Corporate turnarounds, never easy, are especially tricky in retail. Failed investments in new brands are hard to unwind, leases are costly to break and out-of-favour retailers can fall further and faster than the market realises.

Myer Holdings is an example. The struggling department store has been in turnaround mode since its 2009 Initial Public Offering (IPO). Myer (MYR) has fallen from a $4.10 issue price to $1.20 as the department-store category struggles. A takeover might be the best solution.

Then there’s Woolworths. Its disastrous investment in the Masters home improvement chain badly wounded the former market darling. Woolworths (WOW) has reasonable turnaround prospects and has risen 6% since I covered it for the Super Switzer Report in June 2016. But a share price above $30 still looks years away and is no certainty, as Aldi takes market share.

Small fashion retailers have also copped the market’s ire in recent years. Think Noni B before its takeover in 2014 and Speciality Fashion Group. Price deflation in fashion, a patchy economy and more people buying clothes online is a tough backdrop against which to fix a business.

Then there’s the fallout from bad management, too much of which is rife in the retail sector. These managers do not understand their company’s consumers, buy the wrong stock, hold too much inventory or are too slow-footed with retail trends. The failed Dick Smith Holdings is an example.

Poor retail management too often take a textbook approach to turnarounds: cut staff, reduce inventory and invest less in marketing. They end up like department stores, where the only way to get served at the peak of their poor customer service was to pretend to shop-lift.

Strong retail turnarounds, although rare, can produce quick gains for shareholders. They usually involve new management refocusing the business back to its core strength and values, and winning back customers who had become disillusioned with a wayward brand. Think David Jones and the work of its South African owners.

Here are three unfolding retail turnarounds that have caught my eye this year:

1. Kathmandu Holdings (KMD)

I identified the outdoor wear retailer for this report in May 2016 at $1.39 a share, as part of a broader feature on promising New Zealand companies that are dual listed on ASX. Kathamandu has rallied to $1.93 since then – a 39% gain in five months.

To recap, Kathmandu slumped from $3.10 in August 2014 to as low as $1.10 after a big drop in earnings, management changes and worries about the retailer’s direction. As a long-time Kathmandu customer, I felt its product range had lost spark and similar products were available elsewhere at lower prices (look at how many retailers now sell puffy winter jackets).

Kathmandu reported FY16 after-tax net profit of $33.5 million, up 64 % over the previous period. Pleasingly, Kathmandu had higher profit margins, thanks partly to lower operating expenses. A reduction in store inventory helped Kathmandu deliver better-than-expected cash generation and overcome sluggish top-line sales growth.

Kathmandu has plenty of challenges ahead to maintain its improving margins and profitability turnaround. That’s probably why no earnings guidance was given.

I like Kathmandu’s new product and inventory initiatives and, longer term, the potential to sell its products through other retail channels, not only in company-owned stores.

Kathmandu has a great brand, a huge membership base through its Summit Club and is well exposed to the trend of more people, young and old, travelling overseas and needing outdoor wear. Macquarie Equities has a 12-month price target of $2.20. A forecast PE multiple Price Earnings (PE) multiple of around 11 times is undemanding for a retailer of its quality.

Source: Yahoo

2. OrotonGroup (ORL)

The former star has struggled this decade: the annualised five-year total return (including dividends) is -16.6%. There was a time when small-cap fund managers raved about Oroton, which then had the Polo Ralph Lauren licence in Australia and New Zealand.

But the loss of the flagship Ralph Lauren brand in 2013, a challenged product discounting strategy and general weak retail conditions, were a perfect storm.

OrotonGroup was included in the Switzer Takeover Report in May 2015, principally because it looked undervalued and might have been on the radar of private equity predators. OrotonGroup has fallen from $2.69 to $2.35 since that story.

OrotonGroup this month reported 3% growth in revenue and 31% growth in after-tax net profit for FY16. A new range of jewellery, watches and perfume is taking Oroton back to its roots in upmarket fashion accessories.

Oroton’s two-tier strategy also involves selling lower-priced clothing through the GAP brand at its seven GAP stores– a tricky market segment as price deflation in cheaper fashion items eats into profit margins. Oroton is reducing losses at GAP through better trading performance, supply chain efficiencies and cost control. But the big growth driver is its Oroton brand.

I like that Oroton is investing heavily in its brand through advertisements featuring the Australian actress Rose Byrne. So many struggling retailers cut back on brand investment because it’s an easy cost to cut, even though this short-term fix has long-term consequences.

Byrne gives the brand relaxed glamour and is a great choice as Oroton’s ambassador given her rising career and profile. Some handbag-loving females I know tell me the brand and product range has never looked better. Yes, a few anecdotes do not make an investment case. But having a view on retail products and a sense of customer perceptions is important.

Longer term, Oroton looks well positioned to capitalise on the boom in Asian tourism to Australia. Look how many upmarket retailers are catering to wealthier Chinese tourists, particularly women who are likelier to spend on Australian fashion and accessories.

OrotonGroup has no debt and its return on capital employed (ROCE) of 14.7% in FY16 increased from 9.6% a year earlier. Stocks with rising return on equity, no debt and good cashflow should feature prominently on portfolio watchlists.

OrotonGroup’s turnaround will take time and it has plenty of challenges ahead. But the retailer’s mojo looks like it’s returning as it invests in its brand and core products, and makes sensible, lower-risk product extensions into jewellery and watches.

Source: Yahoo

3. McPherson’s (MCP)

The improving retailer has rallied from a 64 cent low to $1.08, but remains well down on prices around $2.50 in mid-2013.

McPherson’s sells hair and beauty products that include the Manicare, Lady Jayne, Revitanail and the popular Dr LeWinn’s brands. It also sells household consumables and appliances.

McPherson’s in August reported 12.3% growth in after-tax net profit to $13.4 million for FY16. The health and beauty division delivered 47% of revenue and the home appliances division, under the Euromaid and Bautmatic brands, delivered 24%.

Health and beauty is the key to McPherson’s. The division continues to grow its share of McPherson’s overall revenue and offer higher-margin products. The popular Dr LeWinn’s brand, in which McPhersons is advertising heavily, has particularly good growth prospects.

If its turnaround succeeds, McPherson’s could be a mini version of BWX, the beauty products group that listed on ASX in November 2015 after raising $39 million in an IPO. BWX ‘s $1.50 issued shares have rallied to $4.89.

I like how McPherson’s has rationalised the business to three core segments, divested lower-margin businesses and invested in its beauty brands. The health and beauty category has good long-term prospects as younger consumers spend more in this segment.

McPherson’s has scope for organic growth. Business forecaster IBISWorld estimates its share of the cosmetics and toiletries wholesaling industry in Australia is 2.6%. IBISWorld expects continued solid demand in organic health and beauty products over the next five years.

As a microcap stock, McPherson’s suits experienced investors.

Source: Yahoo

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. All prices and analysis as at Sept 28, 2016.

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