The rag trade is renowned as a tough place to make a dollar, but Gazal Corporation Limited (GZL) is doing OK.
Founded by Joe Gazal in 1958 and listed on the ASX since 1987, Gazal is one of the largest listed clothing companies in Australia. Gazal supplies and sells brands across a broad range of markets, from discount department store to higher-end garments.
Gazal owns:
• Midford School Wear & Uniforms, established in 1946;
• Bisley Workwear, founded in 1950
• Fred Bracks Menswear, established in 1956;
• Paramount business shirts;
• Holdmetight female shapewear, established in 1987;
• Body Nancy Ganz shapewear, started in 1990 (Gazal owns the brand in the Australian and New Zealand markets); and
• TheMensShop.com.au, the group’s online store, established in 2012. The Mens Shop sells premium labels such as Herringbone, Geoffrey Beene, Van Heusen, Calvin Klein, Gant, MJ Bale, Edwin, Pierre Cardin, Grown & Sewn and Ben Sherman.
As well, Gazal licenses four global brands:
• Calvin Klein;
• Pierre Cardin;
• Spanx shapewear; and
• Van Heusen shirts;
• As well as Australian label Trent Nathan’s business shirt range.
The company distributes these brands through independent boutiques, retailers and department stores, and TheMensShop. Gazal has been the exclusive Australian licensee for the Van Heusen brand since 1975, making it the number one business shirt in Australia. Gazal has owned the distribution rights for Calvin Klein underwear, lingerie and sleepwear in Australia and New Zealand since 2003, and has distributed Pierre Cardin suits in Australia and New Zealand since 2011.
Gazal also operates the wholly owned Trade Secret chain of stores, which it established in 1992. Trade Secret sells discounted fashion apparel, accessories and lifestyle items from popular international brands, for up to 60% less than retail prices.
Trade Secret buyers deal directly with fashion suppliers in Australia and globally to source discount fashion, homewares and accessories – the buyers are encouraged to be entrepreneurial, and leverage their relationships with the suppliers. Store stock changes daily, with buyers purchasing close to the market to ensure a mix of current-season items. The company operates 30 Trade Secret stores, 14 in Queensland, 11 in New South Wales, three in Victoria and two in Canberra.
Operations are divided into the Wholesale group – which includes Van Heusen, Bisley, Fred Bracks, Paramount, Body Nancy Ganz, Spanx, Holdmetight and Pierre Cardin – and Direct to Consumer, comprising TheMensShop.com.au, Trade Secret, Calvin Klein Underwear and Midford School Stores, and the contract workwear business. In FY13, the Direct to Consumer division generated close to 60% of the company’s sales. Gazal’s major customer in the Wholesale division is Myer, which accounts for 9.6% of sales, with David Jones in second position, with 4.8%.
In FY13, Gazal lifted revenue by 2.6% to $279.25 million, while net profit fell by 8.7% to $10.63 million. Earnings per share (EPS) were 18.5 cents, down from 20.5 cents in FY12, while the total dividend was 18 cents: that was the same as the total dividend for FY12, but that year also saw a 4-cent special dividend. Gross margin for FY13 was 6.7%, the operating margin was 5.4% and the net profit margin came in at 3.8%. These margins were the lowest since FY10.
Gazal significantly strengthened its balance sheet over the year. At the interim report, in February, Gazal described how $11.5 million from the sale in 2011 of its underwear businesses (Davenport, Lovable, Crystelle and Fineform and the wholesale underwear business) had been used to reduce net debt from $32.7 million to $24.9 million (at the end of 2011), and how continued strong cash flows and reduced inventory levels had brought this down further, to $16.7 million. That helped to improve the net debt-to-equity ratio from 51% at 30 June 2011 to 43.1% at 30 June 2012, and to 28.7% at 30 June 2013.
But the biggest potential boost for Gazal was October’s announcement of a deal with PVH Corp. for the importation, wholesale and retail sale of Calvin Klein products in Australia, New Zealand and certain South Pacific Islands. The New York Stock Exchange-listed PVH is one of the world’s largest clothing companies, with a portfolio of brands including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD and Kenneth Cole.
Gazal and PVH have set up a joint venture company, PVH Brands Australia Pty Limited, which will license the Calvin Klein brand for a 20-year term. The joint venture will take over Gazal’s existing business of distributing and retailing Calvin Klein underwear in Australia and New Zealand, and PVH’s existing business of distributing and retailing Calvin Klein jeans and related products in Australia and New Zealand. Gazal will manage the joint venture’s operations.
The joint venture is scheduled to begin operations in February 2014.
By combining the existing distribution channels for Calvin Klein underwear and jeanswear in Australia, the joint venture is intended to establish a unified approach to the growth of the Calvin Klein brand in the region. The joint venture will initially focus on the jeanswear and underwear product categories, but Gazal expects it to expand in due course into additional product categories.
The deal is the latest in a trend of fashion brand owners opting to establish their own distribution arrangements in Australia – whether in their own right or, like PVH Brands Australia, through a joint venture – instead of appointing third-party distributors or licensees. Other recent examples include Brooks Brothers’ joint venture with Oroton for the distribution of Brooks Brothers clothing in Australia, and Ralph Lauren Corporation taking back (from Oroton) the distribution rights for the Polo Ralph Lauren brand in Australia.
Gazal will realise a one-off profit of $6.5 million on the sale of its Calvin Klein Underwear distribution business to the joint venture. PVH Brands Australia will add at least another ten Calvin Klein jeanswear stores to the 12 underwear stores that Gazal already operates in specialty department stores. This will boost the revenue of the Direct to Consumer division. In the Wholesale division, the company is focused on growing its market share in the work wear market with the Bisley brand.
All up, the stronger balance sheet, impressive brand portfolio, expected earnings boost from the PVH Brands Australia joint venture, online expansion and the potential for further roll-out of the Trade Secret concept combine to give Gazal a fairly bright future, notwithstanding that discretionary retail has some way to go in recovery.
Chairman Michael Gazal told shareholders at the annual general meeting in three weeks ago that earnings for the first half of FY14 were likely to be “well down on last year’s first half,” but added that the one-off $6.5 million sale profit (to be realised in the second half) and expected general improvement in the business moving into the second half was likely to result in full-year earnings being “well up on the previous year.”
In the absence of broker estimates – Gazal is not covered by any research analysts – the most accurate valuation comes from the historical (FY13) EPS of 18.5 cents and dividend of 18 cents. On those, the stock, at the current share price of $2.96, trades on a price/earnings ratio of 16 times earnings and a fully franked dividend yield of 6.1%. That is the same kind of P/E as that at which Oroton is priced – yet Gazal could argue that it has revenue streams that are less discretionary and more closely aligned with the economy than those of Oroton, for example the Bisley workwear and the school uniforms business.
Gazal has been a good performer for investors in recent years, delivering total returns of 28.2% a year over five years, 23.4% a year over three years and a 12-month return of 32.1% a year. If there is a major problem with Gazal, it is that it is very difficult to buy the stock – GZL’s volume is poor, averaging around $7,000 a day. The Gazal family and associated entities own just over 70% of the stock, it is not covered by analysts and is rarely traded. That does not mean that it’s not worth buying – just that it would take a lot of patience to build up a meaningful holding, in a company that knows the Australian apparel industry better than most.
