Castro Bucks Industry Trend With Across-the-board Strong Results

Men's chain drives positive figures; Fox to float on TASE next month

In the midst of a deepening recession and a grave textile industry crisis, fashion company Castro released encouraging financial results yesterday.

The company posted across-the-board positive figures, including an increase in sales and a positive cash flow.

Castro, like other successful companies in the fashion sector, sells all its products in Israel, but buys almost all its goods overseas. The low cost of textiles in the Far East, particularly in China, leaves more room for profit than Israel's high production costs.

Castro's net profits last year were up 14 percent to NIS 24 million, compared to NIS 20.8 million in 2000. Sales grew 27 percent to NIS 290 million. Fourth-quarter revenues totaled NIS 90 million mainly due to early end-of-season sales. Castro CEO Gabi Roter said while those sales had been brought forward to reduce inventories and improve the company's cash flow, they also had a negative affect on gross profit.

The company successfully reduced inventories, which were down by 36 percent, while cash flow improved by 68 percent.

Roter said the company's cash flow increased to NIS 42 million, compared to NIS 25 million in 2000. "In a situation of uncertainty, cash flow is the most important factor in giving the company a safety cushion," he said, adding that the company had prepared itself for a possible fall in sales.

The driving force behind last year's strong performance was the Castro Man chain, which opened in September 2000. The men's fashion chain accounted for most of the company's sales increase last year. Since being launched, the number of stores in the chain has grown from six to 23. The increase in the number of men's shops compensated for a fall in women's fashion stores. This year, Castro plans to open two women's stores and seven men's stores.

Over the last year, Castro's value on the Tel Aviv Stock Exchange has risen by 72 percent. However, company shareholders believe it is being traded at too low a profit multiple. Roter said that even at the company's present multiple of seven, he would not sell Castro shares since he believes the company is worth far more. "Castro was floated a multiple of 13 and is now much larger and more profitable," Roter said.

Analyst Yuval Ben Ze'ev of Leader DS Securities and Investments said after the publication of yesterday's results that the company this year would increase revenues and maintain a profit level similar to those in 2001. Leader DS yesterday gave a "buy" recommendation for Castro and set its target price at 25 percent above current market price.

Fox to float at 80 percent higher market cap than Castro

After months of speculation over an initial public offering, the fashion chain Fox is set to float on the Tel Aviv Stock Exchange toward the end of March. Fox submitted a draft prospectus to the Securities Commission a few days ago.

Market sources believe that Fox will float at a value of NIS 300 million, 80 percent higher than the market capitalization of its rival Castro. Fox's annual revenues last year were just 5 percent lower than Castro's and the chain operates a similar number of stores. The difference between the two companies appears to be profitability. Fox's profitability is believed to be higher than Castro's, although the company has refused to release financial information prior to the publication of its draft prospectus.

Fox operates 74 stores, including 24 children's stores, while Castro operates 67 stores, including 23 Castro Man stores. Last year, Fox opened 20 stores and is said to be opening 8 to 15 more stores this year. Fox is also planning to launch a men's chain - Fox Man - in the coming months.