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Is Oroton an amazing A1 business?

Is Oroton an amazing A1 business?

Peter Switzer invites me every Thursday fortnight to join him on the Sky Business Channel. 4 June was like any other show. Except once Peter and I had finished discussing investing and stocks and the market, he invited me to stay on for his interview with OrotonGroup CEO Sally Macdonald.

For readers of my blog, you will know that Oroton is one of my A1 businesses. And I have often said that Sally Macdonald is a first-class manager.

Below are the highlights from that interview.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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23 Comments

  1. Hi Roger,

    I have been reading Benjamin’s book for about 2 years and have improved my thinking in investing but I have only had a quick look @ your book and I must thankyou, It;s great. As you know Benjamin’s book is great but it’s old and hard to research company’s that Ben writes about. Roger thank’s a lot.

  2. Until a couple of years ago I would not have bought anything from Oroton. Nothing against Oroton particularly, it is just that being a penny conscious male I didn’t think I needed anything as expensive as that. I told myself I had simpler tastes.

    However, that changed when I received an Oroton bag as a gift. I was impressed by the quality and when I had a (small) problem with the strap they replaced it, no questions asked. I was putting a lot of weight inside the bag and it wore out the metal clip.

    Since then I’ve bought a belt, a wallet and a folio and another bag from their store.

    All of them have been high quality and have endured through some tough usage.

    In terms of their products, I’m converted. I would rather buy one wallet which lasts 5 or more years than buy 5 wallets which last 1 year each, but each for half the price of the Oroton product.

    While they keep making good quality products I’ll keep buying them. Also, their male products aren’t too flashy, so they fit my personality!

  3. Hi Roger

    I stumbled across a very interesting ‘term’ which I think applies directly to Oroton – Veblen Goods.

    (I couldn’t hyperlink to the explanation, but cut & paste url below or search Investopedia, Google etc if anyone interested)

    http://www.investopedia.com/terms/v/veblen-good.asp?partner=tod07

    Is conspicuous consumption in itself some sort of competitive moat in relation to certain businesses/markets – especially in downturns and turbulent times?

    C’mon August and the postie!

  4. Sarah and I visited a store today on Collin’s street, Melbourne. We were impressed with the staff knowledge about their products, though they weren’t hard selling which make the exprience less stressful. But clearly loss sales would translate to lower overall earning to the business coffers. The layout of the store is good as it’s not clustered together making ones selection more easy and enjoyable. Overall we felt welcomed and enjoyed the experience even though no sale registered, Eamon!

  5. Probably we all agree that the current ROE of 50+% is not a sustainable thing. It’s a wonderful thing that they ever got to that level for a short period, but no business that lacks a proprietary component can sustain that. If their “normal” return on equity is closer to 25%, then I have a valuation concern.

    At a share price of nine times shareholder equity, and applying the simplest-case formula for a company that pays out earnings as dividends, the simple return you might expect to make here is only about 3%?

    Since they re-invest some of the retained earnings the result might be better than this, but the shares look very well valued?

    • Hi Will you are right on some counts. The valuations I have published here are based on performance that may not be sustainable. And as I have already mentioned I do run a number of scenarios to produce a range of valuations rather than one and I like to purchase for my own portfolio, when the shares are trading below all the valuations.

      You have to find out what sort of returns and payback periods are involved for the new stores to determine where ROE is going. Thats not too hard to do. I wouldn’t agree that Sally is not developing a competitive advantage (hand bags have been for sale for a long time and a lot of brands carry them – but not many are getting 85% ROE and better than 50% for four years now) or that Oroton doesn’t have one. Whether it is sustainable is the root of your question and mine. It is not true that retailers cannot sustain very high rates of return on equity, it is true however that they eventually saturate the Australian market (rather more quickly than, say the US) and so cannot keep retaining profits at those very high rates. At that point they have two choices, 1) pay all the earnings out as a dividend (valuation drops) or 2) make silly acquisitions (valuation collapses). You could be right and ORL is at fair value. Lets make it a didactic exercise and wait and see.

      • Just to be clear, I think Oroton has a very impressive business. And we should all be so lucky as to have companies in our portfolios with these kinds of magnificent ROEs. It’s a high quality problem to be debating whether the ROE next year will be 80%, 50%, or 25%. :)

        Having said that, the stock is at nine times stockholder equity. My only point is really that their success is not exactly a secret. Nine times equity absorbs a huge amount of ROE. So I am distinguishing Oroton as a magnificent business from Oroton as probably a much less magnificent investment, *given the current price* of shares.

  6. As a man their stores do not do much for me, but the numbers are very impressive , it is just so many retailers that sells handbags and to me handbags looks the same . and i am scared of australian property market and household debt . so i think many retailers could be in for some tough times further ahead as people start to cut down on luxury items , i think jbh and trs will be ok .
    trs because they sell cheap items witch will be good for them
    when people become more price sensitive ..
    and jbh because they have competitive prices and like roger said they stealing market share and younger people are a large customer group . and their is something about jbh stores that makes you want to go in their to have a look i do not know what it is maybe it is al the yellow he he .
    having said that i do own some orl i could not help myself so i went and bought some .
    cheers cody

      • Hi again Roger yes gen y .
        i think orl would do really well in Moscow
        Russian women love luxury handbags .
        have you heard of a swedish company H & M Hennes & Mauritz
        very well run retailer .

      • Hi Roger,

        I am gen y but male obviously. However, my fiance is female and very much interested in fashion adn she is a big fan of the business. Her words are along the lines of “it’s australia’s ONLY luxury related fashion company.”, she is rather optimistic about their futurwe as well.

        From my crash courses in fashion since i met her, and visiting a few of their stores. They are a great company with a competitive advantage in their field and the licence for polo ralph lauren is a great plus as well.I will definitley be jumping on the oroton bandwagon if i am happy with the price being offered by mr market. My on ly concern is the same one you rouched on in regards to a lot of australian retailers, what happens when they have reached the saturation point in the local market, I do not think that oroton would be so much of a success with international expansion. Perhaps into some other smaller markets like New Zealand etc but i don’t think it would be a hit competiting in USA and Europe for example against the bigger players.

        If you want me to ask my fiance a few questions about ORL Roger and get your female POV just drop me an e-mail and i will ask her.

  7. I do note “key [wo]man risk” which you rightly pointed out in the interview and which was always in the back of my mind when I looked at Oroton, or Harvey Norman, or companies where one individual is acclaimed as being pivotal to said business’ success. I’d be more inclined to reduce my margin of safety if I can see stronger evidence to suggest that Sally will definitely stay for at least 5 more years. As you yourself said in the interview, Oroton’s growing strength only makes it likelier for Sally to move on to even more challenging prospects that suit a manager of her calibre.

  8. The new revenue streams and sustainable margins from their core business indicates, to me, a company which is capable of fast and sustained oragnic growth. This means low debt and high ROE. What more could an investor want?

  9. Very interesting interview. I like the way that she gives the impression that the turnaround just happened, with references to Harry Hindsight, and just glosses over minor points like rejuvenating this and that – as though it’s all easy basic stuff. Very self-deprecating. She could almost convince one that she didn’t really do much. Almost.

    She does seem very confident that there is plenty of avenues left for them to exploit.

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