In Israel’s Rag Trade, Fox Is King of the Mall, but on the Stock Market Its Reign Seems Over

The apparel retailer has expanded abroad and stood off competition from foreign brands entering its home market, but its share price is flagging and its profits are under pressure

Dudu Bachar

Try to get through an Israeli mall without financing the Wizel brothers. It’s practically mission impossible. If once upon a time the Wizels had only owned the omnipresent Fox apparel chain, they’ve expanded. Laline bath products, Marcha shoes, Mango shirts, household stuff at Fox Home – all theirs. And more. American Eagle is their franchise here; Billabong surfing gear; Children’s Place – all theirs, and if you buy Nike sneakers in 2016, you’ll be giving that money to them.

In fact the whole second floor of the Ayalon Mall in Ramat Gan might as well be renamed Wizel-Land – all the above are there. And don’t think there aren’t Fox group stores on the first floor, too.

Fox used to be a chain of simple clothing stores. A small fashion chain. Now it’s a gigantic group. How giant? Its value on the Tel Aviv Stock Exchange is 1.1 billion shekels (about $300 million). So Harel, Yiftach and Assaf Wizel are each worth a quarter-billion shekels on paper. They also gross 5 million shekels a year in compensation and share the company’s profits. In the last five years, Fox has distributed almost 230 million shekels to its shareholders in dividends.

Within five years, the Fox workforce has doubled, to about 5,500. Israeli retailers, Fox has a major overseas presence, with 238 sales points in 15 countries mostly operated by franchisees that use all the Fox branding.

“Fox is the only [apparel retail] company to have succeeded overseas,” Harel Wizel told TheMarker. “True, we haven’t succeeded like in our wildest dreams, but in the decade we have been working there we’ve made money every year we have been in operation.”

Castro lagging

Meanwhile, Castro, a rival fashion group, has lagged far behind. Its market cap of 560 million shekels is half of what Fox boasts and has distributed 150 million shekels in dividends to shareholders over the last five years.

How did that gap between Fox and Castro open?

Harel Wizel was snapping up businesses in recent years while Gaby Rotter, who runs Castro, sat back and nursed his wounds after being burned in his last attempt to expand abroad, and the flop of the jewelry chain Diva. One could argue that Castro is highly focused, and has become a fashion outlet for the whole family, with stores for men, women and the kids; others would say it can’t seem to find ways to grow, and that a couple of recent acquisition attempts fell through.

That’s how Rotter sees it. “The aggressive competition in the market demands that we stay fresh and do what we need to do to strengthen the brand and preserve the company’s financial strength, so that we can thrive even when times are tough.” And tough they often are. “In the last three years the country has been through a difficult war twice. At the end of the day, it’s hard to have a strategy in a situation where normal life is interrupted every day.”

Anyway, as far as investors are concerned, Castro is also a stock market success story, albeit not as exciting as Fox. In the last five years, Castro stock rose 180% and like Fox, it distributes profits to shareholders as dividends, although the general public holds only 25% of Castro versus half of Fox’s stock.

Both are considered popular Israeli brands and are a presence at nearly all of Israel’s malls, which is no mean accomplishment: According to market research firm Czamanski Ben-Shahar, Israel has around 380 shopping centers. Fox and Castro are anchor tenants that no mall can succeed without – the magnet that draws shoppers to the mall in the first place before they go off and patronize the other stores. That gives them clout in negotiating rent and enjoying lower costs their rivals can only dream of.

Again, though, Fox wins: it has 470 stores versus 148 for Castro.

Castro and Fox are family firms. The rival chain Golf belonged to tycoon Nochi Dankner’s IDB group until 2012, when it went to another tycoon, Len Blavatnik, who bought its holding company Clal Investments. In the last five years, Golf’s value has shrunk by 15% to 440 million shekels – in other words, shareholders lost money.

The success of Fox and Castro is also noteworthy given the upheaval in the Israeli economy in fashion industry in recent years. Protests against the high cost of living also affected pricing and last summer, sales were hurt by Operation Protective Edge. Foreign chains arrived, stepping up the already fierce competition – Sweden’s H&M alone opened 17 outlets, America’s Forever opened 21 and Gap added eight. Online shopping from international sites has been growing as customs exemptions have become easier to get.

Rotter is confident

Rotter is confident local brands can withstand the foreign challenge. “We have advantages over foreign sites. For instance, sizes on our site are clear to Israelis. At a Chinese site, for example, Israelis don’t always understand which size is which and don’t know what the quality of the item they are buying will be. With us, a shopper can be sure to get his money back is he isn’t satisfied.”

In 2014, turnover in the Israeli fashion market was 17.5 billion shekels, up 9% after the stagnant year of 2013, writes IBI analyst Dorin Palas. But competition by foreign retailers and overexpansion was partly responsible for a 1.5% drop in revenue per square meter, she says.

Apparently, another fashion chain, Renuar, also wants to go public. Some 22 years old, it’s also been growing like a weed and in 2007 it opened a subsidiary chain, Twentyfourseven, for teens. Altogether the chain has 150 stores and 1,000 employees. It’s closely held and so are its figures, but industry sources think it made revenues of 400 million shekels in 2014 and netted 25 million shekels.

But with share prices as high as they are, hasn’t Renuar missed the boat to float? Apparel-retail stocks, including Fox and Castro, have done badly in the last couple of years while Golf actually rebounded. Fox is down 9% this year after its net profit tumbled 80% in the first quarter of 2015. Golf stock, meanwhile, has risen 25% this year.

“We have a lot of brands in our portfolio. It’s the nature of things that new companies and new brands don’t generate profits immediately. It takes time for the brand to win recognition and to make them profitable,” says Harel Wizel. “We’re developing Laline overseas in a big way.”

‘Amazing CEO’

One investment manager unmoved by the downturn in Fox’s fortunes is still battling for the company on the grounds that “Wizel is an amazing CEO who made Fox from nothing and that’s why we invest with him.” Even though they suspect Fox’s profits will stay low for the next couple of years, sales should keep growing, they expect. Another investment manager also likes Fox, but suggests waiting for a better entry point to the stock. Both think Fox stock could slump some more in the near future.

Castro’s profits have been steadier but it could also suffer from pressure on the stock as operating profit slumps under the competitive pressures.

As for Golf, the company recently parted ways with its veteran CEO, Ilana Kaufman, who had led it to great things. Golf is in the midst of changing its business model under its new CEO, Eli Mizroch, and now, like Fox, is aggressively buying new brands, say market animals.

Palas of IBI likes Castro and Golf, anticipating a 30% increase in each. She is working on an analysis of Fox. Meanwhile she suspects that profits on clothing will be eroding further – the down cycle isn’t over. On the other hand, the margins at these clothing chains are roughly double that of the food retailers, which should help drive mergers.

Castro for one, with cash of 234 million shekels and 75 million more in surplus liquid assets over liabilities, is well positioned for a major acquisition, which leads us to a market whisper – that Golf is for sale.

Apropos Golf, it’s become a leader in online sales after buying Adika, a shopping site founded in 2012, its best acquisition yet, according to Palas. The site appeals to the young and has 25,000 visits a day; its sales this year should reach 40 million shekels, an increase of 80% from the year before, she projects.

Castro, meanwhile ,sells merchandise online in 90 countries, says Peles, and is profitable on this Internet activity. Fox has no digital activity, but Wizel has announced that it will start this year. “Until a year ago, online selling in Israel wasn’t profitable,” he told TheMarker. But he thinks it will be now.

And the day may be coming when Castro gives overseas markets another go. “Right now we’re concentrating on Israeli operations, but that doesn’t mean we don’t have plans to expand overseas. When we have something more concrete we’ll explain. Beyond that, at the moment, this is not the best time to be overseas. Greece is in turmoil. The euro is down.”