ORL - OrotonGroup Limited

[Ves]

They lose 1/3 of NPAT, but they gain some meat on their balance sheet as they free up the capital that was supporting the licence previously. Their announcement tried to cast a slight positive spin on the event, that this freed-up capital can be used to grow their own brand more aggressively.

Things won't look too good for tomorrow, however.

That depends how you look at it. It is possible that they lose scale (and therefore margins contract) and their reputation is battered (although I admit, I am not sure how, but it is is possible). Ralph Lauren sales were almost half of their revenue, weren't they? That's a fair chunk of cash flow down the drain, if that cash flow (and the capital it was coming from) was helping the expansion then they better replace it pretty quickly! That's what I mean by losing meat. Maybe I should have said it loses some of its edge. You make a good point, but all of a sudden they have gone from a position with degrees of certainty to one of without! Let us hope they have good contingency plans for their sakes.

Interesting side show: Roger the Dodger also held this very recently. Interesting to see what is said this time... third strike from his list of ten companies you would have no problem holding if the market closed for five years.

edit: I think the market will trade this one close to $4 at some stage tomorrow. I think EPS was $0.62, so it comes down to roughly $0.40 if there was no growth. Not entirely unrealistic if it trades at a P/E closer to 10 instead of 12.5 is it?

 

[McCoy Pauley]

Pre-open estimates a drop of about 10% on the open.

 

[clinta44]

there are sell orders in as low as $5.50... it will be an interesting day that's for sure.

Down down prices are down!

 

[RottenValue]

I assume that Rodger the Dodger would have sold out of this one back in April

 

[clinta44]

I assume that Rodger the Dodger would have sold out of this one back in April

Roger would have bought in 1999 when it was trading at 80c - then sold at its historical high in Feb 2011 at $9!

Another perfect trade no doubt!

 

[McLovin]

The earning potential of ~$30m invested into this business is excellent, assuming that they can deploy that sort of amount. The problem is that they are basically going to have to almost double their Oroton business in order to maintain their profitability. God knows how achieveable that is.

 

[Ves]

The earning potential of ~$30m invested into this business is excellent, assuming that they can deploy that sort of amount. The problem is that they are basically going to have to almost double their Oroton business in order to maintain their profitability. God knows how achieveable that is.

If it was that easy then why would they have been paying out 80-85% of their earnings for so long? I think the market has lost its marbles with this one today... as far as I can see the valuation for the Oroton segment of the business is higher than it was yesterday. It certainly well exceeds the price I thought it would touch.

 

[McLovin]

If it was that easy then why would they have been paying out 80-85% of their earnings for so long? I think the market has lost its marbles with this one today... as far as I can see the valuation for the Oroton segment of the business is higher than it was yesterday. It certainly well exceeds the price I thought it would touch.

I don't disagree with you. CAPEX last year was ~$6m across both brands. They're going to end up with a lot of cash on their balance sheet for years or they're going to distribute it.

 

[Ves]

So allowing for capex they basically paid every single dollar out? It is interesting to note that 60% of their sales came from online, which I would not imagine requires much capital. Asia is obviously what they need this money for and where they will get the most growth.

There were some rumours that they planned to buy Mimco (Witchery ended up with it) and more rumours on a planned purchase of RM Williams.

Also did not realise that 45% of this stock is owned by a concentrated group of holders. Combine this with the fact that there will still be 2 (you could almost say 3) unaffected dividend payments before the PRL contract ends, and I guess that explains why the share price did not fall lower today.

ORL might be subject to a takeover of its own if the share price happens to lose support.

 

[ROE]

Asia is easier said than done, Asian rich don't like unknown brands

Oroton is relatively new they need to build the reputation and that could
takes years and may not be successful.

Not only that you got to have keeping up with the Jones image so owning an Oroton show that
you got some cash to burn so other Jones can imitate your look and buy the same stuff...

all this is not that easy to execute...but if they can pull it off then they may make a few bucks out of it

Remember people shell out big bucks for fashion the brand has to be recognised by their peers, no peer recognition no purchase

and where do Oroton made their stuff? if you sell rich stuff in Asia and it said made in China that is a no go zone

 

[skc]

I don't disagree with you. CAPEX last year was ~$6m across both brands. They're going to end up with a lot of cash on their balance sheet for years or they're going to distribute it.

They have been expensing their Asian expansion as opposed to piling them on the balance sheet.

I am a bit stunned as well that they didn't fall more today. 35% of earnings gone just like that. $30m payment from RL was for inventory already held so it's not exactly free new money. They only managed to spend $1.2m in 2H12 on international expansion so it will be a long time before they finish spending $30m (or a long time before the earning hole is plugged).

I had a valuation of ~$5.5 and I expected the panic to push it below $5...

 

[McLovin]

and where do Oroton made their stuff? if you sell rich stuff in Asia and it said made in China that is a no go zone

Most luxury labels are made in China or other parts of Asia these days. I know off the top of my head Coach, Prada, Burberry and Emporio Armani are all made in China. Last time I was in Asia (earlier this week) they didn't seem to be struggling.

At the very pointy end LV, Jil Sander etc are all still made in Europe but then again LV burns all their excess stock at the end of the season rather than have end of season sales, which is a different league to the one ORL is playing in.

I am a bit stunned as well that they didn't fall more today.

I think we all are.

 

[ROE]

Most luxury labels are made in China or other parts of Asia these days. I know off the top of my head Coach, Prada, Burberry and Emporio Armani are all made in China. Last time I was in Asia (earlier this week) they didn't seem to be struggling.

At the very pointy end LV, Jil Sander etc are all still made in Europe but then again LV burns all their excess stock at the end of the season rather than have end of season sales, which is a different league to the one ORL is playing in.

I think we all are.

You may be right but from doco I watch 2 years ago these Italian fashion house still make majority of luxury goods outside China and only 10-20% in China to test the appetite.

on the same year I research a bit into these things and most Chinese dont like buying luxury goods brands made in China, No brainer if it said made in Italy or France etc....

Time will tell if Oroton Asian sale dont pickup you know what may cause it...

 

[McLovin]

You may be right but from doco I watch 2 years ago these Italian fashion house still make majority of luxury goods outside China and only 10-20% in China to test the appetite.

on the same year I research a bit into these things and most Chinese dont like buying luxury goods brands made in China, No brainer if it said made in Italy or France etc....

Time will tell if Oroton Asian sale dont pickup you know what may cause it...

Yeah, they don't make everything in China but they also aren't making the stuff in Milan or Paris. Basically, the stuff they sell in Asia is made in Asia (not necessarily China) the stuff they sell in the Americas is made in Mexico or a central American country and the stuff they sell in Europe comes from places like Turkey or Romania. Until the 1980s these were small family run boutiques but they're now big businesses with whole teams dedicated to supply chain management, the days of some guy working in a studio to make a garment are pretty much over, although they have done well to maintain that image!

The top end houses still make their stuff in Europe but ORL is not playing in that league. Infact I think ORL is at about the same price point as Coach or RL both of whom make almost everything in China.

Interesting discussion though, next time I'm in Asia I'll have to go and have a look at some CoO labels in the boutiques.

 

[McCoy Pauley]

Up 2.5% so far today. I think that the share price resilience has to do with the fact that ORL made it clear that the decision has no effect on the results to be announced to the market in September (IIRC), so investors/speculators are hoping for a big pay-day in terms of dividends before selling out. I expect ORL's share price to drift lower after it goes ex-dividend in a couple of months.

 

[clinta44]

I expect ORL's share price to drift lower after it goes ex-dividend in a couple of months.

I tend to agree, I think there is a bit more to play out - the $30 Mil figure is solely Oroton's value of the RL Business. It will be interesting to see the full details of the hand back once published.

 

[McCoy Pauley]

Interesting to note that Ralph Lauren Corporation's share price rose 4.6% in the US on Friday night (our time).

 

[McLovin]

Interesting to note that Ralph Lauren Corporation's share price rose 4.6% in the US on Friday night (our time).

That probably has more to do with RL beating analyst estimates last week.

A 5% move in RL's share price is a market cap change equal to about 3x ORL's entire value.

I'd love to know who is buying and how they can justify this price, for ORL.

 

[skc]

That probably has more to do with RL beating analyst estimates last week.

A 5% move in RL's share price is a market cap change equal to about 3x ORL's entire value.

I'd love to know who is buying and how they can justify this price, for ORL.

If an armchair analyst like myself can see the huge apparent mis-pricing, I am guessing that it can only be insiders who is buying. May be there's a deal to buy something to plug the earning hole soonish...

 

[Tannin]

I watched Oroton's price changes with interest. I saw this as an opportunity to buy a good company for a cheap price ..... but ORL only dropped a couple of dollars for a short while and is now trading close to $6.50 - not much more than a dollar lower than before the announcement.

So my money stayed in my pocket. I was looking for a bargain price at or below $5 and that clearly isn't on the radar.

Strikes me that the loss of RL shouldn't really be such a massive blow. They still have the structures and the outlets, same as before, they just need to switch over to other products. I don't see that as being so difficult. (Disclaimer: I know nothing whatever about the fashion industry, and care less. But how hard can it be to find some alternative products to sell next year? Actually selling the stuff is usually the hard bit, after all.)

Summary: I see a good future for the company but I'm not interested at these prices.