As inventory piles up, fashion chains see profit fall
Sales are growing, but tough competition is forcing them to boost costly advertising and price promotions
The three largest publicly traded clothing chains - Golf & Co., Fox-Wizel and Castro Model - all showed eroding margins in their first quarter results. The figures reflect the trend of the local retail fashion industry, which has been faltering for some years now.
The shaky state of the industry has been forcing companies to search for new ways to grow. Operating profits are being eaten away by mounting competition, with ensuing price promotions and climbing advertising budgets, along with escalating rents and minimum wages for employees.
Castro, under controlling ownership of the Castro and Rotter families, was the last to report and, despite higher sales, showed a decline in operating income from the parallel period in 2011. And although the market responded disapprovingly, Castro views the quarter as successful - especially considering the outcome for its rivals.
Shares of Golf have declined close to 1.4% this year to close yesterday on the Tel Aviv Stock Exchange at NIS 12.41. Castro, by contrast, has gained 12.8% this year and finished yesterday at NIS 60.56 while Fox has seen its price rise by 16.9% to NIS 41.84.
Castro's relative strength
Castro's relative strength was evidenced by its 6% operating margin, although this marks a sharp decline from the 9% achieved by the company in the first quarter of last year owing to NIS 2 million spent on a campaign for its new tailored Black line of attire.
This is comparable to the opeorating margins of Fox and Golf, but theirs were achieved by diversified lines of business - Fox's Fox Home and the soap and cosmetics chain Laline, and Golf's home furnishings chain - while Castro operates exclusively in the field of fashion.
Golf, with apparel making up 48% of its sales turnover, didn't register any operating profits from this activity at all, while Fox, with 75% of sales coming from clothing, managed to squeeze just a 2% operating margin from this sector. But both companies, by diversifying their activities beyond clothing, succeeded in displaying revenue growth and increased operating and net profits.
Opening more stores
Subject to intensifying competition, the chains have adopted different growth strategies in the past few years. Fox, under the management of Harel Wizel, established the Fox Home chain, bought into Laline and refocused on basic casual attire.
Golf, led by CEO Ilana Kaufman, went on a buying spree and now operates six retail chains which include, besides those going under the Golf banner, Polgat, Intima, Max Moretti, Blue Bird and the Sprint surplus chain.
Castro, meanwhile, adopted a strategy of expansion and wholesale selling abroad which proved a costly failure. Last year the company closed down all its operations in Germany, Russia, Thailand and Kazakhstan, and is now in the process of shutting down Diva, its fashion accessory chain. After shedding its losing operations, Castro is currently focusing on building its market share in Israel's fashion market.
Another trend characterizing the three companies is expansion of their retail space and number of stores. In February the Israel Securities Authority issued new guidelines for more strict reporting of revenues per square meter in Israel's apparel sector and revenues generated over time by same-store sales - stores constituting the same space and location as in the comparable period.
The figures show that the only chain that succeeded in increasing revenue per square meter between 2010 and 2011 was Castro - but by just 1% to NIS 1,908 per month. Average revenues per square meter for Fox remained unchanged at NIS 1,325, while Golf dropped 2.1% to NIS 1,362 per square meter. But same-store revenues per square meter for Fox and Castro were up 5% to NIS 1,400 and NIS 2,000 respectively, while Golf dropped here too by 1.3% to NIS 1,371 per square meter.
Cash flows from operating activities remained positive in the first quarter, but were much lower in comparison with the first quarter of 2011 - by 25% for Fox and Castro, and by 66% for Golf. The gap between cash flow and net income - which rose in the cases of Fox and Golf, and receded slightly for Castro - is explained by increases in their inventories, which constitute a critical consideration in this industry.
The main reason for this is that last season's or last year's stock is usually deemed worthless and must be written off. Each of the three chains price their inventories differently and according to their own criteria, deciding when to write off their value and register the loss. Increased inventory can either mean the company is growing or that sales have fallen short.
All three chains reported much higher "inventory days" - a calculation indicating how long stock will last before it runs out - than for the same period in 2011.
Fox reported inventory to last 165 days and Castro 159 days. Golf reported 232 days - nearly eight months worth - but in this case most of it was tied into home furnishings, not fashion items.