In my blog post Assignment 1: My draft, Brooks, Ralph & Zac I highlighted some information which at the time I felt were key events in helping understand what was going on at OrotonGroup. Now that I have completed the Ratios tab of my spreadsheet, I’m going to go back through my blog post and hopefully use this new accounting information to support some of my theories of factors contributable to OrotonGroup’s performance.
Today I will start with some thoughts on 2013 as it was a pivotal year for OrotonGroup in terms of the period we have been asked to look at for this course.
Here is the spreadsheet draft with Ratio’s tab completed: Draft Company Spreadsheet 2016 (Amy Plant)
As you will see from the results of the calculations and data 2013 is really a pivotal year for OrotonGroup as there are spikes and troughs in the data. It’s not surprising that 2013 was the year OrotonGroup exited their licencing agreement with Ralph Lauren. This is important because Ralph Lauren is a very successful brand and was included in Deloitte’s 18th annual Global Powers of Retailing report as one of the 250 largest global retailers. Additionally this Report noted Ralph Lauren was one of the companies listed as trading in Australia so this might suggest Ralph Lauren does well in the Australian market – or at least sees the value in operating here.
When the Ralph Lauren (RL) relationship ends in 2013 we can see a decrease in Profit Margin (PM). In Table 1 the blue column represents the PM based on the total amount of profit attributable to OrotonGroup. However, the orange removes the contribution of Ralph Lauren’s profit. As you can see, the Ralph Lauren relationship represents a significant proportion of revenue to the OrotonGroup.
Table 1 – The Ralph Lauren Effect
Now we have seen the RL effect on PM we can begin to understand factors contributing to the sharp fall in Economic Profit from 2013 to 2014. Table 2 shows the Return on Net Operating Assets as another driver for Economic Profit.
Table 2 – RNOA, PM, and Economic Profit
The other factor contributing to the sharp drop is Economic Profit is the Return on Net Operating Assets (RNOA). To understand the RNOA I had a look at what was contributing to this figure: the relationship between Operating Income (OI) and Net Operating Assets (NOA). We can see a huge spike in 2013 with the RNOA working out to be 129% (Table 3). In 2013 OI was higher than NOA which is different to all other years when NOA is higher than OI. As we can see from Table 1, Ralph Lauren represents two thirds of OrotonGroup’s PM. We can also see from the Restated Financial Statements (Tab 2 on spreadsheet) that inventory was low compared to other years. The average inventory, part of Operating Assets (OA), from 2015 – 2012 was $29,581,000 and in 2013 was at the lowest point of $18,457,000. This would make sense because if Oroton Group was exiting the RL commitment, they would not be ordering new stock. Additionally, this is the case for Trade and other payables, under Operating Liabilities (OL), which was an average of $14,630,000 between years 2012 – 2015 and reported lowest in 2013 at $9,078,000. Which I think might be attributable to not needing to purchase stock for sale from suppliers. The net effect of the lower than average figures contributing to the OA and OL meant the NOA was lower than average, and at the lowest of all the reporting years (average NOA was $36,997,000 and 2013 was $24,337,000). The OI in 2013 was higher than 2014 – 2015 due to the large portion (2/3) of profit attributable to Ralph Lauren, this echoes the sentiment in OrotonGroup’s ASX media statement on March 21, 2013 “In this year of transition, the effect of exiting the Ralph Lauren business is expected to result in it representing a greater share of the Group’s overall earnings than in FY12.” (OrotonGroup, 2013). This information was correct, Ralph Lauren’s contribution to overall earnings in 2012 however 2013 seems to be a better sales year generally for OrotonGroup including their other brands (see Table 1). This trend suggests OrotonGroup fared well in 2013 which was characterised by low levels of retail growth (Deloitte, 2014). I think this trend could partly be attribute the opening of new Oroton stores from 60 FY12 to 68 stores trading at FY13 which included opening 11 new stores and closing 3 marginally performing stores. Importantly, 6 of these stores were in David Jones (DJ), a department store. This indicates a smaller investment as these in-store ‘booths’ only require minimal fit out costs less ongoing operating expenses and overheads than a stand-alone brick and mortar shop.
Table 3 – OI, NOA and RNOA
I think so far we’ve seen the effects OrotonGroup’s contract termination with Ralph Lauren. I’m sure as I investigate the ratios further I will find some more information. If you have a retailer, I would love to hear from you once you’ve completed Step 1 of Assignment 3 so we can compare results.