fills in the revenue void with The Gap

As OrotonGroup (ASX: ORL) moves to expand its store presence into Asia, it is adding on new brands to offer along with its own designer collection of bags and accessories. With the expiry of its business agreement with Ralph Lauren, the company needed other well-known name brands to take its place.

Today, the company released an announcement of a new joint venture with The Gap (NYSE: GPS) to open new stores in Australia and New Zealand. Oroton will also have the first right to develop the Banana Republic and Old Navy brands in these countries if Gap decides to create franchises there.

OrotonGroup’s projection is for about 20 Gap stores to be opened over the next 10 years. Currently, there are three Gap stores in Sydney and Melbourne, but under the franchise agreement Oroton will take them over, and has plans to open the first new one in the summer next year.

Other international brands will also be entering the domestic market, which will help department stores Myer Holdings (ASX: MYR) and David Jones (ASX: DJS) if they can sell them through their existing stores, attracting customers who up until now have not flocked to the larger stores as much as the retailers would like.

International stores coming to Australia like Zara, H&M and Uniqlo will be in direct competition with the department stores, as well as Specialty Fashion Group (ASX: SFH) and Premier Investments (ASX: PMV), which sell fashion apparel at mid- and lower-level price points.

For OrotonGroup, 2013’s revenue was up less than 1%, from $184.7 million to $186.2 million, but with higher profit margins, net profits after tax rose 10% from $24.9 million to $27.4 million. The results include revenue from Ralph Lauren for 11 months, so the big thing for investors is to see how much revenue and earnings are lost in the next report without this extra business.

This is why the company is moving quickly to bring in other brands and to create new stores in Hong Kong and Singapore — two cities whose residents love buying brand items — to fill the demand.

Foolish takeaway

The department store stocks are both flat right now as they prepare for the holiday selling season. Watch for sales updates to gauge what to expect from the next half-year report.

Investors who want exposure and diversification in retail fashion companies have to keep up with fast-paced business since, just as styles go out of fashion, a company that can’t keep up and keep its costs under control will be in the bargain bin very quickly.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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