Castro Sales Growing Despite Slowdown

Castro is a bright star in the gloom of the retail clothing sector, with growth and improvement in the performance of most of its activities. Gabriel Rotter, managing partner, said Sunday that he is proud of his company's quarterly report, especially in light of the security situation and the drop in sales in shopping malls. Rotter noted that his stores have been hurt by the economic slowdown, but despite it all, sales are increasing and profits are up.

The differences in the revenues from Castro's chain of menswear stores and those of its ladies' wear chain are not discernible from the financial reports, but it is clearly the menswear chain that is the company's growth engine. These stores have succeeded so well thanks to the correct identification of the young men's clothing market by the company's management.

This particular market segment is problematic and good quality merchandise had been missing in Israel. Castro also succeeded in quickly placing its stores in the forefront of the market and has benefited from the mutual influence of its ladies' wear stores.

The impressive results posted by Castro Men, which was launched in September 2000, prompted the company to speed up its expansion plans for more outlets and today there are 21 Castro Men stores throughout Israel.

The ladies' wear chain has also expanded and now has 43 outlets, compared with 37 a year ago. Unlike the menswear stores, however, the ladies' wear chain did suffer a certain drop in sales together with the rest of the retail sector.

Castro ended the second quarter of the year with net profits of NIS 5.1 million, compared with NIS 3.5 million in the parallel quarter last year, an impressive increase of 47 percent. The company's revenues also grew in comparison to the second quarter of 2000, and were up 36 percent for a total of NIS 65 million.

The half-year figures also show increases in both revenues and profits. Net profits for the first half of 2001 were NIS 10.7 million, compared with NIS 7.4 million in the first half of 2000. Revenues were also up sharply, from NIS 99.5 in the first half of 2000 to NIS 134 million in the first half of this year.

Castro has undergone several changes in the past few years, transforming itself from just another surviving textile company into an economic success and a leading brand name on the Israeli fashion scene. Sound management decisions, such as the transfer of manufacturing to overseas subcontractors, contributed to Castro's growth.

Outsourcing the manufacture of the garments, as other Israeli companies have done, lowered production costs and enabled Castro to focus on marketing instead of on manufacturing. Castro's clothes are made in countries such as China, where labor is cheap, so that the management here can focus on product design and brand name promotion.

Castro also invested in the upgrading of its stores to improve the quality of the shopping experience and encourage shoppers to return for additional purchases.

Like other similar chain stores around the world, Castro's target market is the 15- to 30-year-old crowd, and its stores are built with innovative and spacious designing. Rotter noted that even though income tax regulations allow for investments in equipment and renovations in stores to be depreciated over a 10-year period, Castro updates its stores at least twice during that space of time.

Another factor that contributed to the growth in profits was the halting of exports, which contributed only 3 percent to the company's revenues and generated very low profits. Worker incentives that offered employees a challenge and an opportunity to share in the company's profits also contributed to the Castro's increased profitability.

The company's policy is to give the 130 workers at its headquarters and at is logistics center a bonus equal to 15 percent of the growth in pre-tax profits compared to profits in 1998. Castro deducted NIS 2.3 million from its profits at the end of last year to pay the workers this bonus. Rotter said that the most junior employee received a bonus of NIS 18,000 last year, and this year the bonus should be even greater.

A less positive figure on Castro's second quarter financial report was that of sales costs, which accounted for 3.7 percent more of sales volume than in the parallel period last year and affected operating profits accordingly. Rotter attributed the increased costs to the "Cuba Campaign," starring model Sandy Bar.

The advertising campaign cost about $1.5 million and most of this was spent in the second quarter. Rotter said that it was hard to determine just how much the campaign contributed to sales and that a brand name's place in the market is created over time.

"The advertising campaign with Yael Abuksis eight years ago was expensive too," said Rotter, "but it was very successful and to this day people mention it to us."

Castro's shares have been doing well for investors since 1999. After the share's losses in 1997 and 1998, the past few years have witnessed meteoric rises of up to 500 percent. Since the beginning of 2001 the share's price has risen about 26 percent. Analysts Micha Malka of Harel Capital Markets and Yuval Ben Ze'ev of Leader Dash have awarded the share a "buy" recommendation and a target price 40 percent higher than its current value by the end of the year.