Principles of Financial Market Analysis: MYER and Oroton Group

This report provides a detailed analysis of the financial market, focusing on the Australian fashion retail industry, specifically examining MYER and Oroton Group. It employs both top-down and bottom-up analysis to assess the economic environment, market dynamics, and company performance. The report explores key financial indicators, including the impact of economic factors like GDP growth, inflation, interest rates, and exchange rates on the companies' operations. It also delves into accounting ratios such as profit margin and return on assets to evaluate the efficiency and profitability of MYER and Oroton Group. The analysis highlights the challenges faced by these companies, such as increasing competition, changing consumer preferences, and the impact of global economic trends, while also considering strategic adjustments and future prospects within the industry.

Principals of Financial
Market

EXECUTIVE SUMMARY
If a company manage their financial resources in correct manner than they can earn more
profit in short period for time. Economic environment of a country have capacity to derail
operation of an enterprise. Their are various accounting ratios which can help an enterprise in
ascertaining their current position. If a firm manage their resources in appropriate manner then
they can get surprising return in short period for time. This is essential for attaining mission and
vision of an organisation.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
TOP-DOWN ANALYSIS...............................................................................................................1
BOTTOM-UP ANALYSIS.............................................................................................................5
SUMMARY AND RECOMMENDATIONS..................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
An organisation with sound financial position can face any kind of difficult that is present
in an business environment. Finance department of a company mainly focus on two areas, first is
lowering down the cost of capital, by finding right source of money, and second is investing right
areas so an enterprise can do optimum utilisation of available resources. Fashion retail industry
in Australia is going through favourable changes which can be considered as the main reasons
that multinational organisation from different nations are entering in this emerging market.
Oroton group and MYER are leading companies of this industry (Park and Sabourian, 2011).
Prior one operates in more one country and later one keep their focus on only domestic market.
This assignment will discuss about economic environment where these firm are operating. Top
down and Bottom up analyses will become key part of this report. Some accounting ratios and
measures will be explained under this file.
TOP-DOWN ANALYSIS
Australian companies are not very popular in global fashion retail market. Their are many
small firms in who have done well in domestic country but they failed to make a significant
impact at global level. The reason behind this failure is high internal competition. According to
the report by IBIS, fashion industry is generating a revenue of $19bn. They are providing
employment to around 130,000 employees. In last five years, this sector has seen a growth of
3.9%. Some people are happy that foreign companies are entering in this industry, this will be
beneficial for customers as they will get cloths in best prices but some are not happy entry of
multinational firm because they believe that in present situation, there is a high competition in
this sector. If more enterprises, with deep pocket, will enter in this market than it will hamper the
growth of industry as well as the small firm who are operating in it.
The population of Australia is around 24 million. Their labour force is 12.2 million
approx. and unemployment rate stand around 5.7%. Their GDP per capita is 75,681 Australian
dollar approximately. Fashion industry, including textile, leather and footwear, is providing jobs
to almost 37000 people (Mao, Counts and Bollen, 2011). Market value of this sector is 28.5
billion Australian dollars, it is a rough estimation. Stock price play critical role in determining
the future success or failure of an organisation. MYER has seen continuous falling in their stock
price, their management took several step to cope up with this problem but it is continuously
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going down. This organisation is to focus on this issue so they can maintain their present position
in the industry. Their are four indicators which make huge impact on performance of both
organisations. First is world economy, second is Australian growth rate and Inflation, third is
interest rate and last one is exchange rates. Every company want to enter in emerging market,
they are mainly focusing on Asian continent because their GDP growth rate is much higher
compared to Australia. MYER is highly dependent on their domestic market, they are facing
issues low share price because people are not very optimistic about their future growth. They are
expecting that this company may fail to achieve theirs set objectives (Carfì and Musolino, 2011).
On the other hand, Oroton group has a popular brand 'GAP', the have franchisee of this leading
company. But they are also thinking of closing GAP stores because it is failing to provide them
necessary returns.
If an economy will grow at high rate than purchasing power of customers will also
increase. The reason MYER is failing to attaining high growth because buyers in Australia is
looking for less priced goods. Their buying capacity has not seen any favourable change in
recent years, this can be considered as the prime reason that customers are moving towards
economic products. GAP is gaining success in most of the emerging nations but they fail to
capture Australian market because people are looking towards affordable clothing instead of high
priced products. Annual GDP growth rate of Australia is 2.8%. MYER and Oroton group is
dependent on their domestic market which is filled with small retail firms. Normally in nation,
there are two-three companies who capture most of the market in clothing but Australia is nation
where number of manufactures and sellers is very high, this is the prime reason that this
countries have cut throat competition in this industry (Pastor and Veronesi, 2012). If MYER and
Oroton group would have entered in emerging markets like China and India then they could earn
more profit and market share.
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(Source: Inflation Target. 2017)
In present situation, the inflation is below the average of 5.07%. Most of the experts of
this industry believe that in next two to three years, present position of MYER and Oroton group
will improve. Low inflation will play crucial role in growth of this industry. MYER group has
changed their strategy and they are going to keep their focus on affordable goods. They have
strong presence in all the parts of Australia so they can easily easily target potential customers.
Oroton group is also closing GAP stores because they understand that instead of focusing on
premium class product, they need to concentrate on affordable clothing. Small firms, who
capture most of the fashion retail market, are offering cloths at a very low rate.
The current interest rate is 1.50%, according to recent statement given by head of RBA,
their can be an increment in present rate. This will affect small firms who have significant
amount of share in fashion industry. Oroton group has skilled workforce, their products quality is
also one of the best that is present in industry but because of high competition in market they are
facing issues relating to lower profitability (Carfì and Musolino, 2012). If interest rate increase
than they will get its benefits because financial position of many small traders will get weak and
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Illustration 1: Inflation Target

it will get reflected in their overall performance. Low competition is beneficial for Oroton group.
Increase in interest rate is favourable for MYER. In year 2015, they successful refinanced their
debt which gave them breathing same but now their fortune is in tough time. If rate enhances
then the burden of cost of capital on MYER will increase. This may put a negative impact on
their financial position.
Oroton group is going to leave the franchisee of 'GAP', Australian dollar is strong against
American dollar. Cited firm was getting premium product of 'GAP' at low price because they has
to pay low price for the goods which were expensive in other countries. In upcoming time they
are not going to continue offer this brand in Australia (Posner and Weyl, 2012). This will cost
them some competitive advantage over their competitors. MYER do not get affected by change
in rate of dollar as they do not import or export and commodity. Political instability may become
main reason for weakening of Australian dollar against American. It will provide great assistance
to various multinational companies who are trying to enter in fashion industry of Australia.
MYER is present in every part of their domestic market but they do not have sound presence in
many region. If they make a future strategy, where people can order their product online and it
will be delivered through a drone, they can get funding from different financial institutions
(Inflation Target. 2017). This is essential for attaining long term targets for cited organisation.
MYER can think about expanding their business in emerging markets like China, India.
Australian Dollar is equal to around 0.8 US dollar. They are also planning to get a capital
investment of $480 million which will assist them in increasing their sale by almost three percent
before 2020 (Aizenman, Binici and Hutchison, 2014). This money will be used for mainly four
areas, first is providing better offers to customers, second is improving their shopping
experience, third is enhancing channel of shopping and last one is increasing productivity of
organisation by focusing on reduction of cost and emphasising on flagship stores. Oroton group
was partner of many foreign firms, they were affected by rate of dollar. But in upcoming time,
they are breaking relationship with most of their internation suppliers. They are ending their deal
with 'GAP', one of the most successful luxury brand in clothing industry (Nyborg and Östberg,
2014). Polo Ralph Lauren is ending their relationship with Oroton group, this will make a hole of
$23 million in the earning of Oroton group.
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BOTTOM-UP ANALYSIS
Some companies operate at large level but they earn very less amount in terms of revenue
because of their profitability ratio. This figure play crucial role in attracting more investors as
people like to invest in a company who earn more profit by selling less commodities. This ratio
revel efficiency of an organisation which significant for achieving short and long term objectives
of an organisation. If Profit margin of MYER is compared industry performance then it can be
said that this firm is not performing according to the expectation of this sector. Operating margin
of fashion industry is around 5.5%, this is more by approximately 1% as MYER's operating ratio
is around 4%. The main reason behind this failures is huge cost of capital which cited company
has bear. When multinationals firm will enter in Australian market then competition in this
industry will get enhance. This will increase the pressure on cited firm as they will face more
problem in attracting more investment (Chesney, Reshetar and Karaman, 2011).
The prime reason behind this poor performance is high competitive in market. Profit
margin in this sector is very low and they high competition is putting extra pressure of leading
companies like MYER. Their performance is expected to improve in 2017 because they are
targeting to improve their profitability ratio. In last 3-5 years they have seen tuff time but this
situation will improve in upcoming time. Recent strategic changes in cited firm will give new
direction to them but favourable changes will take time.
Return on assets in another type of profitability ratio which shows the effectiveness of a
firm in managing their available assets for a specific period of time (OrotonGroup Ltd
(ORL.AX). 2017). MYER's return on assets is 3.56% which is almost half compared to industry
figure i.e. around 7%. This means that they cannot blame high competition for their poor
performance. Management of this company is responsibility for the failures which they have
seen in attaining their short as well as long term objectives. If they want to move in right
direction and maintain their leading position in this sector then they have to improve this ratio
(Engelberg and Parsons, 2011). Management of MYER show invest their available funds in right
areas in order to enhance return on assets (Filimonov and Sornette, 2012). They must think about
online stores because in this strategy hey do not need to invest more money but they will may
earn more profit by increasing their areas of operation.
Return on assets ratio of cited firm was very poor in past. They had to put lot of efforts in
order to get their debt refinanced. The burden of their long term loans is continuously enhancing
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which may create more challenges for them in upcoming time. Huge amount of cost of capital
can be considered as one of the prime reason for low return on assets ratio of this organisation.
Industry is growing gradually but leading companies of this sector a failing to grab significant
amount of share. An enterprise with poor return on assets ratio fail to attract potential investors
(Ang and Timmermann, 2012). People do not want to invest in a company who cannot manage
their available resources I an effective manner because they get a feeling that if they failed to use
financial resources effectively in past then how can they manage it in proper way in forthcoming
time. This company is continuously enhancing their profit but they are failing to convert it into
net profit. Their is a high fluctuation in their net income, this is happening because they are
trying to bring some changes strategy. In 2015, their profit went down by almost 200%. But their
income get doubled in next year.
(Sources: OrotonGroup Ltd (ORL.AX). 2017)
As discussed above, operating margin of fashion industry is around 5.5%. Oroton group's
operating ration is around 2.17% which is almost half of this sector. They are trying to expand
their business in domestic country as well as in other nations like New Zealand but they are
failing to convert their sale in profit. An organisation can sell goods of billions of dollar but their
operating margin is poor then they may not earn the profit which they are expecting. This will
put huge amount of pressure on management of a company because complexity in business will
increase, when they expand business, but their efforts will not convert into success. This
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Illustration 2: OrotonGroup Ltd (ORL.AX)

company is facing this issue from a long time (Tauchen and Zhou, 2011). In forthcoming time,
management of cited firm is going to give new direction to their organisation by concentrating
on affordable goods. Earlier their main focus was on luxury apparels but now they are going to
change their strategy. They will gradually shift their business by targeting laymen. They are
breaking their tie up with most of their foreign partners like GAP. Their relationship with Polo
Ralph Lauren is also ending, this business was brining time huge amount of profit. Some of their
partners are leaving them while they are trying to leave remaining one.
Return on assets ration of this organisation is around 2.66% which is very poor compared
to present industry figure that is 7% approximately. Oroton group is run by a rich family so they
do not have much issues relating to money but this ratio proves that they have failed to use their
assets in an effective manner (Voit, 2013). They could become the number one company in
fashion industry of Australia but they did not focus on right segment on customers. Some of their
products were too costly, they made a negative image of this company that they only make goods
for rich people. An organisation cannot become industry leader if they do not keep their focus on
middle class customer. In upcoming time, this firm may change their strategy but this alteration
will take time. Their revenue has increased in last 3-5 years because purchasing power of buyers
is continuously increasing. But if their growth is compared to industry's growth then one can
easily find that they are struggling to move in forward direction. Their are failing to convert their
revenue into profit because their cost of capital is enhancing. It is putting extra pressure on profit
and they have to face its long term consequences in upcoming time. Return to assets ratio define
the effectiveness of an organisation in managing their assets (Grinblatt and Titman, 2016). Some
firms do not earn much profit but this figure help them attracting more investors because
financial institutions always like to bet on a company who can manage their available resource in
an effective manner.
SUMMARY AND RECOMMENDATIONS
From the above report, it can be concluded that an organisation need to focus on various
accounting ratios as they reveal actual position of an organisation. If a company has good return
to assets ratio then they can attract more investment in their business. This will help them in
finding best source of finance which may reduce their cost of capital. Profitability ratios show
the effective of company, it reveal whether they are managing their resources in proper manner
or not. Economic condition of a country make a huge impact on the performance of an
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organisation, fashion industry in Australia is a highly competitive market. Their are many small
firm who have significant amount of share of this sector. Multinational companies are also trying
to enter in this market because they see constant return from this industry. World economy,
Australia's growth rate, Inflation, interest and exchange rates sometime become main reason for
success or failure of an organisation.
Both organisation should focus on using latest technology so they can target more
potential customers in less period of time. If they will invest their funds in right area then their
return on assets ratio will improve which assist them in attracting more investors. They should
also think about investing in developing nations like India, China because this will support them
in improving their operating margin. They can also think about acquiring some small firm who
have significant amount of share in this industry. It will make a direct impact on their profit
which is necessary for attaining long term objectives. Multi-nation companies are going to enter
in Australian apparel market, this will develop new challenges for every firm who is operating in
this sector. If they will acquire successful small firm then these MNCs would not get much
market to capture. This is the correct time for both enterprises to expand their business in other
nation as they cannot depend on Australian market which is growing at a slow pace. Fashion
industry in Asian continent has seen remarkable growth in past few years and they are going to
grow with a high pace in upcoming time. MYER company has to reduce their dependency on
domestic nations, they have expand their business in emerging markets. Oroton group should
keep their focus on domestic market because they are loosing some of their international parters,
this may reduce their profitability ratio.
Ratios show the actual position where a company stand. Management of both companies
should make a strategy where instead of fighting with competitors, firms should focus on
targeting right segment of customers. They have to concentrate of manufacturing affordable
goods so their profitability ratio can improve. Both firms should try to reduce their cost of capital
because it is putting an extra burden on their return to assets ratio. If they keep their focus on
optimum utilisation of available resources then they can get earn huge amount of profit.
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REFERENCES
Books and Journals
Aizenman, J., Binici, M. and Hutchison, M.M., 2014. The transmission of Federal Reserve
tapering news to emerging financial markets (No. w19980). National Bureau of
Economic Research.
Ang, A. and Timmermann, A., 2012. Regime changes and financial markets. Annu. Rev. Financ.
Econ.. 4(1). pp.313-337.
Carfì, D. and Musolino, F., 2011. Fair redistribution in financial markets: a game theory
complete analysis. Journal of Advanced Studies in Finance. 2(2), p.4.
Carfì, D. and Musolino, F., 2012, July. A coopetitive approach to financial markets stabilization
and risk management. In International Conference on Information Processing and
Management of Uncertainty in Knowledge-Based Systems (pp. 578-592). Springer
Berlin Heidelberg.
Chesney, M., Reshetar, G. and Karaman, M., 2011. The impact of terrorism on financial
markets: An empirical study. Journal of Banking & Finance. 35(2). pp.253-267.
Engelberg, J.E. and Parsons, C.A., 2011. The causal impact of media in financial markets. The
Journal of Finance. 66(1). pp.67-97.
Filimonov, V. and Sornette, D., 2012. Quantifying reflexivity in financial markets: Toward a
prediction of flash crashes. Physical Review E. 85(5). p.056108.
Grinblatt, M. and Titman, S., 2016. Financial markets & corporate strategy.
Mao, H., Counts, S. and Bollen, J., 2011. Predicting financial markets: Comparing survey, news,
twitter and search engine data. arXiv preprint arXiv:1112.1051.
Nyborg, K.G. and Östberg, P., 2014. Money and liquidity in financial markets. Journal of
Financial Economics. 112(1). pp.30-52.
Park, A. and Sabourian, H., 2011. Herding and contrarian behavior in financial markets.
Econometrica. 79(4). pp.973-1026.
Pastor, L. and Veronesi, P., 2012. Uncertainty about government policy and stock prices. The
Journal of Finance. 67(4), pp.1219-1264.
Posner, E.A. and Weyl, E.G., 2012. An FDA for financial innovation: Applying the insurable
interest doctrine to 21st century financial markets.
Tauchen, G. and Zhou, H., 2011. Realized jumps on financial markets and predicting credit
spreads. Journal of Econometrics. 160(1). pp.102-118.
Voit, J., 2013. The statistical mechanics of financial markets. Springer Science & Business
Media.
Online
Inflation Target. 2017. [Online]. Available Through: <http://www.rba.gov.au/inflation/inflation-
target.html>. [Accessed On 25th September 2017].
OrotonGroup Ltd (ORL.AX). 2017. [Online]. Available Through:
<https://au.finance.yahoo.com/quote/ORL.AX/financials?p=ORL.AX>. [Accessed On
25th September 2017].
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