Polo licence expiry 'risk for Oroton '

The expiry of OrotonGroup Ltd's Polo Ralph Lauren licence could be an earnings risk for the clothing and accessories retailer that reported a first half profit that was above expectations, analysts say.

Goldman Sachs JBWere retail analysts George Batsakis and Will Charlston maintained their hold recommendation for the business as the stock is expected to perform in line with the S&P/ASX 200 index for the next 12 months.

Mr Batsakis and Mr Charlston said the expiry of the Polo licence in June 2010 was an earnings risk and would weigh on the luxury retailer's share price in the near term.

"We believe Oroton is generating excellent results for the Polo brand and is also well-placed for the licence to be renewed," they said.

"However, it is worth noting that Polo Ralph Lauren of the US recently acquired the South East Asia Polo licence."

Like-for-like sales for Polo grew by five per cent in the first half for OrotonGroup, and the analysts estimate that the brand generates 30 per cent of profit and 60 per cent of sales for the company.

"Oroton produced the strong result despite the tough trading conditions, with like-for-like sales growth and EBIT (earnings before interest and tax) margin expansion exceeding comparative companies (except Country Road)," the analysts wrote in a client note.

The company had reported a net profit of $12.5 million for the half year to January 24, up from $10.38 million in the prior corresponding period.

Interim dividend was raised to 16 cents fully franked, compared with 15 cents in the same period last year.

"First half net profit of $12.5 million was above our forecast of $11.8 million due to stronger than expected EBIT margin. Tight cost control offset lower gross margin."

Goldman Sachs JBWere upgraded OrotonGroup's full year net profit forecast but said it remained cautious about consumer spending in the next two years.

"We upgraded our full year 2009 net profit forecast by three per cent to $19 million. However, this assumes a flat second half net profit of $6.5 million."

There was no change to Goldman Sachs JBWere's full year 2010 net profit forecast of $20.2 million for OrotonGroup nor to the 2011 full year profit forecast of $22 million.

"This reflects our cautious view on consumer spending and the impact of a lower Australian dollar/higher import costs on Oroton's profit," it said.

"We estimate ORL (OrotonGroup) has hedged the Australian dollar at favourable rates until July 2009. However, ORL will need to increase selling prices in full year 2010 to offset higher import costs."

OrotonGroup shares closed at an intraday high of 31 cents, or 11.88 per cent, to $2.92.