Luxury apparel and designer goods retailer OrotonGroup Limited (ASX: ORL) this morning posted a net profit of $2.2 million on revenues of $66.8 million for the half-year period ending 24 January, 2015.
The profit was down 57% on the prior corresponding period (pcp), while revenues were up 6%, mainly thanks to the addition of revenues from newly operating GAP stores.
The stock has dropped 7% to a 52-week low of $2.52 on the interim result.
Falling Oroton sales
On a like-for-like basis Oroton group sales were down 6.5%. That's a significant fall and although consumer sentiment in the second half of 2014 has been soft, it has not been sufficiently weak to excuse the falling like-for-like sales.
The high-fashion market is fickle and competitive, where you're hot or not, and the comparable sales fall suggests change in the sales and marketing strategy is required.
The group said the fall was due to the effects of the strategy to reduce discounting, which is an attempt to protect margins and brand strength, although a changing strategy will not always fix more underlying problems if they exist.
Brooks Brothers and GAP not helping
The group also operates the GAP and Brooks Brothers men's fashion stores and opened three new GAP stores in Australia during the half-year period. Worryingly though the existing GAP stores saw a like-for-like sales decline of 0.9% on a pcp which is unlikely to have been particularly strong in itself.
GAP is another brand in a competitive space, which will need to be price competitive to succeed. The group has also been investing in its Brooks Brothers business and now has 14 operating stores including one fully online.
However, the stores posted a $1 million trading loss for the half due to lower gross margins than planned and new store openings. Sales wise the brand's opportunity is in offloading large amounts of shirts and suits to male shoppers, with potential to emulate its North American success.
The outlook
A lot of traditional apparel retailers face a tough long-term outlook, although there will be success stories the sector as a whole is one investors need to tread carefully in.
As an example Myer Holdings Ltd (ASX: MYR) today reported flat sales growth and rising costs to see its own shares drop 9.8% this morning and 48% over the past year.
As a premium retailer, Oroton also has similar conceptual challenges to Kathmandu Holdings Ltd (ASX: KMD) in deciding when and how to put stock "on sale" without sacrificing credibility in the eyes of consumers.
Kathmandu has dropped 47% over the past year thanks to an ill-judged sales strategy, while Oroton is off 31% as both businesses have trouble hiding from bargain-hunting consumers. Add in the online headwinds and foreign entrants and the Australian apparel space is clearly facing issues.
Overall these kinds of businesses may be ones to avoid – especially when there are other businesses sitting in the middle of growth sweet spots, with competitive advantages and fast-growing earnings!
