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Five years after its establishment, H&O (Hamashbir Fashion) has reported its first significant annual profits. In 2003 H&O, which is controlled by Benny Gaon, recorded net profits of NIS 2.3 million, after losses of NIS 8.7 million in 2002, losses of NIS 11.4 million in 2001 and NIS 2.7 million in 2000. Sales turnover in 2003 grew by 8 percent, to NIS 304 million, up from NIS 281 million in 2002.

Company president Yisrael Peleg said Sunday that the transition to profitability is mainly the result of more efficient operations, achieved via reducing floor space at a few stores in power centers, without harming the overall sales figures. Peleg explained that the company's streamlining resulted in a higher return per square meter and a change in H&O's market position, with H&O now being viewed by shoppers as a chain that provides value for money.

H&O's rapid growth in 2003 also stems from the company's winning a tender by the Israel Police and Prison Services for the provision of personal clothing, sportswear and uniforms in exchange for points their employees receive as part of their fringe benefits. Israel Police and the Prison Services have an option to extend their arrangement with H&O for another three years, but no announcement has yet been made regarding the exercising of this option. The tender is worth about NIS 30 million in sales annually.

Most of the improvement in H&O's financial results was in the fourth quarter of 2003, during which sales surged by 15 percent, to NIS 85 million, compared to NIS 73.6 million in the fourth quarter of 2002. The company's profitability also increased sharply. Profits in the last quarter of 2003 were NIS 8 million, compared to losses of NIS 8 million in the parallel in 2002.

H&O is not meeting the financial conditions imposed on it by the banks, to which the company owes some NIS 60 million. In December 2003 H&O asked the banks to forgo their right to demand the immediate repayment of loans H&O had taken. The company's financial reports indicate that the banks did grant an additional extension of a few months for the repayment of its debts. H&O's board of directors figures that the extension will enable the company to regain its ability to meet its credit terms.

After two years during which H&O opened no new stores, the company is planning to expand in 2004, Peleg said Sunday. The chain, which has 24 branches, is hoping to open two or three new stores.

H&O is also examining the possibility of opening subsidiary chains of stores that cater specifically to men or women or that sell only undergarments, and which will preserve the chain's main brand. Such specialty stores will enable H&O to rent smaller spaces in malls, so rents will be lower.