Aussie Retailers: Nothing to Buy Here

Another one bites the dust…

Aussie retailers are dropping like flies.

Last week, ‘affordable luxury’ retailer OrotonGroup Ltd [ASX:ORL] announced that administrators were taking over operations.

Oroton joins an incredibly long list of iconic retailers that have gone under in the past two years. Since November 2015, Topshop, Marc’s, David Lawrence, Pumpkin Patch, Laura Ashley, Fat Fashions, Payless Herring Bone, Rhodes & Becket and Lover have all had debt collectors knock on their door.

And that’s just clothing and apparel retailers.

The list is even longer when you throw in Dick Smith, Allphones, Howards Storage World and Fineline Home Products.

You’ve then got SurfStitch Limited [ASX:SRF]. The surf-wear retailer was the first pure online retailer listed on the ASX. Yet in September, poor sales, management in-fighting and a large debt burden meant they too went into the hands of administrators. Management reckons that they can restructure the business. Outside interests would rather sell whatever little value is left in the company.

The retail landscape in Australia is bleak, to put it mildly. As Oroton asked for shares to be put in a trading halt, fashion news site RagTrader suggested that perhaps the company had found a buyer.

Unfortunately not…

Turns out Oroton has spent the better part of six months looking for a buyer. But it appears no one wants the company, as reported by Simply Wall St last month:

If [Oroton] has been on your watchlist for a while, now may be the time to enter into the stock, if you like its growth prospects and are not highly concentrated in the retail industry. [Oroton’s] low-debt position gives it headroom for future growth funding in the future. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise.

Did Simply Wall Street get it wrong? Hindsight says yes. But if you are only crunching numbers from the 2017 financial report, it’s easy to see where they went wrong.

Oroton said there was net debt of $5.4 million for the last financial year. And the one-off $11 million write-off from closing GAP stores doesn’t seem too bad either.

It’s also worth pointing out that Oroton nearly defaulted on its $35 million finance package with Westpac. In August, Westpac finally agreed to extend the period for another six months. Of course, this doesn’t show up in 2017 financial data. So it’s not so much that Simply Wall Street got it wrong, but that key information wasn’t included in the end of financial year analysis. 

More to this than meets the eye

More to the point, the retail sector in Australia isn’t as simple as scouring a balance sheet and making a decision. There are so many factors affecting retailers to consider.

Part of the problem crippling Oroton was high fixed rents in top-notch locations. It’s not so much that products were expensive. But because Oroton emphasises the ‘luxury’ side of their goods, stores are in the flashy or top-end sections of major shopping centres.

Premium sites come at a cost. Oroton stores can’t slum it next to fast-fashion retailers. Meaning the company is paying rent to look as fancy as the international designer labels but with goods a third (or tenth) of the cost.

However, just looking at Oroton’s financial data doesn’t give you the full picture of the company. Oroton’s stock was one of the few among Aussie retailers to rebound quickly from the GFC. Thanks to the affordable luxury of their products, and having been an early adopter of online retailing, Oroton was a strong company that was well placed for the future.

The share price tumbled to $2 in March 2009. But a strong rally saw the stock peaking at $9.48 in February 2011. Today, ORL shares are worth about 50 cents.

The unravelling first began in August 2012. Oroton lost its Ralph Lauren licence. Eagle-eyed retail watchers knew that Ralph Lauren products made up 45% of Oroton’s total sales and 35% of net profits.

Less than 12 months later, in 2013, Oroton said they’d plug the earnings hole with a new venture. Oroton planned to bring Brooks Brothers and GAP to Australia. Turns out this move contributed to Oroton reporting a $14.3 million loss this year.

As Oroton was bringing new brands to Australia, it also decided to make the same mistake seemingly every other Aussie retailer makes — expansion at any cost.

Rather than expand locally, the company looked to the incredibly competitive — and at the time very weak — Asian retail market. It didn’t work. Oroton misread local consumers. The ones who prefer high-priced designer items over affordable luxuries.

David Jones is a key example of this. Under guidance of then CEO Mark McInnes in the mid-2000s, David Jones went from having a flagship store in major east Australian cities only to one in every tier-one shopping centre across Australia.

Myer followed suit, increasing their ‘store footprint’ into new areas.

The problem with this strategy is that it rarely boosts profits enough to justify the small increase in sales. Instead of investing heavily in online shopping, retailers turned themselves into glorified showrooms. People would come to touch and feel clothing, but would then go home and make the purchase online. Or worse, wait for it to go on sale…from somewhere else.

If anything, the ‘more stores, more people’ mantra often leads companies to discover that they are cannibalising their sales. Rather than having half-a-dozen highly-profitable stores, they have an anchor store rolling in the dough, with 12 stores barely turning a profit.

Oroton’s demise didn’t begin in June when it struggled to meet debt payments. It’s an example of strategic failure. One we are likely going to see with more Aussie retailers over the next year.

Get set for the great Aussie retail crash.

Kind regards,

Shae Russell,

Editor, Markets & Money


Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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