Our rummage through the discretionary retail sector continues with Oroton (ASX:ORL), the owner and omni-channel retailer of flashy handbags and accessories.
I remember when Oroton was ‘cool’. You couldn’t walk Sydney’s winter streets without seeing their umbrellas everywhere. But according to the fashionistas I’ve spoken to, that’s no longer the case (I’m the last person you’d ask about the ins and outs of handbag popularity). Michael Kors and Coach are currently considered cool.
This highlights one of the big challenges in the space. Fashion brands, like Oroton, are exactly that: fashion. Their popularity ebbs and flows and company profitability goes with it.
At its height, Oroton produced returns on capital that even Pablo Escobar would be proud of. But now it's scrambling just to keep its head above water.
Brand popularity can even sow the seeds of its subsequent unpopularity. Exclusiveness is a big part of a brand’s allure, but that goes when the masses buy in. Just like Billabong (ASX:BBG) becoming uncool when Dads started wearing it.
Adding to Oroton's woes is the structural headwind of higher competition. The foreign majors have increased their domestic presence but the internet has also levelled the playing field, giving upstart designers the platform to reach consumers like never before.
These forces, and some unforced errors, have led to woeful financial performance for Oroton. Its stock price sits at all-time lows, hovering above $1.
What it does have going for it is some low hanging fruit awaiting harvest. Oroton’s CEO recently left, and in many ways, that’s positive, as the company’s underperformance gives his successor a mandate to make swift changes.
Exiting the poor performing GAP joint venture would have to be first on the list. This business loses over $3m annually, so pulling up stumps here would make a quick improvement to the bottom line, as well as releasing a decent amount of working capital.
Optimising Oroton’s store footprint would be next, including considering the exit of its marginal Asian stores.
Management has guided for underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) of $2.5m. With some optimisation, and after backing out the $3m in hedging losses, it’s possible that adjusted EBITDA could be in the high single digits.
If so, Oroton’s $39m enterprise value starts to look cheap.
If the company doesn’t make difficult changes then it's becoming increasingly likely that someone else will do it for them. Oroton is ripe for a private equity picking, allowing a private restructure before an eventual return to the ASX (ASX:ASX) boards or a trade sale.
An insider buyout is also a strong possibility. That could be the founding Lane family, or substantial shareholder Will Vicars, who curiously left the board shortly after topping up his holding.
Either way, if you think Oroton's 80-year-old brand isn't dead, then its shares could be quite interesting.
My guess is that things are likely to get more difficult for retailers in general before they get easier, which encourages us to be cautious. And it'll take more than this superficial view for us to be convinced, but Oroton is certainly one retailer we're considering.