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Country Road expands business with a little Witchery

Casual wear retailer Country Road (ASX: CTY) reported  high revenue and earnings growth in 2013. This was due to the acquisition of the Witchery and Mimco store chains in a deal worth $172 million in October 2012.

Total revenue rose from $419 million to $706.3 million, with earnings soaring 155.6% from $16.1 million to $41.15 million mostly from the addition of Witchery and Mimco stores’ earnings from October 2012.

The company operates the Country Road and Trenery stores, and currently includes 71 retail stores, 7 clearance stores and 93 concession stores in David Jones, Myer and Woolworths South Africa.

Since Witchery was privately held previously, it is difficult to know its individual performance levels before the acquisition, but with nine months of sales and earnings added to Country Road for the year, we have a clearer view how Country Road itself will perform in the future.

Total debt for the company went from zero to $78.58 million, raising its gross gearing up to 33.2% — still manageable at that level. Both its current and quick ratios now stand at little above 1, which is a basic threshold that investors like to see, so with good management of inventories, company expenses shouldn’t get too far ahead of cash and receivables.

Net profit margins have improved from 3.58% to 6.73%, returning back to the high levels seen back in  2007 before the GFC, so the acquisition may have played a part in that performance boost.

Other fashion retailers like Premier Investments (ASX: PMV), Specialty Fashion Group (ASX: SFH) as well as David Jones (ASX: DJS) are all adjusting their business models to salvage sales during a drawn-out weak economy. Acquisitions consolidate business, reducing the number of competitors, and complement any organic growth a company can produce on its own.

Foolish takeaway

Fashion retailing may seem like a simple industry compared to high-tech companies, but competition is fierce, and a company is only as good as the last season’s collection with styles and customer tastes changing rapidly. Investors must watch them closely, and learn to recognise what gives a particular company its staying power.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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