‘Gap has to go’: Oroton urged to abandon joint-venture following shock earnings downgrade

OROTON is being urged to ditch its loss-making joint venture with Gap, as questions swirl around the future of the luxury handbag retailer.

Oroton has a 50 per cent joint venture with Gap. Picture: Justin Sullivan/Getty Images/AFP

OROTON is being urged to ditch its loss-making joint venture with Gap, as questions swirl around the future of the luxury handbag retailer.

Shares in Oroton Group plummeted to 20-year lows on Wednesday after the company shocked the market with its second earnings downgrade in five months.

Oroton warned its full-year earnings will fall by as much as 85 per cent this financial year due to an ongoing sales slump. Earnings are expected to finish at between $2-3 million, down from $12.9 million the prior year.

The slowdown has been blamed on poor mid-season clearance sales at Oroton and deteriorating performance at Gap, which is expected to finish the year at a $3.5 million loss.

The drastic downgrade wiped more than $11 million off the company’s market value, with shares closing down 20 per cent at $1.085. Oroton will release its full-year financial results on September 21.

Interim chief executive Ross Lane said competitive conditions experienced during the April mid-season sale were expected to continue into the more important end-of-season sales in June and July.

“Given the recent retail market trends of poor April mid-season and January summer sales, and low consumer confidence, management consider it prudent to reassess the outlook for the full financial year,” he said in a statement.

Oroton’s shift away from women’s apparel, shoes and lingerie, and lower sales at its factory outlets, are also having a larger impact than expected.

Oroton has suffered from plummeting sales. Picture: Dean Lewins/AAP

The handbag maker’s woes come amid a wave of insolvencies in the struggling Australian retail sector, which has claimed high-profile names including Marcs, David Lawrence, Rhodes & Beckett, Herringbone, Payless Shoes and Pumpkin Patch.

High-end fashion in particular appears to have come under pressure from weak consumer spending and low wages growth, with Myer recently saying luxury women’s label Sass & Bide accounted for $1.5 billion of its fall in sales in the three months to April 29.

In a note on Wednesday, Citi outlined three strategic options for Oroton, which it upgraded to a “high risk” rating. “Gap has to go,” analyst Craig Woolford wrote. “Oroton could exercise the Gap put/call option in February 2019. This would effectively transfer 50 per cent ownership of the joint venture brand to the Gap company.”

Exiting Gap would cost an estimated $6 million. “Given the lack of earnings contribution from the Gap joint venture, we think the exit costs of ~$5.8 million, while large, could refocus management back on the core Oroton brand which has been profitable.”

The second option would be for Oroton to sell its brands to a strategic overseas buyer seeking entry into Australia.

“Given its store footprint and brand equity, this could provide a good opportunity for an offshore retailer with experience in the luxury apparel sector,” Mr Woolford said, highlighting the recent acquisition of Kate Spade by Coach in the US.

The third, and unlikely option, is to for Oroton to delist from the stock market. “While a low probability, the company could relinquish its share market listing and seek to restructure operations away from public markets,” Mr Woolford said.

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— with AAP