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Oroton and RCG Corporation Ltd are about to show their colours

OrotonGroup Limited (ASX:ORL)

Due to the loss of the Ralph Lauren licence and competitive conditions crimping margins, Oroton will record a steep fall in profits this 2014 financial year – however the market has adjusted for this and Oroton is currently selling at 16 times projected 2014 earnings and a fully franked yield of 5%.

Meanwhile the new CEO has been active in further developing the business; in particular the wholly owned Oroton brand. The product range of apparel, shoes and watches will be expanded and larger format stores will be introduced to showcase this. Core leather goods such as handbags will have a price range of between $200 and $1,400 broadening market reach. Asian stores are starting to gain traction with revenues increasing strongly. Other core initiatives include the opening up of the Middle East market and further investment in the successful online presence.

A joint venture company (51% owned by Oroton) has been formed with the iconic Brooks Brothers to establish this brand in Australia and New Zealand. The potential here has been underrated by the share market. Flagship stores in Melbourne and Sydney are set to open, and David Jones Limited (ASX:DJS) will have seven concept concessions up and running this year.

An exclusive franchise agreement has been signed with Gap Inc to develop this well-known casual clothing brand in Australia. Oroton and Gap may elect to enter into a 50/50 joint venture for fair market value after five years in certain circumstances. Gap also has a purchase option for 100% of the franchised business which it may exercise anytime after five years for fair market value.

With the rejuvenation of the core Oroton brand and the potential of the new businesses – Oroton Group is now positioned for significant earnings growth from 2015 onwards.

RCG Corporation Limited (ASX:RCG)

RCG is an investment holding company which manages the Athlete’s Foot chain of mid-range casual footwear – most stores are franchised. In addition RCG has the Australian wholesale distribution rights for prestige brands Chaco, Caterpillar, Cushe, Merrell, Saucony and Sperry Top-Sider.

Being a vertically (retail & wholesale) operated business places RCG well in its chosen part of the footwear market. Although the retail segment is reaching maturity the real prospects for growth are likely to come in the wholesale division.

Although underlying profit in the 2013 year showed growth of 10%, declared profits were impacted by the withdrawal from the Shoe Superstore chain – demonstrating the fickleness of the consumer in recent years – Shoe Superstore was directed at a less trendy segment of the market.

Management has stated earnings growth of 15% is likely in the current financial year. If realised this would complete five continuous years of double-digit underlying profit growth – not bad given the retail malaise of the last few years. At 79c, RCG is selling at 16 times 2014 earnings and provides a fully franked 5.3% dividend yield.

Foolish takeaway

Specialist retailers such as Oroton and RCG Corporation can provide both pitfalls and opportunities for investors. Oroton literally lost half its business when the Ralph Lauren licence wasn’t renewed; subsequently having to assess and develop credible replacements. RCG is still on the roll of increasingly status driven performance footwear. Both companies are soundly managed and financially strong; and both have mapped out a positive future for shareholders. At present prices both offer a good buying opportunity.

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Motley Fool contributor Peter Andersen owns shares in Oroton Group

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