GAP- Tess Scheflan
A Gap outlet in Jerusalem: Sales may be strong but profits are a different matter Photo by Tess Scheflan
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Fashion chain Castro Model is negotiating to buy the Israeli franchises of Mango, G-Star and the Gap from Mordechai (Moti ) Zisser's Elbit Imaging, according to sources close to the talks. The deal is estimated in the NIS 50 million range, though Elbit originally asked for double that.

Gabi Rotter, the co-CEO and part-owner of Castro, has met with Elbit representatives, said Rotter's associates. One source close to Rotter said the negotiations have reached an advanced stage and Elbit is very interested in the deal - and is waiting for Rotter's answer.

Castro, which has 132 stores in Israel and 36 abroad, denied reports it's looking to buy the chains.

Elbit also issued a denial. "There is a round of rumors that we want to sell the operations, which has no basis in truth," the company said. "The company is very satisfied from the results of these operations."

Elbit is reportedly interested in selling off its fashion holdings as its retail business arm is running big losses. Elbit lost NIS 135 million in the first quarter, compared to a NIS 20 million profit in the same quarter of 2009. This was Elbit's fourth straight losing quarter, a NIS 650 million loss in total.

Elbit's retail fashion revenues have doubled in a year to NIS 42 million a quarter, but this was due to the opening of new Gap stores, while the retail business still ran NIS 8 million in the red for the first quarter.

Gap Israel has four stores, in the Azrieli Mall in Tel Aviv, the Arena Mall in Herzliya, the Mamilla Mall in Jerusalem and the Mall Hayam in Eilat. A number of senior managers in Elbit's fashion arm have recently decamped.

The Spanish fashion chain Mango has 26 stores in Israel under Elbit's management and the Dutch luxury jeans brand G-Star has two stores.

Fashion industry sources are of the opinion that Rotter is capable of rescuing Elbit's franchises. "They have good and successful brands, but they have a management problem: Strange locations, poor business conditions versus the malls and political decisions from above," said Avi Malka, one of the owners of the ML and Jump fashion chains. He said that even though the brands are successful, there is a problem with franchises for international brands. "The international chains have not proved themselves in the past year," said Malka. "Rent in Israel is high compared to sales, and maintenance and operating costs are also high. That is why you need high profits and anyone who runs a a brand and also pays a percentage to an international company is not left with enough profit," he said.

Malka added that he had yet to see a franchisee of an international brand make money in Israel.

Rotter - if he buys the franchises - will join a growing list of Israeli fashion chains that also import international brands.