Analysis

Fashion Retailers Are in a Funk — and Amazon Looms

A late Passover hurt the chains’ first-quarter results, but their biggest problem is growing online competition

File photo: People stand in the lobby for Amazon offices in New York, February 14, 2019.
Mark Lennihan / AP

The trendiest color in the first quarter for Israel’s big apparel retailers was shocking red: All four of the big publicly traded companies that operate chains posted losses amid sharp drops in sales. The only question is whether the dismal results are the way of the future for local clothing chains or just a bump in the road.

The metric that gave the biggest cause for concern was same-store sales, the revenue at stores that have been open for at least a year. These were down by 16%-19% from a year earlier at chains operated by three out of the four companies: Golf, Fox Wizel and Castro-Hoodies. At the Hamashbir Lazarchan department store chain, same-store sales were down just 4.7%.

These companies’ shares have taken a pounding, falling by 30% on the Tel Aviv Stock Exchange in the past month.

“All the companies attributed the drop in activities and profitability in the first quarter to the timing of the Passover holiday. In my opinion it was too big a drop to attribute only to Pesach,” said Ilanit Sherf, head of research at the Psagot investment house. “They’ll need a fantastic second quarter to make up for the first quarter.”

Unlike last year, when Passover began at the end of March, this year the holiday fell in the third week of April. That meant that most pre-holiday purchases were made in the second quarter.

But more than that, Israeli chains are feeling the pain of foreign competition from internet sales and in-person shopping, as increasing numbers of Israelis travel abroad frequently. Local stores can’t compete with the lower prices and greater selection offered by foreign competitors.

“In the first quarter reports, fashion retailers had various explanations for their poor results, but that’s not the main story: Right now changes in shopping habits, first and foremost the move to online shopping, are the biggest forces in the industry,” said Shira Achiaz, an analyst at IBI Investment House.

Israelis have become avid online shoppers, mainly from foreign companies such as eBay, Amazon and Asos. Although delivery remains problematic, small purchases are exempt from the purchase and value-added taxes shoppers would have to pay at home. Shopping while abroad offers many of the same advantages.

Israeli retailers have been slow to offer e-commerce options, although tellingly the one that got into the game early had the least worst quarter of the big retailers. Golf, which acquired the Israeli online retailer Adika four years ago, saw its sales drop 11% year on year in the first quarter. Adika was the group’s only unit to show an operating profit.

Hamashbir is also better positioned to cope with online sales because its customers are generally older and less likely to shop by internet, analysts say. It posed a big 14.9 million shekel ($4.112 million) loss in the first quarter, but its sales were down just 2%.

The online challenge threatens to grow. At the end of April Amazon signaled plans to deepen its presence in Israel by inviting local third party retailers to sell products directly to local shoppers through the site. Many industry figures said it was the first step in a wider rollout in Israel, which would include a local logistics center and warehouse.

The worst results for the big retailers was turned in by Castro-Hoodies, which was formed by a merger of two groups a year ago and counts among its shareholders the fashion model Bar Refaeli. The group posted a 49 million shekel loss and suffered a 19% drop in same-store sales. Its shares have fallen 40% in the past 12 months.

When the merger of the two groups was announced in June 2018, outside consultants said the combined value of the two companies should be between 1 billion and 1.3 billion shekels. Its market cap today on the TASE is less than 480 million.

Fox Wizel seems to be coping with the online onslaught pretty well. Its shares were up 40% over the past 12 months, although off the peaks they reached in March. In the first quarter, its loss was the smallest of the big four, a mere 7.2 million shekels as same-store sales declined 16%.

Gil Dattner, an analyst at Bank Leumi, isn’t ready to write off the retailers, certainly not based on a single gruesome quarter. First-half results will give investors a clearer picture of what sales and other metrics look like cleared of Passover distortions.

Do any of the analysts think one of the big retailers could eventually collapse?

Dattner preferred not to answer the question.

“Of the publicly traded ones, not at the moment,” said Sherf. Achiaz replied: “We expect other players to leave the field, but not necessarily one of the groups traded on the stock exchange.”