In February, in less than three months, local fashion brands are expected to launch their 2017 summer collection. But for now, it seems that the new collection will reach the stores much earlier than the companies manage to sell their winter collections, a winter that is yet to arrive. The sales of winter items are directly linked to the weather, causing sales to be particularly weak as the weather remains warm.
Like last year, this year's winter is slow in coming in coming. The continuing spring-like weather has negatively affected the sales of fashion chains, which launched their winter collections two months ago. As in 2015, it seems that this year fashion chains will have little choice but to start discounts now, even before the winter officially starts on December 21, in order to avoid accumulating large a stock that they will be unable to sell later on.
As the CEO of one of the fashion chains says, "Nobody is working. Everyone's sales have dropped around 12%, specifically the sale of knitwear, coats and other warm clothing items. In November every year, there is already some rain, but this year the first rain has yet to arrive. And customers are not buying light clothing instead, they are simply waiting for the end of season sales. It's enough to look at the discounts that have been offered from the beginning of the season until now - the industry average is a minimum 25% discount. A second item for 50%, and so on."
Fox-Wizel Ltd. (TASE: FOX), Castro Model Ltd. (TASE: CAST) and Golf & Co. (TASE:GOLF), the three fashion chains traded on the Tel Aviv Stock Exchange, are yet to publish their third quarter financial statements and estimates are that all three will report weaker results for the year's fourth quarter. Although, overall, fashion chain shares have enjoyed a strong trend since the beginning of 2016, on a three-year perspective they have provided investors with a relatively disappointing return.
Head of Psagot Investment House Ltd. Brokerage Analysis Department Ilanit Scharf says, "It seems that fashion discounts have already begun. The same thing also happened last year, the winter did not come and retail chains were left with stocks, which resulted in earlier discounts and lower prices. Not all the fashion chains have started their end of season discounts, but the beginning of this trend is already evident. I estimate that considering the fine weather, so close to December, with the winter collection already launched two months ago, and considering the dynamics of this market, if the weather does not significantly change soon - the rest of the chains will gradually join the discounts. This of course has a negative effect mainly on their profitability, and sometimes also on their sales.
"I estimate that eventually everyone will start their end of season discounts earlier," Scharf adds, "since the chains which have already started the discounts are drawing many more customers, and even if it suddenly rains for a few days, it will not make much of a difference. The consumers of course go to the chains that offer large discounts and sales and the others do not have much choice but to join in."
How do the market dynamics work?
Scharf: "Similarly to other sectors, the fashion retail sector introduces discount sales in a modular and gradual manner. It starts with the low-cost chains, with the chains selling more prestigious clothes and fashion items joining later on. There are chains that prefer postponing discounts, even if at present sales do not meet forecasts. Nevertheless, as I said, if this spring weather continues, they will eventually have no choice but to start discounts early."
How was this reflected in the companies' financial statements last year?
"It of course caused a decline in operating profit, among other things because sales are accompanied by advertising campaigns that cause expenses to rise, and also often cause revenue to shrink, making profitability drop. Overhead expenses are very high, so a large volume of sales is required to maintain profitability rates and continue growing."
For some time, Israel's warm climate and weather fluctuations have caused fashion companies to price items high initially in order to be able to offer discounts without eroding their gross profit. Nevertheless, this time, it is unlikely that any of the chains will be able do this, considering the extremely poor sales so far.
Scharf added, "The profitability of fashion chains has dropped in the past two years. They are subject to higher expenses and, at the same time, also suffer from increased competition - both from online trade and from more and more Israelis flying abroad and shopping there. The shekel is relatively strong against the euro and the pound, for example, making it more worthwhile to buy abroad. There is an annual two-digit increase in the number of people travelling abroad, which creates competition, in addition to the arrival of new brands in Israel which we believe will continue in the next few years. This forces chains to cope with several difficult fronts.
"In 2015, the operating profits of listed companies in this industry dropped, including the funds from operations. In 2012-2013 the situation was reasonable, but it deteriorated in 2014 and 2015. We can see the weakening in Castro and Fox's financial statements. The same is also true for Golf, but there the crisis also had many other reasons."
Published by Globes [online], Israel business news - www.globes-online.com - on November 21, 2016
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