Treasure Chest | May 08 2014
By Greg Peel
Australian luxury fashion house OrotonGroup ((ORL)) successfully exploited the value of its brand, its loyal customers, and its early-mover online offerings in the period from FY07-12, rising from around $1.50 to around $9 over the period, notwithstanding a brief GFC stumble in FY09. There was no doubting, Oroton was hot.
By 2012 the momentum began to ease for Oroton and as the anticipated rebound in Australian consumer spending failed to materialise, ORL started to roll over. Around the time the broad market was shaping up for its big PE rally from mid-2013, the rapid inflow of competitive international brands in Australia had served to knock Oroton off its perch. Things went from bad to worse, and ORL traded down to $3.50.
The company posted somewhat of a shocker of an interim earnings report back in March, but brokers weren’t surprised. Oroton had taken to discounting its luxury goods to compete with the foreign infidels but while margins were slashed, volumes failed to respond. The boot was put in when the company lost its distribution licence with Polo Ralph Lauren. “The exit of Polo,” said Citi back in March, “was a painful experience”.
But management did not lay down for the count. Rather, deals were signed with global brands GAP and Brooks Brothers, discounting was ditched and Oroton looked to improving its factory outlets and increasing its number of promotional events. When reporting on the result release, analysts called the bottom for ORL.
Citi upgraded to Buy from Neutral, forecasting double-digit earnings growth over the next three years. Credit Suisse held its existing Outperform rating, seeing the potential for earnings to double in five years. ORL’s share price bounced, but has since wavered around the $4 mark.
At the time, UBS — the other of three FNArena database brokers covering Oroton — remained more cautious on Neutral. This morning however, UBS has upgraded to Buy, thanks to a new senior analyst. That analyst can see a return to the glory days of FY07-12.
UBS estimates the top ten international luxury brands took 400 basis points off Oroton’s market share over 2009-12. The company is responding now with its own global “face of the brand” marketing campaign and reinvesting in high impact store refurbishments. It’s all going to mean a structural jump in marketing costs and capital expenditure, but UBS believes this is essential for the long term health of the brand.
Oroton is also now transitioning GAP to a “seasonally matched” model, which worked for Polo RL before the licence was lost. The Banana Republic brand will have strong appeal in Australia, UBS suggests, with the first store expected to open late next year. New Oroton stores are planned for Singapore and potentially China and will increase ORL’s longer term takeover appeal, the analysts believe.
UBS sees ORL as entering a new high growth phase and is forecasting a compound annual growth rate of 19.7% in FY14-17. With the stock trading at a 13.3x multiple of forecast FY15 earnings, UBS believes it is cheap.
UBS has lifted its twelve-month price target to $5.20 from $4.15, leaving the other brokers in its wake at $4.20 (Citi) and $4.65 (Credit Suisse).
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