Ralph Lauren was enthusiastically included in Oroton’s recent expansion into Asia, where it has opened seven stores across Singapore and Malaysia.
The end of the license will deliver a $27 million in cash back to Macdonald, Carleton says. This is largely because Ralph Lauren shipped each season’s range to Oroton immediately when it was made, leaving Oroton to store it for six months until it was the right season to sell it.
Macdonald can use the cash to give a dividend back to shareholders or, as she has told newspapers, invest in fast-growing brands and markets.
The market is backing Macdonald, with shares rising 16 cents to $6.86 yesterday. Most analysts have a hold recommendation on the stock; a few have a buy. None has a sell recommendation.
Oroton’s performance over the past five years during Macdonald’s reign is certainly striking. The group’s compound annual growth rate for revenue is 11% , EBIT is 12% and net profit is 11%. It’s a remarkable achievement given the global financial crisis and the structural change decimating other retailers’ results as online retail sales grow.
Oroton has grown its own online business 60% and it now makes up about 10% of its revenue. Oroton’s experience begs the question of whether big partnerships and big customers are worth the risk.
Barrett says: “Our advice is that you have to be very careful about putting all your eggs in one basket. You have to have a healthy spread of deals if you want to have a business in your own right, as opposed to the companies that are feeder to the auto industry, for example.”
As a growth strategy, a single big customer or partner can be a positive, recent research has found. A single customer or partnership is simpler and cheaper for companies to manage, and can provide an impressive brand recommendation and a stable profit platform to grow from, according to a 2011 study.
But Barrett says licensing deals are ways for big brands to test a market, and many deals are heavily weighted in favour of the licensee. “Companies can get unsuspecting people to do all the marketing and sales, and then step in and take over all your hard work,” she says. “If leading companies do enter into more license relationships, make sure the agreements are going to protect you if any partner wishes to withdraw.”
The conditions in Australia leave leading companies particularly vulnerable. A company such as Oroton should have many deals bubbling all the time, just in case, Barrett says. “It is like playing multiple games of chess,” she says. “In Australia, you cannot be one-trick pony. We don’t have the number of people. In America, where they have such a large market, they can make mistakes, but you can’t do the same thing in Australia. You can have a focus, and then a variety of options.”
But Carleton is not concerned that Macdonald may not make an acquisition in the immediate future to replace Ralph Lauren.
“It is likely that Sally Macdonald and the board of OrotonGroup have been looking at acquisitions given current opportunities. Sally Macdonald has proven to be one of the best retail operators in the current Australian retail environment and she is not going to be rushed into a decision. She will make sure it is the right decision for the long-term success of the business. In June next year, if she doesn’t have something ready to go, she would be prepared to wear a dip in earnings for 12 months in order to make the best decision to drive strong earnings growth over the medium term.”
“That shows the strength of management team.”
Kath Walters is the editor of LeadingCompany and an award-winning journalist of 15 years’ experience. Kath was previously a senior writer and editor at BRW magazine covering management, strategy, finance, entrepreneurship and venture capital across all industry sectors. In 2006, Kath won the Citibank Award for Excellence in Journalism (General Business). Follow her on Twitter.
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