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The buying power of consumers may have dropped sharply, and shoppers may be staying away from malls in droves - yet the Castro fashion chain stands out in its industry by reporting rising income and a healthy bottom line

The company yesterday released its third quarter results showing income up to NIS 90 million from NIS 71 million in the same period of last year - 27 percent growth. Net profits did even better, soaring from NIS 4.5 million to NIS 7 million and operating profits scored an impressive 73 percent improvement to NIS 11 million. This included a 3 percent cut in costs after efficiency drives and tighter wage policies in the chain's stores. Castro opened seven new stores in the period, bringing the total to 28 men's fashion stores, and 46 for women.

And yet, despite it all, Castro is trading at a market value of only NIS 118 million, even undercutting its shareholders' equity of NIS 123 million. The chain is suffering, along with the market, from the uncertainty in the geopolitical situation and the continuing recession, which have pushed Castro's shares down 34 percent since January of this year.

One needs to delve deeper than the profit and loss account and look more closely at the balance sheet and cash flow. Is the inventory reasonable? Is there anything irregular in the stock or in clients' credit levels? Are there lost debts? Current liabilities must be checked against current assets. What can be said of the company's financial ethics?

On all these accounts, Castro's reports seem to show that the company is sound, acting with due concern over inherent risks and endeavoring to minimize them.

Castro has NIS 60 million in cash and tradable stocks compared to NIS 14 million in liabilities to the banks, and long-term commitments of NIS 45 million. Though client credit has ballooned 35 percent to NIS 47.5 million, one must view this against a 27 percent jump in sales, and clearly the credit increase is mostly in credit card payments which are relatively secure. The credit jump is therefore reasonable.

Inventories have increased by only 10 percent to around NIS 40 million, reflecting sales of five to six weeks. In comparison, Fox, a major competitor in the same field of fashion retailing, reported in its financial statements last week that its inventory reached NIS 140 million - a nine-month stock.

Better than expected

"Castro's third quarter was its best of all time," said CEO and major shareholder Gabby Rotter with obvious pleasure at yesterday's results. He pointed out that the company had forecast growth in 2002 of "only" 10 percent.

Management was coy about the improved bottom line, saying the company had not taken any particularly significant steps in the quarter, and there was no particular explanation for the sales. "The buyers decided to buy Castro, as we have tried to convince them to do," was the best explanation Rotter could come up with.

He declined to be drawn on comparisons with the rival Fox chain, whose results disappointed investors last week. He said: "We will continue to work to our normal schedule, we have not been sidetracked, and that is why our customers have stayed loyal."

Castro's sales stand out, particularly in these difficult times.

"In such circumstances, there are shocks, there are those that fall and others that keep firm." He added that even he was surprised by Castro's third quarter results.