Oroton: A tale of struggle
Struggling with mounting losses from the Gap stores it operated under license from the American retailer, Oroton punted on a recovery in consumer confidence and a lift in sales headed towards Christmas 2017.
The consumer spending rescue did not eventuate and the exit costs related to a decision to cut the losses on the six Gap stores added to choking debt levels that had climbed to $40 million by November 2017.
Without funding support from key shareholder, Will Vicars, Oroton would have been forced to call in administrators long before the unavoidable decision on 30 November 2017.
Now Vicars has emerged as the only potential buyer for the beleaguered business. He was a director of Oroton until May last year, when he resigned to lighten his workload.
Although he left the board at the same time, Oroton commissioned a strategic review of its business and Vicars maintained support for the luxury handbags and accessories retail chain and retained an 18.2 percent shareholding.
Deloitte, appointed as administrators to Oroton on 30 November, announced on 27 December it had entered into a binding implementation deed with a company controlled by Vicars that would seen him buy the business outright.
Deloitte has indicated the acquisition will be realised through a deed of company arrangement that will see the public company privatised if Vicars proceeds.
Vicars, who controls Caledonia Funds Management, is both a shareholder and creditor of Oroton and guaranteed a $20 million working capital debt to the Westpac Bank last August to keep the business going, while it sought a buyer or an investor prepared to inject new capital.
The details of the proposed acquisition have not been released by Deloitte, Oroton or Vicars but it seems the deal hinges, in part, on some restructuring under the protection of the administration before any transaction is finalised.
The restructuring will include some store closures and staff redundancies.
Vicars has opted to exclude his creditor claim and shareholding rights in Oroton, which has been suspended from quotation on the Australian Stock Exchange since 30 November, in developing a financial offer for the business.
The return to secured creditors will depend on both Vicars’ cash offer and any reduction that can be achieved in Westpac’s creditor claim, if Vicars is able to assume responsibility for part of the debt facilities currently provided by the bank to the business.
Shareholders in Oroton are not expected to receive any return on their shares, which could give rise to legal action against Oroton directors and, potentially, Deloitte.
The prospect of legal action would relate to the level of disclosure by Oroton to shareholders between May and November, including advice in August that sales and margins for the first two months of FY18 were above the comparable period in 2017.
A key player in any legal action could be the Gazal Corporation, which acquired a now worthless 7.35 per cent shareholding in Oroton at $1 a share in July.
Gazal indicated it might consider opportunities arising from the review Oroton commissioned May but has not provided Deloitte with any offer following the administration appointment.
The reason Deloitte might become embroiled in any legal action arising from Oroton’s collapse is the fact that the firm undertook an assessment of the retailer’s financial position in July, a project that included an analysis of the outcome for shareholders and creditors if the company went into liquidation.
Deloitte and the advisory firm, Moelis, assessed liquidity issues, debt facilities, retail lease commitments and the Gap license agreement.
While Gap had been a major drain on the retailer’s financial position, many Oroton retail stores have also been struggling for profitability with sales falling and costs rising.
In FY17, a six per cent like-for-like sales decline in Oroton stores contributed to a $14.3 million net loss, a result also impacted by writedowns for the Gap outlets and hedge fund losses.
Vicars vs landlords
The occupancy costs for stores is a critical issue for Vicars, who wrote to some landlords of Oroton outlets, demanding a reduction in rent of up to 40 per cent in some instances. He is also believed to have sought reduced charges for concession stores in Myer and David Jones.
Vicars gave landlords less than a fortnight to respond to his ultimatum that Oroton would walk away from stores if the rents were not reduced.
Stores in Sydney’s Pitt Street Mall and Macarthur Central in Brisbane’s central business district have already been closed because landlords refused to cut rents.
The short timeframe for resolution of the rent issues was dictated by the need to finalise the purchase offer to be put to Deloitte, but also to identify restructuring initiatives that could be undertaken more easily while Oroton remained under the control of the administrators.
For example, the administrators can close stores and terminate leases without the penalties that would apply if Vicars takes ownership and then seeks to exit any locations.
The viability of stores going forward also impacts on staffing and inventory levels, including new seasonal stock orders.
Oroton had 57 stores leased from around 20 different landlords at the time the rent reduction demand was made, including QIC, Scentre, Vicinity, AMP, Lend Lease, GPT and Mirvac.
Cause for concern
Vicar’s demand for reduced rents is problematic for landlords who might want to retain the well-known retail brand in their centres. However, some may be concerned that similar demands could come from other retailers if they opt to support Oroton.
Landlords have already been pressed by Premier Retail for rent reductions with the same threat of simply walking away and some have been hit by closures or retail floorspace contractions by major retailers, including Myer and, of course, Gap.
Major retail landlords are also facing the exodus of up to 300 stores from the Specialty Fashion Group (SFG) brands which include Millers, Katies, Crossroads, Autograph, City Chic and Rivers.
SFG’s sales fell 2.1 per cent in FY17, while net losses quadrupled from $2.2 million in 2016 when the company was working to turn around the Rivers chain to $8.4 million in FY17.
SFG closed 79 stores in the last financial year and will exit at least 50 more this year that are underperforming or unprofitable, in large part, because of increasing occupancy costs.
The current store network of around 1,000 sites is to be cut to about 700 by 2020.
Further pressure on landlords is expected from food chains with Retail Food Group battling franchisee anger as increases in occupancy charges, energy costs and wages hit their profitability.
Another franchised food chain, Sumo Salad, took the unprecedented step of placing one of its business entities into administration to enable it to renegotiate retail leases and to walk away if rents could not be reduced.
Vicars is confident the Oroton business is fundamentally sound but rent reductions are the deal maker or deal breaker in terms of the financial offer to be put to Deloitte.
If Vicars doesn’t proceed with acquisition plan, Deloitte would be expected to immediately begin closing stores as the six-month review and the administration process have failed to find an alternative buyer or an investor prepared to re-capitalise the business.
The administration and ultimate ownership change or windup of Oroton ends the 79-year control of the retailer by the Lane family, a period that included a 23-year-association with the successful Polo Ralph Lauren brand, as well as the creation of an Australian luxury brand.
Indeed a key factor in the collapse of Oroton was the termination of the Polo Ralph Lauren license which, in turn, led to disastrous attempts to replace the lost sales turnover and earnings with a brief flirtation with Brooks Bros and the Gap venture.
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