About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
19 September 2014, 10:01 AM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

FY14 result slightly above market expectations

OrotonGroup (ORL) reported FY14 EBIT of A$13.3m (+12%), in line with guidance and our forecast of A$13m. Like-for-like (lfl) sales growth of 8% was well above our forecast and implies 2H lfl sales growth of +14%. This was a very strong 2H performance although it needs to be put in the context of -8% comps in the pcp and the aggressive GP margin fall (heavy clearance activity in 1H14). 

ORL maintains a very strong net cash position (cA$10m) positioning the group well to fund future opportunities. A final dividend of 8cps was declared.

Outlook - looking down the barrel of a return to growth

As expected, ORL did not provide any formal FY15 earnings guidance. We expect:

  • reasonable growth from the Oroton domestic business (4% comps, GP margin expansion and higher marketing costs);
  • Asian losses to fall to cA$2m;
  • A$0.5m profit from Brooks Brothers; and
  • a break-even result from Gap.

ORL's persistent lack of transparency across its divisional contributions adds an extra layer of forecasting risk. Capex will ramp up in FY15 to >A$8m (vs A$4m in FY14) largely due to a higher level of IT infrastructure investment and the Oroton refurbishment program.

Valuation stacks up

After a sustained period of turmoil (loss of Ralph Lauren + Oroton price deflation and discounting), we believe the group has reached a turning point. 

While Oroton doesn't pose a strong earnings story domestically, we are satisfied a base has now been reached. The key to future growth lies in the Gap store rollout with the brand capable of being dominant in a highly competed category. 

Following EPS upgrades, our DCF/EV/EBIT valuation increases to A$4.62 (from A$4.27). We upgrade our rating to Add (from Hold).

More information

If you are interested in finding out more about OrotonGroup (ORL), please contact your nearest Morgans office.

Disclaimer(s): Analyst owns shares.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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