Retail is a fickle industry; like any, it experiences booms and busts which are driven by swings in consumer confidence.
This makes stock picking within the retail sector fraught with danger, given the tendency for things to go from good to bad in the blink of an eye — just ask shareholders of Dick Smith Holdings Ltd (ASX: DSH) and Myer Holdings Ltd (ASX: MYR) and they will tell you what I mean!
However, companies like David Jones, JB Hi Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) and Premier Investments Limited (ASX: PMV) show that retail can work in your favour too, provided you find a niche in the market. OrotonGroup Limited (ASX: ORL) is one retail stock which, in my opinion, has that niche, deserving a closer look as your next purchase.
The industry
Retailing is hard because of the constant change in customer attitudes and preferences. Any marketing textbook tells you that retailers must provide a "customer-perceived value" proposition whenever they intend on selling a product or service. Put simply, the value proposition requires the benefits of a product or service to outweigh its costs (in the customer's mind).
As alluded to earlier, retailers must therefore position their product in a manner which meets the wants and needs of the ever-changing customer profile, making a retailer's life incredibly difficult in the process.
It can be done
It's important to remember that retailing is an essential industry in a consumption economy like Australia. Although companies like Myer and Dick Smith might attest otherwise, individuals continue to shop in the current economic climate. September's quarterly retail sales data supports this fact with sales growing 0.6% quarter-on-quarter. The reason for the difference in opinion is a change to customer preferences.
Whilst more and more people are eating out, shopping for their favourite brands and spending on household goods, a lot of this consumer spend is flowing to companies which provide a unique product offering; not just companies like Myer who have profited from increased spends in the past.
Examples of where this spend has gone includes Premier Investments, Harvey Norman, JB Hi Fi and Woolworths SA owned David Jones, all of which have demonstrated that focused and well managed companies can flourish in current conditions (and whose share prices have done well as a result).
This now brings me to OrotonGroup.
Why OrotonGroup?
OrotonGroup is the distributor and retailer of its namesake brand, Oroton. It is one of Australia's leading luxury goods and clothing retailers and owns the Australian distribution rights to American household name, GAP. The company experienced a tough few years following its unsuccessful foray into a joint venture with Brooks Brothers Australia and the loss of its distribution licence for Polo Ralph Lauren in 2013 (which previously accounted for 50% of its earnings).
However, OrotonGroup has since refocused by attempting to elevate its flagship Oroton brand to target the niche market of affordable luxury goods. In its 2015 full year results, CEO Mark Newman indicated the group's strategy of repositioning itself was working, with underlying full year earnings (EBIT) coming in at $6.8 million. Pleasingly, its core Oroton brand experienced 8% growth in like for like sales during the first few weeks of the 2016 financial year, following a 6% decrease in 2015 (on a like-for-like sales basis).
The market seemingly approved of OrotonGroup's results, sending its share price surging over 20% since September. However, even at current prices, the company trades at a discount to listed-peer Premier Investments and is, in my view, cheap if management can execute its strategy to plan.
Foolish takeaway
It is important to remember that OrotonGroup operates in an ever-changing industry where inaction can be the difference between success and failure. Under new management, OrotonGroup appears to be pursuing the former with the company demonstrating a disciplined focus on its unique value proposition of affordable luxury retail.
Whilst it won't require much for Oroton to lose its way, I believe the current share price does not reflect management's new-found focus, providing the perfect opportunity for the brave investor to buy today.
