The second quarter financial results of most Israeli retail companies demonstrated that war is good for business. With far fewer Israelis flying abroad for vacations has kept money in the domestic economy with shopping centers and malls, and fashion and food chains benefitting. Alongside this there has been a reduction in discount sales and special offers.
For most of the large publicly-traded companies in Israel's retail industry, the second quarter showed a double-digit jump in revenue and profits. Thus, fashion chain Castro (TASE: CAST) sales grew by about 17% to NIS 537 million compared with the corresponding quarter last year. Net profit jumped 69% to NIS 56.7 million, and operating profit jumped 62%.
Castro is an excellent example of a company that has streamlined in its variety of brands over the last two years. The group operates the Castro, Hoodies, Urbanica, Carolina Lemka, Yves Rocher, Kiko Milano and Top Ten brands, and in recent years has increased the number of its stores, changed brands and reduced retail space, and the results are also reflected in the latest report.
Textile, home design and fashion chain Golf (TASE: GOLF) has also implemented streamlining by closing its lossmaking Adika online fashion site, which it acquired in 2015. Golf reported net profit of NIS 26 million in the second quarter compared with just NIS 3 million in the corresponding quarter of 2023.
Fox-Wizel (TASE: FOX), Israel's biggest fashion group, reported record revenue of NIS 1.5 billion in the second quarter and net profit of NIS 124 million, up from NIS 89 million in the corresponding quarter of 2023.
Israel's biggest department store chain Hamashbir 365 (TASE: MSBI) saw net profit surge 89% to NIS 5.3 million, with revenue up to NIS 238.3 million from NIS 229 million in the corresponding quarter last year. Hamashbir's financial report mentioned that sales were affected by less Israelis traveling abroad.
Delta Israel Brands (TASE: DLTI) reported revenue of NIS 262 million, up from NIS 193 million in the second quarter of last year, while net profit jumped 71% to NIS 34.4 million.
The malls are packed
"Since November 2023, a month after the war broke out, the State of Israel has been operating on a kind of 'closed economy,' remarks Ofer Malls VP trade and operations Omer Ogolnik. "The number of airlines flying to Israel and the number of flights going abroad is significantly smaller."
Thus not only money intended for shopping abroad has become available, but also big amounts that in normal times include the significant costs for flights and hotels. The same money remains in Israel during the war months and has been injected into domestic businesses. In addition, Passover fell this year during the second quarter - a time traditionally characterized by increased sales, while in 2023 it was during the first quarter.
However, there have still been days of sharp sales declines, during security escalations, such as in the days preceding the Iranian missile and drone attack during April. Ogolnik points out that even after the assassinations in Beirut and Tehran in July, there were four days of sluggish sales, and the three weeks between the fasts of the 17th of Tammuz and Tisha B'Av also saw lower trade.
"Despite the excellent financial reports, there were still several days of declines mainly due to Iranian and Hezbollah threats, but as a whole every month we continue to see increases in payments. It is important to remember that the days leading up to Tisha B'Av are always quiet but over the last week, on the other hand, the malls have been full," Ogolnik says.
"When people want to take a break and can't fly abroad, they choose to go to the mall, eat and shop. Except for the last two weeks when people preferred to be close to their security room at home in the evenings," explains Shachar Turjeman, President of the Federation of Israeli Chambers of Commerce (FICC) and chairman of Brill Shoe Industries. "We were all on alert and hardly went out. Some of that wariness has diminished over the last week."
However, the routine of war has not only affected the desire - or the compulsion - of the public to buy Israeli-made products, but also affected prices with few promotions and discounts, which some companies mentioned in their reports.
Retail industry companies say that due to high demand a stock, while inventory ordered in advance was based on the assumption of a "normal" year, goods were sold even before the usual 'sales' windows. However, the situation has changed in the last two weeks, with stores in malls and websites announcing the arrival of the "end of season sales." Octopus, for example, is selling children's shirts for NIS 10, Urbanica is offering 70% discounts, while Delta has items from NIS 29.90, and Golf is offering 60% discounts on its summer collection.
"When a company orders goods, it doesn't know if there will be a war," observes Turjeman. "If less people flew abroad and more made their purchases in Israel, there is no reason to offer discounts because no inventory remains. There was no malicious intent here, but while there were goods for a normal year, this year was not normal. All the goods were sold at higher than average prices, since there was no need to conduct promotions due to the level of purchases. None of the chains took advantage of the situation."
However, Brill did offer heavy discounts. Turjeman says, "We entered this year with a very big inventory carried over from last year, so we behaved differently from the market. Every chain that has excess inventory offers big sales. We will reach the end of the year with a healthy inventory, and go into next year with a balanced inventory." Brill's revenue grew 9% to NIS 154 million in the second quarter, compared with NIS 141 million in the second quarter of last year. Net profit was NIS 7.8 million, up from NIS 165,000 in the second quarter of 2023.
Turjeman recounts that last week the market offered big discounts, partly due to the sharp drop in sales in the days after the escalation with Iran and Hezbollah. "Since the security situation after the assassinations was tense, and sales volumes were low, the chains brought forward the end-of-season sales that were supposed to start two weeks later."
Shopping malls are also investing hundreds of millions of shekels in renovations and improvements and changing the mix of stores. Melisron, for example, is enjoying an increase in occupancy and contract renewals. It is upgrading the large Ofer mall in Petah Tikva, where branches of international and local brands have been opened and renovated with an investment of about NIS 53 million, the most prominent of which is Zara. The first Victoria's Secret store in Israel was also opened in the mall with an investment of about NIS 5 million, and last year the company invested NIS 120 million in the expansion of the Ramat Aviv mall.
"In the end, the game in retail is revenue," Ogolnik points out. "And in these financial reports, it's not just about less flights. It also reflects the streamlining and hard work of the chains that do everything to be unique and efficient, which is not easy. The job market is very difficult, maritime transport has increased expenses. But in all the reports you see an increase in operating profit, and for income producing real estate companies it shows that the revenue is good. Tenants are looking for additional locations, and this generates growth. It doesn't just concern fashion - the whole leisure world of restaurants and cafes in shopping malls is doing well."
Winter collections will decide
The coming quarters are also expected to be good but it could depend on several factors beyond the continuation of the war.
Turjeman says, "There is the question of what winter will be like. If it is cold, the fashion chains will have a good year. If winter doesn't come - and we have had several such winters in recent years - the second half of the year will be less good for the chains. But you have to understand that there have been two good quarters. It doesn't give us pleasure. These are good results in a tough atmosphere. We all wish for a good year, but without Covid, judicial reform tensions, or war."
According to a senior source in the industry, "If there is no further drama by the end of the year, 2024 would have been the best year ever for retail in Israel."
Published by Globes, Israel business news - en.globes.co.il - on August 28, 2024.
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