fox-wizel ltd. periodic report for 2013

Transcription

FOX-WIZEL LTD.
PERIODIC REPORT FOR 2013
Index
Chapter A - Description of the Corporation's Business
Chapter B - Board of Directors' Report on the State of the Corporation's Affairs
Appendix to Chapter B - Status Report for November 2013 - Fox-Wizel Debentures (Series A) rated
by Midroog
Chapter C - Financial Statements as of December 31, 2013
Chapter D - Additional Information on the Corporation
Chapter E - Corporate Governance Questionnaire
Chapter F - Report on the Effectiveness of Internal Control over Financial Reporting and Disclosure
FOX-WIZEL LTD.
Chapter A
1.1
1.2
1.3
1.4
2
2.1
2.2
3
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
3.1.8
3.1.9
3.1.10
3.1.11
3.1.12
3.1.13
3.1.14
3.1.15
3.1.16
3.2
3.2.1
3.2.2
3.2.3
3.2.4
3.2.5
3.2.6
3.2.7
3.2.8
3.2.9
Index
Description of the Corporation's Business
Description of the General Development of the Company's Business
The Company's activities and description of business development
Operating segments
Investments in the Company's equity and share transactions
Dividend distribution
Other information
Financial information regarding the Group's operating segments
The economic environment and the effect of external factors on the Group's
operations
Description of the Group's business in its operating segment
The fashion and home fashion operating segment
General information - the fashion and home fashion operating segment
Products
Segmentation of revenues and product profitability
Customers
Marketing and distribution
Order backlog
Competition
Seasonality
Production capacity
Fixed assets and facilities
Intangible assets
Suppliers
Working capital
Limitations on and supervision of the Company's activities
Collaboration agreements
Additional information
The aromatic bath and body care products operating segment
General information - the aromatic bath and body care products operating
segment
Products
Customers
Order backlog
Competition
Seasonality
Production capacity
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Page
3
3
8
9
10
11
15
15
19
19
20
21
29
29
31
32
33
34
35
36
39
39
40
40
43
43
44
45
51
51
53
54
3.2.10
3.2.11
3.2.12
3.2.13
3.2.14
3.2.15
3.3
3.3.1
3.3.2
3.3.3
3.3.4
3.3.5
3.3.6
3.3.7
3.3.8
3.3.9
3.3.10
Chapter B
Chapter C
Chapter D
Chapter E
Chapter F
Index
Intangible assets
Suppliers
Working capital
Limitations on and supervision of Laline's activities
Additional information regarding the entire Group's activities
Human capital
Credit financing
Insurance
Taxation
Limitations on and supervision of the Company
Material agreements not in the ordinary course of business
Litigation
Business strategy and targets
Expected developments in the coming year
Discussion of risk factors
Board of Directors' Report on the State of the Corporation's Affairs
Financial Statements as of December 31, 2013
Additional Information on the Corporation
Corporate Governance Questionnaire
Report on the Effectiveness of Internal Control over Financial Reporting
and Disclosure
-2-
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FOX-WIZEL LTD.
PERIODIC REPORT FOR 2013
CHAPTER A - DESCRIPTION OF THE CORPORATION'S BUSINESS
Part 1 - Description of the general development of the Company's business
1.1
The Company's activities and description of business development
The Company was founded on June 1, 1995 under the name of Wizel Textile Marketing Ltd. as a
private company. On February 10, 2002, the Company changed its name to its current name FoxWizel Ltd. ("the Company"). Effective from April 2002, the Company's securities have been traded
on the Tel-Aviv Stock Exchange ("the TASE"). The Company and subsidiaries in which the Company
has ownership interests are collectively referred to as "the Group". The Group is engaged in design,
acquisition, marketing and distribution of clothes, trendy accessories, underclothing, footwear and
casualwear. The Company also sells aromatic bath and body care products.
1.2
The operating segments
The Company is active in two main operating segments:
1.
Fashion and home fashion under the following brand names: FOX – in Israel and abroad and
American Eagle Outfitters and Aerie in Israel. Starting March 2014, the Company will launch in
Israel the retail chain "The Children's Place", see additional information in paragraph 1.2.1.
2.
Aromatic bath and body care products through the Laline brand name in Israel and abroad.
Each of these operating segments represents an accounting operating segment. See details of the
adoption of the provisions of IFRS 8 regarding operating segments and the criteria for their adoption
according to management's approach in Note 29 to the financial statements.
1.2.1 The operating segment of fashion and home fashion
This operating segment is marketed through several marketing channels as follows:
1

Local sales - through the Israeli retail chain - a chain of stores operated by the Company
itself and/or through subcontracted operators ("directly operated sales" and/or "directly
operated stores") and wholesales to institutional stores and entities in Israel ("wholesales
in Israel").

Foreign sales - sales to franchises and wholesalers abroad ("foreign franchise sales")
and, until December 31, 2012, sales to the Russian subsidiary1.
On December 31, 2012, the Company decided to discontinue the Russian subsidiary's activity, see paragraph 1.2.3 to the periodic
report for 2012 and to the report below.
-3-
Local sales
The FOX brand name
The Group's major activities in the Israeli fashion industry are performed under the FOX brand
name. The Company also sells housewares and home textile accessories in the Fox Home retail
chain. The FOX brand name is one of Israel's leading fashion brand names. It has maintained its
top position by following current trends, practicing innovation and developing a variety of
models while maintaining product quality, using structured marketing and positioning strategies
and operating an advanced logistic system.
In the fashion industry, the Company designs most of the clothing items sold by it using
experienced designers who are employed at the Company and produce two main collections
every year: the spring/season collection and the fall/winter collection. The products marketed by
the Company are custom manufactured for it by subcontractors in various Southeast Asian
countries. The Company's design department designs products for the sub brand names: women,
men, kids, baby and also designs housewares and home textile products. As of the reporting
date, the Company operates 130 stores under the above sub brands and 30 stores under the Fox
Home sub brand2. Most of the Company's products are sold in combined stores that offer two or
more of the Company's sub brand names.
The American Eagle Outfitters and Aerie brand names
On June 30, 2010, the Company signed an agreement with Aeo Management Co. for the
acquisition of a franchise of the American Eagle Outfitters and Aerie brand names (collectively
- "AE"), two leading clothing trademarks in the United States which offer fashionable
casualwear at affordable prices. The strength of the AE fashion brand name is evidenced, among
others, in the high frequency of issuing new collections in the course of the year, showing and
selling between ten and a dozen collections in one year.
According to the agreement, the Company will set up and operate a retail chain for selling the
above brands in Israel whose deployment rate is based on the business plan and local market
needs.
The franchise is in effect for a period of ten years beginning on January 1, 2012 with an option
for extension by another ten years. The franchise provider has an option for repurchasing 51%
or 100% of the brand activity in Israel, at the end of the first ten years of operation and on
several predetermined dates, for a price based on a predetermined valuation mechanism.
The AE retail chain commenced operations on February 2, 2012. As of the reporting date, the
chain operates 293 stores in leading shopping malls around the country. The stores also sell
Aerie underwear products based on the store-within-a-store business model. In December 2013,
the Company started to deploy separate chain store of the Aerie brand.
See additional information in paragraph 1.1 to Chapter B to this report and in the Company's
immediate report of July 1, 2010 (TASE reference: 2010-01-539400).
2
3
Including four combined stores in Beer-Sheva, Bnei-Brak, Eilat and Daliyat al-Karmel for selling FOX and Fox Home.
Including two separate chain stores of the Aerie brand.
-4-
The Children's Place brand name
On June 29, 2013, the Company signed an agreement with The Children's Place International
LLC according to which the Company was granted an exclusive franchise to set up chain stores
in Israel that will sell clothing of the children and babies' clothing brand "The Children's Place"
("TCP"), one of the top clothing brand for children and babies in the USA. TCP offers a variety
of clothes, footwear, jewelry, bags and trendy accessories with high quality at affordable price.
The franchise is in effect for ten years which end on December 31, 2023 with an option for
extension by another ten years. According to the agreement, the Company will set up and
operate chain stores for selling the brand in Israel. The deployment rate is based on the business
plan and the local market needs considering the experience and information pertaining to the
activity as described above. As of the reporting date, the Company signed 14 agreements with
leading shopping malls across Israel to open 14 stores in 2014 and 2015.
See additional information in the Company's immediate report of June 29, 2013 (TASE
reference: 2013-01-076803).
Foreign sales
The Company operates abroad and plans to expand the deployment of its FOX fashion retail
chain to other international markets in collaboration with exclusive franchisees in each country
which possess financial, logistic and marketing infrastructures and specialize in the domestic
retail industry. The foreign stores are established by the franchisees that bear the entire costs of
construction, including the logistics and advertising costs.
As of December 31, 2013, 256 stores/points of sale operate under the F&X and FOX brands in
11 countries around the globe: Singapore, Thailand, Romania, Moldova, Panama, the
Philippines, Cyprus, Kazakhstan, Serbia, Greece and Russia. The Company also generates
wholesales through resellers in eight countries: Russia, Kazakhstan, Panama, Georgia, Belgium,
India, Greece and Germany (online sales). See additional information in paragraph 3.1.5 below.
1.2.2 The operating segment of aromatic bath and body care products
On January 19, 2007, the Company signed a share allocation agreement whereby it purchased
50% of the share capital of Laline Candles and Soaps Ltd. ("Laline") and Laline International
Ltd. ("Laline International"). Laline sells soaps, candles, oils, bath products, body care
products, baby care products, accessories and gifts.
Laline markets its products mainly through the self-operated retail chain in Israel. In addition,
Laline markets its products to wholesalers and overseas through franchises. As of the reporting
date, the Israeli retail chain consists of 88 stores in leading shopping malls in Israel. There are
also 18 franchise stores operating under the name of Laline in four countries around the world:
USA (California), Japan, the Caribbean's and Singapore.
Laline is subject to several legal proceedings that have arisen in the ordinary course of its
business. In the opinion of its legal counsels, Laline's exposure in respect of these legal
proceedings is immaterial to the Group's business.
See a detailed description of Laline's business in paragraph 3.3.7 below.
-5-
1.2.3 The Company has other activities that do not constitute a reportable segment as follows
a.
A.H. Fashion Manufacture and Marketing 3020 Ltd. - on July 3, 2007, the Company
signed a share allocation agreement with A.H. Fashion Manufacture and Marketing 3020
Ltd. ("Sacks"), a private company controlled by Ilan and Ronit Halfon. According to the
agreement, the Company acquired 50% of Sacks issued and outstanding share capital.
Sacks manufactures and markets women's fashion products to local and foreign
wholesalers and through retail sales by directly-operated stores in Israel under the Sacks
brand name. As of the reporting date, Sacks operates 16 stores in leading shopping malls
in Israel and has some 121 employees. In 2013, Sacks generated sales totaling
approximately NIS 58,735 thousand (100%) compared to NIS 58,648 thousand last year.
To date, Sacks has entered into wholesale agreements for marketing its products in the
Netherlands, Germany, Switzerland, Spain, Belgium, the UK, Denmark, Canada, South
Africa and Russia.
In addition, in 2012, Sacks began making sales to franchisees abroad. As of the reporting
date, two franchise stores operate in the Netherlands and Russia.
b.
Billy Haus Ltd. - on August 25, 2006, the Company acquired 50% of the share capital of
Billy Haus Ltd. ("Billy Haus"), founded on October 2, 1999, which imports international
youth surfing sportswear and extreme sports apparel. Its main brands include Reef,
Billabong and Element. Billy Haus markets its products to wholesalers and through a
retail chain of 36 stores in major shopping malls in Israel. Billy Haus has some 291
employees. In 2013, Billy Haus generated sales totaling approximately NIS 85,836
thousand (100%) compared to NIS 73,653 thousand last year.
c.
Marcha Ballerina Ltd. ("Marcha") - on December 5, 2012, Marcha was co-founded by
Billy Haus, which holds 66.7% of Marcha's authorized share capital, and Contact
Business Contacts Ltd., a private company wholly owned and controlled by Mr. Ari
Melamud, which holds 33.3% of Marcha's authorized share capital. Marcha sells ballerina
shoes. As of the reporting date, the chain comprises 12 points of sale in large shopping
malls across Israel. During the reporting period, Marcha started to sell to foreign
wholesalers. Currently, eight points of sale operate in Hong Kong, Singapore, the Ivory
Coast, London, Belgium, Hungary and the Czech Republic.
d.
FOX Leviev - the Company and Memorand Management (1988) Ltd. ("Memorand"), a
company controlled by Mr. Lev Leviev, an interested party in the Company which as of
the reporting date holds 12.53% of the Company's shares, signed a collaboration
agreement for selling the Company's products and opening stores in Russia and in the
Commonwealth of Independent States.
According to the agreement, a new company was founded - Fox Leviev LLC ("the
Russian subsidiary") - which was held in equal parts by the parties (through a
partnership registered in Cyprus, see below). In 2012, the Russian subsidiary generated
sales under the Fox brand in Russia totaling approximately NIS 26,435 thousand (100%).
See additional information in Note 9 to the financial statements.
-6-
As of December 31, 2013, the number of stores operated by the Group in Israel is
342 as follows
No. of fashion and home stores in Israel
No. of aromatic bath and body care stores in Israel
No. of stores that do not form a reportable segment
Total stores in Israel
31.12.2012
1894
86
656
340
31.12.2011
1725
76
437
291
A diagram of the Group's structure and the Company's holdings as of December 31,
2013
Fox-Wizel Ltd.
)"the Company")
Fox Wizel
(BVI) Ltd. (5)
Fox-Wizel
China Ltd.
(Ye Zhang
International
Trading
Company(
)China)
Fox-Wizel
Cyprus
Limited
(Cyprus)
Fox-Leviev
LLC
(Russia) (
4
5
6
7
Billy-Haus
Ltd. (2)
Laline
International
Ltd. (3)
Laline
Candles and
Soaps Ltd. (3)
A.H. Fashion
Manufacture
and Marketing
3020 Ltd. (4)
Marcha
Ballerina Ltd.
(6)
Including 27 American Eagle stores, 30 Fox Home stores and four combined FOX and Fox Home stores in Beer-Sheva, BneiBrak, Eilat and Daliyat al-Karmel.
Including 16 American Eagle stores, 23 Fox Home stores and two combined FOX and Fox Home stores in Beer-Sheva and BneiBrak
Including 16 Sacks stores, 35 Billabong stores and 14 point-of-sale of Marcha Ballerine.
Including 15 Sacks stores and 28 Billabong stores.
-7-
1.3
(1)
The share capital is held by a partnership registered in Cyprus which is equally
held by Fox-Wizel Cyprus Limited and a Cypriot company held by Memorand
Management (1998) Ltd. (a company controlled by Mr. Lev Leviev, an interested
party in the Company, who holds, through Memorand, 12.53% of the Company's
shares as of the reporting date). Fox-Leviev was liquidated in 2012. For additional
information, see paragraph 1.2 above.
(2)
50% of the share capital is held by the Company and 50% by Effi Haus Ltd.,
controlled by Efrat Haus.
(3)
50% of the share capital is held by the Company, 25% by Revital Levi Holdings
Ltd. and 25% by Meirav Cohen Holdings Ltd.
(4)
50% of the share capital is held by the Company, 40% by Ilan and Ronit Halfon
and 10% by Amos Halfon.
(5)
The entire shares are registered in Mr. Harel Wizel's name, the Company's CEO
and a director, who holds them in trust for the Company.
(6)
66.7% of the share capital is held by Billy Haus Ltd. and 33.3% is held by Contact
Business Contacts, a private company wholly owned and controlled by Mr. Ari
Melamud.
Investments in the Company's equity and share transactions
In 2013, employees exercised options and shares were allocated. Total proceeds from the exercise of
the options, as above, amounted to NIS 2,649 thousand.
There has been no change in the authorized capital.
-8-
1.4
Dividend distribution
1.4.1 Distribution of dividends in 2013 and 2011
Following is a description of dividends distributed in the past two years:
2012
Date
April 18, 2012
September 20, 2012
Amount
distributed
(NIS in
thousands)
25,000
Manner of
distribution
(cash/other)
Cash
27,000
Cash
Amount
distributed
(NIS in
thousands)
25,000
Manner of
distribution
(cash/other)
Cash
21,560
Cash
% of dividend
Made in respect distributed out
Allowed/
of retained of income in the
court approved earnings for relevant period
Allowed
July-December
54%
2011
Allowed
January-June
72%
2012
2013
Date
April 23, 2013
September 17, 2013
% of dividend
Made in respect distributed out
Allowed/
of retained of income in the
court approved earnings for relevant period
Allowed
July-December
56%
2012
Allowed
January-June
50%
2013
On March 9, 2014, the Company declared distribution of dividend in the amount of
approximately NIS 25.5 million, representing NIS 1.96 per Ordinary share from the retained
earnings in the second half of 2013.
The balance of distributable earnings as of December 31, 2013 amounted to approximately
NIS 316.8 million.
1.4.2 Dividend distribution policy
Pursuant to the decision of the Company's Board of Directors of March 26, 2002, according to
the Company's dividend distribution policy, dividends will be distributed semi-annually after
the issuance of the interim financial statements as of June 30 and of the annual financial
statements as of December 31 for each year, at a rate of at least 50% of the legally allowed
distributable earnings retained in the six months covered by the relevant financial statements.
The Board of Directors will be entitled to revise the dividend distribution policy at its discretion
and invest the Company's earnings in developing its business.
1.4.3 Distribution of dividends from income deriving from a beneficiary enterprise
As for the implications of the distribution of dividends from income deriving from a beneficiary
enterprise as defined in the Israeli tax laws applicable to the Company, see Note 27 to the
financial statements.
-9-
Part 2 - Other information
2.1
Financial information regarding the Group's operating segments
For details of the adoption of the provisions of IFRS 8 regarding operating segments and the criteria
for their adoption according to management's approach, see Note 29 to the financial statements.
Below are the Group's operating results in 2013-2012 according to operating segments (NIS in
thousands):
2013
Sales
Sales to subsidiaries
Total sales
Gross profit
Variable operating costs
Fixed operating costs
Operating income
Operating income margin
Aromatic
Fashion and home bath and
fashion (AE, FOX) body care Other Israel
Abroad (Laline) unallocated Adjustments
960,743
86,958 135,498
144,571
(280,070)
960,743
86,958 135,498
144,571
(280,070)
589,875
29,858
93,170
93,320
(186,490)
207,953
26,287
284,019
8,119
43,106
97,903
21,739
23,777
19,404
(27,480)
10.2%
25.0%
17.5%
13.4%
Total
1,047,700
1,047,700
619,733
135,343
12.9%
2012
Sales
Total sales
Gross profit
Operating income
Aromatic
815,537 105,651 124,750
158,736
(283,487)
3,366
815,537 109,017 124,750
158,736
(283,487)
481,379
34,246
87,681
102,829
(190,509)
167,020
24,201
239,190
11,529
41,507
75,169
22,717
21,973
26,954
(34,836)
9.2%
20.8%
17.6%
17.0%
- 11 -
Total
921,187
3,366
924,553
515,626
111,977
12.1%
2011
Sales
Total sales
Gross profit
Operating income
Aromatic
589,992
96,547 111,339
142,820
(254,158)
11,010
589,992 107,557 111,339
142,820
(254,158)
367,213
23,830
80,222
90,784
(171,006)
108,828
21,600
180,150
11,831
36,681
78,235
11,999
21,941
8,553
(20,567)
13.3%
11.2%
19.7%
6.0%
-
Total
686,540
11,010
697,550
391,043
100,161
14.8%
Developments in financial data
As for explanations for the Company's operating results, assets and changes in revenues, gross profit
and operating income in 2013 and 2012 according to operating segments, see the Board of Directors'
Report in Chapter B herein and Chapter B to the periodic report for 2012.
2.2
The economic environment and the effect of external factors on the Group's operations
Following is a description of the factors in the Group's macroeconomic environment which are liable
to affect its operations:
2.2.1 Global and local economic and financial crisis
Towards the end of 2008, global financial markets began experiencing serious turmoil with the
collapse of certain large financial institutions in the United States and in other countries. Among
others, this global financial crisis led to severe deteriorations in the capital markets, significant
plunges and fluctuations in stock exchanges around the world and in Israel, the lowering of the
U.S.'s credit rating, the aggravation of the credit crunch and global recession. In 2011, Israel
showed signs of recovery with the surge of social protests demanding reprioritization of the
country's socioeconomic policies and reduction of the cost of living.
In 2013, the Israeli market grew by about 3.3% (based on the forecasts of the Central Bureau of
Statistics as of the reporting date and similar to the growth rate in 2012). Yet, the financial
market in Europe, the United States and Southeast Asia continues to operate in environment
with high level of instability. The Group's management believes that it is too early to declare the
end of the global crisis and there can be no certainty as to whether another deterioration will
occur.
- 11 -
2.2.2 The political-security situation
The majority of the Group's points of sale are located in shopping malls and commercial
centers. Any change for the worse in the political-security situation might minimize the number
of potential shoppers who enter the malls and centers and impair the Group's sales and business
results. The political-security situation in Israel is liable to adversely affect global public
opinion and Israel's position in the world and therefore impair the success of the Group's brands
abroad.
2.2.3 Limitations on production and political and economic changes in China and the Southeast
Asian countries
Most of the Group's products are manufactured by suppliers and subcontractors in China. The
Group is exposed to any limitations and/or changes in legislation and/or in political processes in
China and/or in Israel and/or other countries which might affect the possibility of manufacturing
the products in China, shipping the products out of China and/or the manufacturing costs in
China. Moreover, significant fluctuations in the Chinese Yuan exchange rate might affect
production costs and consequently the prices of products imported from China.
To the best of the Group's knowledge, as a result of the accelerated development in China, many
changes took there place in recent year such as an increase in taxes imposed on textile exporters
as well as regulatory changes, including in labor laws. The Group is unable to assess the degree
of effect of the above mentioned factors and of any other factors arising from China's
accelerated growth on the purchase prices of products made in China. The Group estimates that
its competitors are exposed to the same changes. In addition, the Group occasionally enters into
small scope contracts with supplies from other countries in order to examine alternative sources
of production and minimize its exposure to the Chinese market.
In late 2010, the Company began making purchases from Bangladesh subcontractors.
Bangladesh has no diplomatic relations with Israel and the Group is aware that restrictions have
been imposed on Bangladesh companies that prevent them from directly trading with Israel. As
a result, there is a risk that this activity will either be discontinued or interrupted due to political
decisions made in this country. Production in Bangladesh is exposed, among others, to
processes of intensified control on employment in the country, particularly in the textile
industry. Currently, it is difficult to assess whether the above processes will have an effect on
the production capacity in Bangladesh.
The Company estimates that there are immediate alternatives for the Bangladesh subcontractors
in other countries of the Far East. In order to purchase products from countries which have no
diplomatic relations with Israel such as Bangladesh, on March 22, 2010, the Company founded
Fox Wizel (BVI) Ltd., registered in the British Virgin Islands.
- 12 -
2.3
Foreign currency exchange rate fluctuations
The Group is affected by fluctuations in foreign currency exchange rates, mainly the U.S. dollar,
arising from purchases in foreign currency from foreign suppliers and subcontractors and from
purchases from local suppliers whose cost of products is sensitive to changes in exchange rate
fluctuations. On the other hand, most of the Group's sales are made to local customers in NIS and/or in
unlinked NIS credit. As a rule, the Company enters into hedges to protect itself against possible
changes in foreign currency rates.
In addition, exchange rate changes in foreign currencies in relation to the NIS are liable to change the
purchase prices of the Group's products, the selling prices to consumers and consequently, impair the
Group's profits.
2.4
Changes in interest and the CPI
The Company is exposed to changes in interest and/or the Israeli CPI arising from financial liabilities
assumed by it for financing its operations and from the linkage of the rental fees payable to lessors. In
order to hedge some of those liabilities, the Company invests some of its cash balances in linked
debentures.
2.5
The market's position and changes in the standard of living
The scope of the consumer products sector in general and, particularly, the fashion, home fashion and
aromatic products industry is derived, among others, from the size of the population and its standard of
living. The population growth rate, the purchasing power and private consumption growth rate, the
level of available income and the standard of living all have a potential impact on the scope of the
Group's operations and business results. In order to mitigate this impact, the Group focuses on
expanding its operations in foreign markets.
2.6
Competition
The Group's principal areas of activity involve the design, acquisition, distribution and marketing of
clothes, trendy accessories, housewares and home textiles which it performs by operating retail chains
by itself and through operators and through wholesales in Israel and abroad through franchises and
sales to others. The retail and particularly the fashion industries are specifically characterized by fierce
competition. In order to minimize the effect of changes in the fashion industry on its profits, the Group
continuously adapts the majority of its products to the changing fashion trends. In addition, starting
from 2010, the Company focuses on basic products that are less affected by changing fashion trends.
See more information on the fashion and home fashion segment in paragraph 3.1.7 below. In the
Group's aromatic bath and body care products segment, there is competition between several branded
retail chains (some of which department stores and others retail chains) as well as local private stores.
See details on competition regarding Laline in paragraph 3.2.7 below.
- 13 -
2.7
Change in customs duty and tax rates in Israel
Most of the Company's products are manufactured in the Far East. Therefore, changes in customs duty
on imported goods from Far East countries might affect the Company's expenses and profits. Changes
in customs duty in foreign countries in which the Group sells its products may also have an effect on
the Group's revenues (although the Group's franchisees bear the customs related costs) since an
increase in customs duty rates will make it difficult for the Group to compete with local manufacturers
or with manufacturers from foreign countries.
Changes in customs duty rates, mainly on textiles imported to Israel might affect the Company's
results. On January 1, 2012, the customs duty rates applicable to all industrial items and consumer
products, including the products imported by the Company, were reduced. The lowering of the
customs duty rates continued in 2013 to the point of cancelling the customs duty on certain textile
products. On May 1, 2013, all customs duty on most of the textile products was updated to a flat rate
of around 6%. Also, on June 1, 2013, the VAT rate was updated to 18% and the corporate tax was
changed on January 1, 2014 to the rate of 26.5%. These changes may have an effect on the Group's
business results.
2.8
Change in minimum wage
Most of the Group's employees receive minimum wage or slightly higher wages and therefore any
significant increase in minimum wage will have an adverse effect on the Group's expenses and profits.
In keeping with the announcement issued by the President of the Manufacturers Association of Israel
and the Chairman of the Histadrut in Israel of January 2, 2011, the minimum wage was increased in
April 2011 from NIS 3,850 to NIS 3,890 a month, in July 2011 to NIS 4,100 and in October 2012 to
NIS 4,300 a month.
2.9
Costs of commodities
The rise in the prices of commodities, mainly cotton, might lead to erosion of the Group's profits from
products and, consequently, impair its financial results and business operations.
2.10 Shutdown of seaports
Since most of the Group's products and commodities are manufactured abroad and shipped to Israel
and to foreign franchises by sea, any disruptions in seaport activity in Israel, China and/or target ports
will adversely affect the marketing of the Group's products and its profits.
2.11 Rental fees
The Group rents spaces in shopping malls and commercial centers for its operations. Structural change
in the way this market operate or in the relationship between them and the Group may have an effect
on the amount of the Group's rental fees and may adversely affect its operating results.
- 14 -
Part 3 - Description of the Group's business in its operating segment
3.1
The fashion and home fashion operating segment
3.1.1 General information - the fashion and home fashion segment
a.
Developments in the operating segment markets
The Company's main activity is in the fashion and home fashion segment.
As a dynamic and leading company in the fashion and home fashion industry, the
Company has invested considerable resources in an innovative design department which
produces versatile collections while managing to distinguish itself in the fashion industry
by focusing on basic models. In addition, the Company invests resources in enhancing its
customers' club by offering unique benefits to its members.
The Company has nationally deployed stores in shopping malls and commercial centers
under the FOX, Fox Home, American Eagle and Aerie brand names.
Due to its size, the Company is able to reduce acquisition costs both in terms of order
volumes and number of items ordered from each model thereby offering its customers
attractive and competitive prices.
As of the reporting date, the Company has 189 stores across the country.
The fashion industry in Israel in recent years has experienced several trends, mainly
involving Israeli fashion chains seeking to expand to international markets, increased
competition from the penetration of international chains into the Israeli market,
investment in building a brand identity as a means of distinction from other chains,
mainly through advertising and managing customer loyalty programs, enhancement of the
shopping experience mainly by designing the points of sale in a manner that provides an
emotional shopping experience, expansion by development of additional products under
the same brand, opening of outlet stores, expansion of existing shopping malls and
transition to shopping centers and malls.
As part of the Group's strategy for dealing with competition in the Israeli fashion
industry, in the reporting period, the Group took the following measures:
(1)
Continued maintenance of low costs in order to offer the Company's products at
affordable prices.
(2)
Expanding the American Eagle and Aerie international brand names.
(3)
Opening the international chain store The Children's Place.
(4)
Consolidation of sub brand stores under a single store.
(5)
Continued expansion into foreign markets through franchises.
- 15 -
(6)
Continued offering of versatile brand names and various types of apparel products
marketed by the Group by selecting leading brands for each category.
(7)
Diversification of all non-clothing fashion products and launching of more Fox
Home sub brand stores.
(8)
Enhancing the FOX brand name by emphasizing its unique features in an ad
campaign and focusing on basic products identified by the Company as its core
products.
(9)
Improvement of the shopping experience in the Company's stores by refreshing the
stores' appearance and by consolidating stores.
(10) Change of store location and store closing in less profitable locations.
(11) Continued focus on providing quality service.
(12) Enhancement and thoughtful operation of the Company's a customers' club as a
tool for strengthening the Company's relations with its customers. On January 1,
2014, the Company launched a consolidated customers' club under the name of
"Dream Card" which encompasses all of the Group's brands (apart from Marcha
Ballerine and Sacks) so that an existing member of the club can enjoy the club's
benefits in each of the brands without additional fee. See additional information in
paragraph 3.1.5 below.
b.
Special restrictions, legislation, regulations and constraints applicable to the
operating segment
The Company's activities in its operating segments are subject to general legal provisions
regarding imports, exports, customs, consumer protection, labor laws and business
licensing. The Company's activities are also subject to specific legal provisions regarding
labeling of products, washing instructions and price presentation which require it to use
Hebrew. The Company customers' club and mails sent out to the club's members are
subject to the provisions of the Law for the Protection of Privacy, 1981 ("Law for the
Protection of Privacy") and the revised Media Law (Amendment No. 40), 2008 ("the
Spam Law"). The Company meets all of these legal provisions. See additional
information in paragraph 3.1.14 below.
c.
Changes in the scope of operations in the segment and the profits therefrom
According to RIS data, there was an average increase of about 0.7% in same store sales in
the fashion and footwear industries in 2013.
d.
Market developments in the operating segment or changes in the nature of the
customers therein
See paragraph 3.1.1 above.
- 16 -
e.
Critical success factors in the operating segment and changes therein
The Company believes that there are several critical success factors underlying the
operating segment as follows:
(1)
Design of versatile and trendy collections while investing resources in an
innovative and dynamic design department, keeping up-to-date with local and
global developments in the fashion and home fashion industry and with the varying
tastes of customers. In the reporting period, the Company focused on basic models
while emphasizing the FOX brand name's main power and launching new stores
under the Fox Home sub brand name.
(2)
Investment of resources in advertising in order to retain and enhance power,
distinction and dominance in the fashion industry. Enhancing and increasing the
customers' club and maintaining constant contact with club members while offering
unique benefits to members and forming a consolidated customers' club. See
additional information in paragraph 3.1.5 below.
(3)
National deployment of the Company's stores in strategic locations inside major
shopping malls and centers in Israel in order to allow prospective customers
maximum exposure to the Company's products.
(4)
Utilizing the Company's economies of scale both in order volumes and in the
number of items ordered from each model to assist in minimizing acquisition costs
and offer competitive prices to customers.
(5)
Maintenance and use of advanced, automated state-of-the-art management, control,
information and logistics systems.
(6)
Maintenance of effective quality control system from the manufacturing stage and
thereafter.
(7)
Maintenance of a solid, reliable and flexible foreign acquisition and manufacturing
infrastructure system.
(8)
National deployment of the American Eagle and Aerie brands.
(9)
Relying on a stable financial capital structure.
In the reporting period, the Company took steps to improve its capabilities both in
perfecting work procedures and in improving the planning, design, acquisition, quality
control and supply chain systems, including the Chinese subsidiary's operations. The
Company also acted to refresh the chain's stores to enhance the customers' shopping
experience and achieve operational optimization. The Company continues to recruit
suitable franchisees for its foreign products to increase the foreign franchisees' sales
volumes.
- 17 -
f.
Changes in the system of suppliers and commodities in the operating segment
The Company's management believes that in the last few years, the majority of
manufacturing activity in the industry in general and specifically in the Company has
been conducted by Far East subcontractors, mainly from China, India and Bangladesh.
The Company has no dependency on a specific supplier and/or subcontractor since all the
Company's products can be manufactured at the desired quantities by a large number of
other suppliers and/or subcontractors in China and/or in other countries (mainly in
Southeast Asia) without incurring any significant additional production costs. In order to
achieve a flexible and efficient acquisition process, the Company also acts through the
Chinese subsidiary for locating suppliers, monitoring production and assuring quality. In
2010, the Company also began manufacturing through subcontractors in Bangladesh.
g.
The main barriers to entry and to exit in the operating segment and changes therein
The Company estimates that there are no significant barriers to entry in the fashion
industry in which it operates. The barriers to entry in setting up a single fashion store are
low since it does not require any special resources. However, the transition from
operating a single store or several locally deployed stores to nationwide deployment
requires making large investments in infrastructures and in logistics and also requires
financial strength.
The rental agreement for the Fox House signed between the Company and Tnuvot Keshet
Ltd. is for an initial period of ten years from January 2006. The overall rental fees for this
period represent a barrier to exit. See more information on the rental agreement and its
implications in paragraph 3.3.6 below.
h.
Alternatives to the operating segment products and changes therein
The Company's products have many alternative products by local manufacturers and/or
importers that are marketed throughout Israel in numerous and diversified points of sale.
The Company acts to retain and enhance its competitive edge over alternative products
through market differentiation, design, quality and by attributing added value to its brands
by adhering to leading and innovative designs, offering competitive prices, developing a
variety of products, offering an enhanced shopping experience, expanding deployment in
leading locations, advertising, public relations and managing a members' club.
i.
The structure of the competition in the operating segment and changes therein
The fashion industry is characterized by fierce competition between a large number of
branded chains and local retailers. See more information in paragraphs 3.1.1 above and
3.1.7 and 3.2.7 below.
- 18 -
3.1.2 Products
The Company's products include various types of fashion products (clothing, footwear,
underclothing, accessories etc.). The Company designs its products through an in-house design
department divided into four sub-categories: women, men, kids and baby. The Company also
sells the American Eagle and Aerie fashion brands which are deigned at AE's US headquarters.
In addition, the Company sells housewares and home textiles in the Fox Home stores. The
products are manufactured through subcontractors in the Far East, mainly China. See more
information on the production capacity in paragraph 3.1.9 below.
The FOX brand name sells the Company's products in a nationally deployed retail chain in
Israel, to wholesale customers in Israel and abroad and to the Company's franchisees abroad.
The Company's products are characterized by trendiness, focusing on basic models. The
products are sold at affordable prices. The Fox Home brand name sells housewares, home
accessories and home textile products. The focus is placed on versatility, the shopping
experience, affordable prices and a trendy appeal. The American Eagle and Aerie brand names
sell fashion apparel and trendy underwear in a chain of stores located across Israel.
The Company's entire products constitute clothes, accessories, housewares and home textiles.
There is no material difference between the products with respect to risks, logistics, store
location, employees, marketing and the Group's decision making process in the fashion and
home fashion segment.
3.1.3 Segmentation of revenues and product profitability
The Company's products in the fashion and home fashion segment do not differ materially in
terms of risks, acquisition, marketing, the Group's management's decision making process and
gross profit margins. Moreover, there is no material difference between gross profit margins
according to the classification of products.
Following are details of revenues and gross profit according to types of customers:
2013
Fashion and home
Revenues
fashion operating
(NIS in
Segmentation
segment
thousands) of revenues
Directly operated stores
946,775
91%
Wholesalers and others
13,968
1%
Foreign franchisees
86,957
8%
Total
1,047,700
100%
Gross profit
margin
62.0%
23.1%
34.3%
59.2%
2012
Revenues
(NIS in
Segmentation
thousands) of revenues
799,562
86%
15,975
2%
109,016
12%
924,553
100%
Gross profit
margin
59.7%
27.7%
31.4%
55.8%
The decrease in the gross profit margin from wholesalers in 2013 arises from sale of past season
products at high discount rates compared to 2012 and from increase in surplus sales to
wholesalers in 2013.
The increase in the gross profit margin of foreign franchisees arises from the decrease in foreign
customer discounts in 2013.
- 19 -
Below are details of proceeds data per sq. m. in directly operated same stores and per employee
in 2013 and 2012:
Fashion and home fashion operating segment
Total sales in directly operated stores (NIS in thousands)
Total sq. m. in directly operated stores - annual average
Sales per sq. m. per annum - directly operated stores - annual
average (NIS in thousands)
Sales per sq. m. per annum - directly operated same stores (NIS in
thousands)
Number of directly operated stores
Monthly proceeds per employee (NIS in thousands) 8
Change in same store sales
2013
946,775
59,389
2012
799,562
45,863
15.9
17.4
16.2
189
29
-0.2%
17.6
172
28
7.1%
The sq. m. numbers presented in the table above are in gross numbers, consisting of public
spaces and storage areas. The calculation of total average sq. m. per annum is proportionate to
the number of months of operation for each store. The calculation of sales per sq. m. of same
stores in 2013 is based on stores that have not changed in terms of sq. m. or of the sub brands
sold therein in 2013-2012. Similarly, the calculation of sales per sq. m. of same stores in 2012
was based on stores that had not changed in terms of sq. m. or of the sub brands sold therein in
2012-2011. Accordingly, the stores underlying the calculation for 2013 are not identical to
the stores underlying the calculation for 2012. The decrease in total sales per sq. m., in
directly operated stores and in same stores derives from the change in the mix of brands
and in the stores that were taken into account in the calculation for 2013 compared to the
calculation for 2012. In 2013, FOX operated 154 same stores. The proceeds per employee do
not include subcontractors' employees.
The increase in sales per sq. m. of same stores is a result of the Company's strategy to
consolidate stores in order to create a more meaningful shopping experience for the customer.
3.1.4 Customers
The Group's customers can be classified into three main groups:



The end consumers at the stores managed and operated by the Company (in Israel)
Wholesale customers in Israel: owners of stores across Israel and institutional buyers
The Company's foreign franchisees
The Company is not dependent on a specific customer whose loss would materially affect its
operating segment, including any foreign franchisee. See additional information about the
Company's customers in paragraphs 3.1.5 and 3.1.6 below.
8
2012 data was recalculated.
- 21 -
The condensed table below presents the credit terms granted to Fox's non-retail customers:
No. of
Operating
Customer
customers
segment
type
as of 31.12.13
Payment terms
Substantially all - cash only
Fashion and home Wholesalers About 107
customers
fashion
Foreign
11 countries Customer obligo initiated against
franchisees
prepayment or bank guarantee.
Credit terms are usually 60-90 days from
BOL9 date.
Selling price is cost +
3.1.5 Marketing and distribution
a.
General
Marketing channels
The Company has three major marketing channels under the FOX brand name:



Direct sales in Israel through a chain of stores operated by the Company or by suboperators.
Sales to foreign franchisees.
Wholesales in Israel.
Distribution in Israel
The distribution of the Company's products in Israel is done from the Company's state-ofthe-art storage and logistic center at Fox House at the Airport City near Ben-Gurion
Airport.
The Company's products are stored at the logistic center and distributed to the Company's
stores in Israel based on predetermined distribution procedures issued by the Company's
HQ according to sales forecasts, targets and actual sales. Distribution is carried out on a
daily basis and includes models that have been pre-booked before the season begins and
re-ordered items based on each store's specific needs. The IT systems allow online
supervision and control in order to provide a quick response, inventory management and
operation flexibility and inventory shifting between stores and from the logistic center to
stores. These tools enable better utilization of inventories, reduction of items returned
from the stores to the logistic center and optimization of store spaces. The Company's
logistic center in Israel and its computerized systems and conveyance machinery enable
customized gathering of items for each store individually based on each store's specific
needs and actual sales. From time to time and based on its needs, the Company uses
external storage apart from the logistic center, as above, through subcontractors.
9
Bill of Lading.
- 21 -
Distribution to stores is normally done using the Company's truck fleet.
Sales to wholesalers and others in Israel are also performed from the Company's logistic
center at the Airport City.
Distribution overseas
The distribution of the Company's products to foreign franchisees is generally performed
directly from the Company's foreign subcontractors' warehouses and facilities. The
Company delivers the manufacturing orders to foreign subcontractors, which includes
information of the target country for product supply. Sales to foreign franchisees are
usually performed under FOB terms. Once a supplier completes the manufacturing of
orders for a foreign customer of the Company, it delivers the sale documents (invoice +
packaging specs) to the Company's import department simultaneously with shipping the
cargo to the customer's customs clearance agent which ships the goods to the target
country. Once the documents are received, the Company's import department issues the
sale invoice to the customer based on the Company's pricelist. Invoices issued by the
Company are transferred to the customs clearance agent and the foreign customer to be
used for clearing the goods in the target country.
Marketing the Company's products in Israel
The Company markets its products to Israeli customers through a chain of stores managed
and operated by the Company and through sales to wholesalers and retailers which resell
the Company's products at the points of sale operated by them.
Direct sales are made under seven sub brands: FOX women and/or women and men, FOX
kids, FOX men, FOX baby, Fox Home, American Eagle and Aerie. The Company's
clothing products are sold both in mixed stores that sell two or more of the Company's
brands and in single brand stores. Since 2009, the Company has been acting to increase
the number of stores that sell two or more of its brands while closing down single or two
brand stores in a structured strategy designed to create a unique shopping experience on
the one hand and improve the consolidated store's operational profitability on the other.
This trend has been accelerated in the reporting period.
The Company's stores are mostly located in leading shopping malls and commercial
centers in Israel. The stores are all designed under a uniform and unique concept which is
occasionally updated and adapted to the Company's marketing objectives. Sales and
marketing in the actual stores are performed by the sales teams who have been
specifically trained in the sales, service and fashion fields. In addition, the Company
provides special offers at the stores (advertised at the points of sale) and holds special
sales events. The Company operates several outlet stores for selling surplus inventories
that have not been sold during the year. The Company has been minimizing the number
of outlet stores in order to improve its market positioning and consequently optimize its
inventory and sale management process.
- 22 -
The Group's marketing activity in Israel consists, among others, of advertising on
television, issuing catalogs, advertising in the written press, in magazines, in billboards
and in shopping malls and stores, operating a website, activities for members of the FoxFriends customers' club and for members of all brands Dream Card and etc. The
marketing activities, their nature and scope vary from time to time and are determined at
the Company's management's discretion.
As of December 31, 2013, the Company entered into agreements for opening seven new
fashion stores under the FOX brand. These stores are expected to open in 2014, some of
which after the completion of the construction of the shopping/commercial centers in
which they will be located and others after they are vacated and customized for the
Company's needs.
From time to time, the Company looks into opening new stores once new commercial
centers are erected in attractive locations or when an opportunity arises for opening a
store in a city where the Company does not have an active store. The Company
simultaneously examines the profitability of its store chain in order to close/consolidate
stores to maximize profits, efficiency and the shopping experience.
In the reporting period, the Company opened eight stores for selling housewares, home
articles and textiles under the Fox Home brand name covering an average area of some
400 sq. m. per store and located in shopping malls and commercial centers. As of
December 31, 2013, the Company entered into agreements for opening five new stores
under the Fox Home brand which are expected to be opened in 2014.
In the reporting period, the Company opened 11 American Eagle stores covering an
average area of 605 sq. m. per store and located in shopping malls and commercial
centers. As of December 31, 2013, the Company entered into agreements for opening
four new stores which are expected to be opened in 2014.
As of December 31, 2013, the Company entered into agreements for opening seven stores
of The Children's Place brand in 2014. Also, as of the date of the report, the Company
entered into agreements with leading centers in Israel for opening 14 stores of the brand
in 2014-2015.
The gross profit derived from the sale of the Company's products in each of the sub
brands does not differ materially between the various products for each age group/type
(women, men kids and/or baby).
- 23 -
Following are details of the stores opened and closed in 2011-2013 as of December 31,
2013:
Total stores as of December 31,
2011
Stores opened in 2011
Stores closed/consolidated in 2011
2011
2012
2013
Fashion
and home
fashion stores
151
- Average cost of setting up one sq. m. of new store about NIS 3,500
- Total cost invested in setting up new stores - about
NIS 24.2 million
18
)21(
149
NIS 16.7 million
32
)9(
172
NIS 54 million
29
)12(
189
NIS 43 million
Rental agreement term
(without the extension option)
Up to one year
One-three years
Three-five years
Over five years
(*)
Total rented
area (sq. m.) (*)
9,096
12,095
15,326
29,278
Total number
of stores
35
43
43
68
Includes public spaces and storage areas that are updated as of December 31, 2013.
Customers' club
As part of the sale and marketing system in the stores managed and operated by the
Company in Israel, in September 2008, the Company launched a customers' club ("Fox
Friends"). According to the club's rules, membership entitles the members of Fox
Friends to shopping discounts and/or to the right to participate in special sales offers
initiated by the Company from time to time. Joining the club requires paying a
membership fee.
10
The average cost for setting up a store does not take into account participation of third parties. If participated, actual cost could
have been lower. Total area in the computation leaves out public spaces that are taken into account for payment of rental fees.
- 24 -
On January 1, 2014, the Company launched a consolidated customers' club which
encompasses all of the Group's brands (apart from Marcha Ballerine and Sacks) so that an
existing member of the club can enjoy the club's benefits in each of the brands without
additional fee. Former customers' clubs (Fox, Laline, Billabong) will stop recruit new
members and will terminate within three years from January 1, 2014.
The Company believes that this procedure will leverage size advantage and its retail
status and will bring to a strategic advantage over its competitors.
The Company distributes catalogs and leaflets informing the club members of special
offers and new products. In this context, the Company operates in conformity with the
Spam Law.
According to the club's rules, the Company may change the club's rules and/or the
benefits offered to the members from time to time, at its exclusive discretion.
The Company registered the club members' data as database pursuant to the provisions of
the Law for the Protection of Privacy as specified in paragraph 3.1.14(c) below.
The Company considers the customers' club as a main tool for retaining customer loyalty
and invests extensive marketing and sales promotion efforts therein compared to its other
marketing efforts.
As of the reporting date, the Company has 870 thousand members of Fox Friends club
and 250 thousand members of Dream Card club.
b.
Pricing of the Company's products in Israel
The Company's products have uniform prices that are determined before each season
begins. The pricelist states the final consumer selling price (including VAT) and the
product's wholesale price (excluding VAT) ("the Company's pricelist"). The Company's
pricelist applies to products sold in directly operated stores in Israel and through the
Company's franchises and others in Israel (wholesalers, retail stores, institutional entities
etc.) but not to the Company's activities with foreign customers.
- 25 -
c.
Sales and marketing abroad
As elaborated below, the Company enters into franchise agreements with foreign
companies which grant the franchisees an exclusive, limited and non-transferrable license
for distributing and reselling the Company's products in the relevant countries and the
right to use the FOX trademark as well as other Company brand names and trademarks.
The franchisees bear all the costs relating to transport, insurance, taxes, customs etc. as
well as costs relating to construction, operation and advertising of the chain in the
relevant territory. In most cases, the franchise is granted for retail sales only. The
Company began private label sales to customers ("PL"). This activity is preformed like
sales to other Fox franchisees. As of the reporting date, the Company operates in 11
countries through 10 franchisees. Simultaneously, in eight countries, the products are
distributed by resellers as follows:
(1)
Singapore
On August 16, 2005, the Company signed an agreement for marketing and
distributing the Company's products in Singapore with Fox F. Apparel (S) Pte Ltd.,
a Singapore company controlled by Wing Tai Clothing Pte Ltd. ("the Singapore
company" and "Wing Tai", respectively). The Singapore based Wing Tai group
operates licensed fashion retail chains. The agreement is in effect for a period of
six years from May 1, 2004 through April 30, 2010. In November 2009, an
appendix to the agreement was signed which extended the agreement for another
period of six years from May 1, 2010 through April 30, 2016. The agreement can
also be extended by two additional six-year periods each. As of the reporting date,
the Singapore company operates 22 stores.
(2)
Romania
On February 28, 2006, the Company signed a franchise agreement with S.C. Corsa
S.R.L. from Romania ("the Romanian company"). The agreement in is effect for
a period of five years from February 28, 2006 and may be extended by another
five-year period. As of the reporting date, the Romanian company operates 19
stores in Romania and one store in Moldova. In 2008, the franchise agreement with
the Romanian company was expanded to also grant the Romanian company the
distribution and marketing rights in Moldova. The first store in Moldova was
opened by the Romanian company in November 2008.
Due to the poor condition of the economy in Romania and the condition of the
franchisee, which is in stay of proceedings, the Romanian customer significantly
reduced the quantity of its orders from the Company.
See more details in paragraph 1.1 to the Directors' Report of last year.
- 26 -
(3)
Thailand
On September 1, 2006, the Company signed a franchise agreement with LME Co.
Ltd. from Thailand ("the Thai company"). The agreement in is effect for a period
of five years from June 1, 2006 and may be extended by another five-year period.
As of the reporting date, the Thai company operates 130 points of sale in Thailand,
about 57 for women and 52 for men, under the FOX brand inside large department
stores and about 17 unique FOX stores and four outlet stores in large shopping
centers.
(4)
Panama
The Company granted KOYCO, a Panama company (formerly: Fox Fashion S.A.,
"the Panama company") an exclusive retail license to distribute and sell the
Company's products in Panama. The Company also granted the Panama company a
license to sell the Company's products to wholesalers in Mexico, Argentina,
Ecuador, Guatemala, Colombia, Venezuela, El-Salvador, Chile, Honduras, Costa
Rica and the Dominican Republic. As of the reporting date, the Panama company
operates 33 points of sale in Panama alone, four in unique FOX stores and the rest
in large department stores under the FOX brand name. The Panama company also
makes wholesales of the Company's products in the countries mentioned above.
(5)
Germany
The Company's products are sold under a license in Germany through Bon Prix
which operates two marketing channels: online sales and sales through catalogs
distributed to customers.
(6)
The Philippines
On August 1, 2007, the Company signed a franchise agreement with Suyen Corp
from the Philippines, a subsidiary of Bench ("the Philippines company"). On
April 12, 2012, the contract was renewed for another five years. In August 2008,
the first F&X stores were launched in the Philippines by the Philippines company.
As of the reporting date, the Philippines company operates 18 stores.
(7)
Puerto Rico
On August 19, 2009, the Company signed a franchise agreement with Piben
Imports, Inc. ("the Puerto Rico company") for a period of ten years with an
option for extension by two additional ten-year periods each. During the reporting
year, the Company terminated its engagement with the franchisee and the
franchisee discontinued its activity in the country.
- 27 -
(8)
Cyprus
On May 19, 2009, the Company signed a franchise agreement with MPM Fashion
Ltd. for a period of five years with an option for extension by two additional fiveyear periods each. As of the reporting date, seven stores operate in Cyprus under
the FOX brand name.
(9)
Kazakhstan
On May 4, 2009, the Company signed a franchise agreement with Tamgaly Group
for a period of five years with an option for extension by two additional five-year
periods each. As of the reporting date, three wholesale stores and three FOX stores
operate in Kazakhstan.
(10) Serbia
On August 30, 2009, the Company signed a franchise agreement with Univers for a
period of five years with an option for extension by two additional five-year
periods each. As of the reporting date, five FOX stores operate in Serbia.
(11) Russia
On December 6, 2012, the Company signed an agreement with Vneshtorg Ltd. &
Sentiabr Ltd. for selling wholesale products in Russia. As of the reporting date, 15
stores operate in Russia under franchise and there are wholesales to numerous
stores across Russia.
The Company's sales to Russia were also made in the past to the Russian
subsidiary, Fox Leviev LLC, which terminated its Russian activity on
December 31, 2012, see paragraph 1.3 to Chapter B.
(12) Georgia
On November 28, 2011, an agreement was signed with G Fox Ltd. for the sale of
wholesale products in Georgia. As of the reporting date, the wholesaler operates
two FOX stores in Georgia.
(13) Burma
On November 1, 2012, the Company signed a franchise agreement with 3T
Company for a period of three years with an option for extension by two additional
three-year periods each. The agreement was not fulfilled due to local difficulties of
the franchisee.
(14) Belgium
In 2013, D.O.D started to market Fox products in its stores across Belgium based
on the store-within-a-store business model.
- 28 -
(15) Greece
On September 6, 2012, an agreement was signed with Master S.A. As of the
reporting date, two stores under a franchise operate in Greece. The franchisee
intends to open other wholesale distribution channels.
(16) India
During 2013, the Company started to market its products through a wholesaler in
India.
(17) PL customers
The Company uses the knowhow relating to manufacturing, designing, logistics
and the supply chain in Israel and abroad as well as the franchises available to it to
various brands to manufacture a private label to several customers. In 2012, sales
to leading chains and companies in Europe started.
3.1.6 Order backlog
All the Company's customers, excluding foreign franchisees, purchase its products from time to
time based on their specific needs and without ordering in advance. The Company's franchisees
order the products they need from the Company four-nine months before each season begins.
Details of order backlog from the Company's franchisees (NIS in thousands)
Expected revenue
recognition period
Q1 2014
Q2 2014
Q3 2014
Total
Order backlog as of
December 31, 2013
13,356
15,741
16,723
45,820
Orders supplied by
the report date
8,122
8,122
Order backlog at
the report date
5,234
15,741
16,723
37,698
The Company's overall order backlog as of December 31, 2012 approximated NIS 75,480
thousand and was entirely met in 2013.
3.1.7 Competition
The competition in the fashion industry is fierce and versatile. There are many entities,
including manufacturers, importers, international fashion chains, local fashion chains, private
stores and bazaars that compete with the Company's activities in the fashion sector.
The Company's main competitors include but are not limited to international and local fashion
chains such as Castro, TNT, H&O, Honigman, Lee Cooper, Golf, Tamnoon, Pull & Bear,
ZARA, H&M, GAP and Forever 21. There is also considerable competition in the housewares
segment from brands such as Golf & Co., Hamashbir, Sheshet, Naaman Porcelain, Vardinon,
IKEA and non-food stands in the food chains.
- 29 -
The Company deals with this competition mainly by utilizing its economies of scale in terms of
order volumes and the number of items ordered from each model made by the Company while
continuously considering the feasibility of production in the various sites which is reflected in
reduction of production costs and consequently the Company's ability to sell its products at
competitive prices. In addition, the Company hires professional fashion designers that stay
abreast of local and global developments in the fashion industry and of customers' changing
tastes by visiting fashion shows and exhibits, analyzing sales reports and obtaining feedback
from the Company's various department managers. In the reporting period, the Company
focused its collections on basic models which represent the Company's core business and which
are less affected by changing fashion trends.
Also, as discussed in paragraph 3.1.5 above, the Company launched a consolidated club to have
as strategic advantage over the competitors.
The negative factors that are liable to affect the Company's competitive position include:
unforeseen changes in fashion trends, the strengthening of local brands and chains and the
introduction of new international brands into the Israeli market. In early 2010, two world
famous international brands entered the Israeli fashion scene: GAP and H&M. In 2011, the first
Forever 21 store was launched. International fashion chains penetrating into Israel compete with
the Company and benefit from international reputation. The entry of these three international
brands as well as the potential entry of other brands into Israel will largely enhance the fierce
competition in the Israeli fashion industry. In the reporting period, the Company successfully
dealt with the competition in the industry. Management is considering its next steps for coping
with the competition. The Company is also making special investments in advertising in order
to enhance public exposure and awareness to its brands by creating added value to its products
and attributing an appealing image to its products and brands and in order to distinguish itself
from competitors by using leading designs, advertising and public relations. In 2013 and 2011,
the Company invested in advertising and marketing in the fashion and home fashion segment an
amount of NIS 26,737 thousand and NIS 23,128 thousand, respectively. The Company also
maintains national deployment of its stores in prime locations, advanced automated
management, control, information and logistic systems, an effective quality control system and
a firm, reliable and flexible production infrastructure. Further, the Company introduced a
consolidated customers' club that will increase loyalty to the Group's brands and according to
the published business plan, it is also contemplating to develop other ventures using the existing
logistic infrastructure which, among other, will improve its competitiveness.
As for the Company's methods of dealing with competition in the Israeli fashion industry, see
paragraphs 3.1.1 and 3.3.8 above.
- 31 -
3.1.8 Seasonality
The Group's activities as a group engaged in the clothing and apparel industry are affected by
seasonality - summer (March-August) and winter (September-February). The Company designs,
manufactures and orders most of the products sold by it twice a year, about four-nine months
before each season, and coordinates the advertising and marketing efforts at the beginning of
each season (mostly in the first month of each season).
The winter seasons, and mostly the fourth quarter of each year, are characterized by higher sales
than the other quarters. Main sales are made in the first three months of each season. Moreover,
seasonal volatility is reflected in sales in each season. The winter sales are usually positively
affected by cold weathers and the beginning of the rain season in October-December and
negatively affected by warm and rainless winters.
Furthermore, there is generally an increase in sales volumes shortly before the holiday seasons,
which affects sales volatility between quarters. The first and second quarters of each year are
mainly alternately affected by the timing of Passover.
Data of sales in the fashion and home fashion segment in 2013 and 2012 according to quarters
(NIS in thousands)
Q1
Q2
Q3
Q4
Total
2013
NIS in
%
thousands
of sales
256,427
24.5%
234,671
22.4%
256,770
24.5%
299,832
28.6%
1,047,700
100.0%
2012
NIS in
%
thousands
of sales
182,650
19.8%
237,288
25.7%
220,388
23.8%
284,227
30.7%
924,553
100.0%
Data of gross profits in the fashion and home fashion segment in 2013 and 2012 according to
quarters (NIS in thousands)
2013
Q1
Q2
Q3
Q4
Total
NIS in
thousands
140,979
147,163
150,074
181,517
619,733
- 31 -
2012
% of gross
profit from
sales
55.0%
62.7%
58.4%
60.5%
59.2%
NIS in
thousands
97,023
140,509
120,803
157,291
515,626
% of gross
profit from
sales
53.1%
59.2%
54.8%
55.3%
55.8%
Data of operating income in the fashion and home fashion segment in 2013 and 2012 according
to quarters (NIS in thousands)
2013
Q1
Q2
Q3
Q4
Total
NIS in
thousands
23,157
29,182
24,603
42,700
119,642
% of
operating
income from
sales
9.0%
12.4%
9.6%
14.2%
11.4%
2012
NIS in
thousands
7,659
34,832
15,753
39,642
97,886
% of
operating
income from
sales11
4.2%
14.7%
7.1%
13.9%
10.6%
3.1.9 Production capacity
The vast majority of the Group's products are manufactured several months before each
(summer/winter) season begins by a large number of subcontractors and, therefore, there is no
material limitation imposed on the Company's production capacity.
The Group is not dependent on any specific suppliers and/or subcontractors since all its products
can be manufactured in the desired quantities by a large number of other suppliers and/or
subcontractors in China and/or in other countries without significant additional production
costs.
Quality control
The Company exercises several quality control levels for its products both for controlling
production processes in subcontractors' factories and for controlling the quality of products
received in Israel. Quality control is performed by the Company's
QC department managed
by the Chief Quality Officer ("QCO"). The first phase of quality control commences with the
receipt of an initial model from the subcontractors which is based on the product file prepared
by the Company's designers with the desired model's specs. The preliminary examination
inspects the quality of raw materials, dyes, sewing and compliance with washing instructions by
the Company's QC staff. After obtaining approval for commencement of work and receipt of
goods, the majority of goods received from all subcontractors are inspected. The Company's
QCO is responsible for submitting a quality control report on a monthly basis (categorized
according to women, men etc.) which reviews findings of any deficiencies in the goods
received. Moreover, the QCO inspects the production and ongoing work processes at the
subcontractors' factories in China. The Company operates a customer service department that is
in charge of detecting flaws in products and classifying them according to the various suppliers
as well as preparing a customer service report which specifies the models returned due to flaws
in production.
11
On January 1, 2013, the reporting method has been changed, from proportionate consolidation to the equity method.
- 32 -
3.1.10
a.
General
The Company does not own any real estate properties and its activities (offices,
warehouses and stores) are performed on leased real estate. In order to secure rental
agreements, the Company provided the building lessors promissory notes signed by it.
The Company also provided the building lessors bank guarantees in a total of
NIS 17,119 thousand as of December 31, 2013.
b.
Offices and warehouse
Starting from January 2006, the Company's office, administrative and design activities
are all performed at the new Fox House at Airport City. In September 2006, the
Company also moved the remaining storage, logistic and marketing activities to the
Fox House. See details about the rent agreement in paragraph 3.3.6 below.
c.
Retail stores
As of December 31, 2013, the Company rents 189 active stores across Israel, most of
which in shopping malls and commercial centers. The rent terms for each store are
determined in negotiations between the Company and the lessors. The rent period lasts
from one year to ten years. The initial rent period in most rent agreements is between
one and five years. In addition, in most rent agreements, the Company has an option
for extension of the rent period by additional periods of 5-15 years.
The rental fees for most stores are calculated as the higher of a fixed percentage of
proceeds or a fixed amount and are mostly linked to the Israeli CPI. In addition to
rental fees, the Company generally also pays additional fees for the leasehold's
management and maintenance.
With the lessors' consent, the Company granted certain operators the right to use 15 of
its stores As of the reporting date in return for the rental fees charged to the Company
and provided that they comply with the other provisions in the rent agreements with
the lessors although the Company is the actual party to the agreements. Total rental
fees and management fees in respect of the stores recorded by the Company in its
books for 2013 amounted to approximately NIS 126,915 thousand and for 2012
approximately NIS 99,581 thousand. As for the Company's engagements in rent
contracts, see Note 19b to the financial statements.
d.
Investments in fixed assets, set up and equipment expenses
The Company owns equipment and fixed assets (mainly leasehold improvements).
The adjusted depreciated cost of the Company's fixed assets as of December 31, 2013
totals approximately NIS 182,735 thousand.
- 33 -
Details of investments in fixed assets and the related set up and depreciation expenses
as of December 31, 2013:
December 31, 2013 (NIS in thousands)
Accumulated Depreciated
Cost
depreciation
cost
Furniture and equipment in stores and
offices
Motor vehicles
Installations and leasehold
improvements
Total fixed assets
37,365
1,406
26,624
298
11,011
1,108
298,284
337,325
127,668
154,590
170,616
182,735
Cost
depreciation
cost
offices
Motor vehicles
improvements
Total fixed assets
3.1.11
33,301
1,350
23,766
427
9,535
923
250,114
284,765
103,903
128,096
146,211
156,669
Intangible assets
a.
Trademarks
The Company's policy is to achieve proprietary protection over its various trademarks
and brand names and it is therefore acting to have them registered in its name in Israel
and worldwide. The Company's signature brands in Israel are closely identified with
the Company and represent its main trademarks. They are imprinted on the Company's
products and ad campaigns as a means of recognizing and differentiating the
Company's products and attributing value to the Company and its products.
The Company owns 7 various types of registered trademarks in Israel, including FOX
and Fox Home.
- 34 -
As of the reporting date, the Company's expenses relating to trademarks, their
registration and protection are immaterial. The Company's management believes that
the Company has adequate protection of its trademarks in Israel and that it is able to
defend them against third party claims with high likelihood. Registering the
Company's trademarks abroad is currently in progress. As of the reporting date, the
Company has trademarks registered in China, Singapore, Poland, Mongolia, Romania,
the Ukraine, Serbia, Bulgaria, Italy, Slovenia, the Philippines and Spain. In addition,
applications have been filed for registering the Company's trademarks in other
countries as well. The registration process is lengthy and might last between one and
three years in each country and in certain cases even longer. The duration varies from
country to country. Even after the process of registering a trademark abroad is
completed, a third party might appeal in a petition to have it reversed. Due to all the
reasons detailed above, the Company's management believes that the Company's
protection over its trademarks registered abroad and over the applications filed for
registering trademarks abroad at this stage is not as strong as the protection it has over
its Israeli trademarks since the FOX and F&X brands have not yet accumulated the
reputation that they have in Israel overseas.
The Company uses the American Eagle Outfitters and Aerie trademarks which are
registered in Israel in the name of Retail Royalty Company by virtue of the exclusive
license agreement signed by the Company with AEO Management Co.
Further, soon the Company will use The Children's Place trademark which is
registered in Israel in the name of The Children's Place International LLC (which, in
return, conferred the Company the license to use it under the terms of the franchise
agreement (starting January 1, 2014).
See additional information of the Company's intangible assets in Note 11 to the
b.
Licenses
The Company sells license for the manufacture, marketing and sale of various fashion
products and accessories under the FOX brand name ("the licenses"). The licenses
grant the right to use the FOX name and/or the Company's other trademarks that are
granted to third parties that manufacture products that bear the Company's trademarks
in return for royalties. This activity is immaterial to the Company. The total revenues
from this activity in 2013 amounted to approximately NIS 34 thousand and in 2012
approximately NIS 368 thousand.
3.1.12
Suppliers
a.
General
As of December 31, 2013, the Company has outstanding engagements for purchasing
merchandise in an amount of approximately NIS 95 million.
- 35 -
b.
Suppliers and subcontractors
The Company has about 80 main suppliers and subcontractors which manufacture the
models ordered by the Company in the Far East. The Company does not have a longterm agreement with any of the suppliers and subcontractors and the orders are made
every season based on negotiations between the parties. The Company pays the
foreign suppliers and subcontractors for manufacturing the products, sometimes
through advance payments or credit letters and sometimes at different credit terms
without collateral, all based on the negotiations between the parties and in keeping
with economic considerations.
The Company does not have a right to return the products purchased by it from
foreign suppliers.
The following table specifies the percentage of purchases of finished goods abroad out
of total purchases of finished goods made by the Company according to suppliers and
subcontractors:
Supplier A
Supplier B
Supplier C
% of total purchases of
finished goods in 2013
About 9.2%
About 8.7%
About 5.2%
About 7.1%
About 6.4%
About 4.4%
In the course of the year, the Company also operated through the Chinese subsidiary
owned by it for making direct orders from suppliers which contributed to
diversification of acquisitions, another reduction in the dependency on a specific
supplier and potential reduction in acquisition costs.
In addition to the above table of suppliers, the Company operates as a franchisee
according to a license purchased from AE and, therefore, AE may be considered as a
material supplier for the Company. Nevertheless, AE has numerous suppliers in many
countries around the world and is not dependent on any supplier. Moreover, As of the
reporting date, the Company is not dependent on any specific supplier and/or
subcontractor since all the products can be manufactured for the Company in the
quantities needed by a large number of other suppliers and/or subcontractors in China
and/or in other countries without incurring additional production costs.
3.1.13
Working capital
a.
Policy of holding inventories of finished products
The Company holds inventories of finished products for the supply of the Company's
products for an average period of about four months based on seasonal sales forecasts
that are prepared about one year in advance. Since the supply time of the products is
about four-five months from the date of order, the Company receives the products
about one month before the season begins so that the scope of inventories held by it is
relatively large at the beginning of the season and is minimized at the end of the
season.
In 2013 and 2012, inventory days were about 160 and 156, respectively.
- 36 -
b.
Inventory data (NIS in thousands)
Fashion and home fashion segment
Finished goods
31.12.2013
174,313
31.12.2012
182,940
The Company's inventories as of December 31, 2013 that had been purchased by
December 31, 2011 amounted to approximately NIS 2,513 thousand. The Company's
inventories as of December 31, 2012 that had been purchased by December 31, 2010
amounted to approximately NIS 1,434 thousand ("inventories from previous years").
The Company sells inventories from previous years in the self-operated outlet stores
and in special end of season sales in non-outlet stores.
The Company periodically evaluates the condition and age of inventories and makes
provisions for slow moving inventories accordingly. The Company's evaluations
include, among others, examining the selling prices of items of inventories from
previous years sold in stores against their cost in the Company's books and analyzing
the movement in inventories over the years in order to examine the sales rate of
inventories from previous years. The Company believes that inventories that are up to
two years old will be sold by it at a price that is higher than cost. As of December 31,
2013, the value of inventories was written down in respect of a provision for the
impairment of inventories in the amount of approximately NIS 1,257 thousand,
representing about 50% of the value of inventories which is above two years old. The
Company believes that the provision recorded in the books for inventories from
previous years is adequate.
The Company orders the majority of products sold by it twice a year, about four-nine
months before each season. The ordering of products for the next season is based on
forecasts according to sales data in previous seasons and estimates and assumptions
regarding expected changes in the scope of sales arising from various factors such as
opening new stores, changes in customer tastes etc. Items from AE are ordered about
six times a year based on the turnover in the chief collections and on an ongoing basis
for supplements. Housewares consist of multi-seasonal items that are ordered on an
ongoing basis based on a safety inventory model according to sales rate and seasonal
items which are ordered twice a year according to the turnover in collections. Not
being able to predict future demands for products might expose the Company to high
inventory levels.
c.
Merchandise return policy
The Company's foreign franchisees and wholesale customers in Israel are not granted
a right of return at the end of the season.
In addition, in directly-operated stores, the Company adheres to the provisions of the
Consumer Protection Law and, according to the provisions of the law, grants refunds
to customers who return merchandise.
- 37 -
d.
Credit
(1)
Credit from suppliers
The Company accepts credit from suppliers under current + 60 day terms. In the
year ended December 31, 2013, the average credit term from suppliers was
about 68 days as opposed to about 64 days last year. The weighted credit
received by the Company from suppliers in the reporting period did not change
materially compared to the reporting periods. The Group's average scope of
credit from suppliers in 2013 totaled approximately NIS 77,185 thousand
compared to approximately NIS 71,417 thousand in 2012.
(2)
Credit to customers
Directly-operated stores in Israel - the Company allows customers using credit
cards to use a payment plan free of linkage or interest based on the scope of
purchase. The Company periodically enters into engagements with issuers of
coupons and magnetic gift cards (not payment cards) that allow making
purchases in a large number of institutions and chains. These issuers pay the
Company the consideration for the transactions less a discount at current + 3045 day terms. As a rule, sales to wholesalers in Israel are not provided on credit.
Sales to others in Israel generally use average credit terms of current + up to 60
days.
Sales overseas - sales to foreign franchisees are made at average credit terms of
cash or current + up to 60 days from the date of receipt of the goods by the
customer or from the date of issuing the invoice.
In the year ended December 31, 2013, the weighted credit granted by the
Company to customers totaled about 32 days compared to about 33 days last
year. The Group's average scope of credit to customers in 2013 totaled
approximately NIS 91,732 thousand compared to approximately NIS 82,987
thousand in 2012.
(3)
Doubtful accounts
The Company's management makes ongoing assessments of credit granted to
customers. The financial statements include specific allowances that adequately
reflect, according to the Company's management, the loss inherent in debts
whose collection is doubtful.
- 38 -
3.1.14
3.1.15
Limitations on and supervision of the Company's activities
a.
Pursuant to the Business Licensing Law, 1968, an individual cannot operate a business
that requires a license unless they hold a license pursuant to the Law and the terms
prescribed thereunder. In February 2007, the Company received a business license for
the Fox House pursuant to the Law. The license was renewed on September 15, 2013.
According to the Decree of Business Licensing (Businesses the Require a License),
1995, the Company's activities in most of the stores in the shopping malls and
commercial centers do not require a business license.
b.
The Company's activities are subject to specific legal provisions in the Consumer
Protection Law, 1981 and the Law for Supervision of Commodities and Services,
1957 ("the Supervision Law"), the Second Television and Radio Authority Rules
(Television Advertising Ethics), 1994 ("the Authority Rules"), including decrees and
regulations issued thereunder, regarding non-deception of consumers, mandatory
labelling of components and mandatory provision of washing instructions and price
presentation in Hebrew. The Company strictly complies with these legal provisions
through procedures, controls and automated solutions.
c.
In September 2008, the Company launched the Fox-Friends customers' club and had it
registered as a database (in August 2008) pursuant to the Law for the Protection of
Privacy whereby data included in the database can only be used for the purposes for
which the database was founded. The Company is subject to certain reporting duties
vis-à-vis the Registrar of Databases and is required to maintain the confidentiality of
the information held by it and to secure the data in the database. As for the distribution
of advertising pamphlets to customers, the Company acts according to the provisions
of the Law for the Protection of Privacy and the Spam Law.
d.
In January 2014, the Company launched the consolidated customers' club, the Dream
Card. In June 2013, The Company registered the club members' data as database. The
Company acts pursuant to the provisions of the laws and regulations regarding the
protection of privacy and protection of information.
e.
As a public company, the Company is subject to the Securities Law, 1968, including
the regulations, decrees and rules published thereunder as well as the provisions of the
Companies Law, 1999, including the regulations, decrees and rules published
thereunder.
In the context of the expansion of the Company's activities into foreign markets, the
Company entered into collaboration agreements and MOUs with certain foreign companies.
See information in paragraph 3.1.5(c) above.
- 39 -
3.1.16
Donations - see paragraph 5.4 to Chapter B.
Amendment of articles of association - on January 10, 2013, the general meeting approved
replacing the Company's articles of association with a revised article of association. See
immediate reports of December 6, 2012 (TASE reference: 2012-01-303666) and January 10,
2013 (TASE reference: 2013-01-010860).
3.2
The aromatic bath and body care products operating segment
Laline sells soaps, candles, oils, bath products, body care products, baby products, accessories and
gifts. In November 2008, Laline moved its office, administrative, design, storage, logistics and
marketing activities from Moshav Rishpon to Fox House at Airport City. The sublease agreement was
prepared with the approval of Tnuvot Keshet Ltd. (the lessor which leased the property to the
Company) under the same commercial terms as those in the Company's rent agreement and calculated
according to the space occupied by Laline.
As of the reporting date, Laline operates 88 stores in Israel and has some 600 employees. It also
operates in four foreign countries.
As stated in paragraph 1.2.3 a above, the Company holds 50% of the share capital of Laline. Despite
this holding rate, the aromatic bath and body care products operating segment, including the data from
Laline's financial statements, is presented at full holding rate (100%).
For additional details, see paragraph 2 to Chapter B below.
3.2.1
General information - the aromatic bath and body care products segment
a.
Developments in the aromatic bath and body care products operating segment
markets
The aromatic bath and body care products segment is subject to extensive competition
from pharm chains and department stores that offer unique departments that sell skin
and body care products. There are also competing chains such as Sabon and local
shops that sell beauty and body care products.
As part of its strategy for dealing with competition in the aromatic bath and body care
products segment, in the reporting period, Laline took the following measures:
(1)
Investing in creating an identity as a means of differentiation from other
networks;
(2)
Advertising, managing and continuously developing the customers' club;
(3)
Developing a shopping experience mainly by designing the points of sale to
provide an emotional shopping experience;
- 41 -
b.
(4)
Achieving growth by developing additional products under the same brand
name.
(5)
Applying to international markets using franchisees and resellers;
Special restrictions, legislation, regulations and constraints applicable to the
operating segment
See paragraph 3.2.14 below.
c.
Changes in the scope of operations in the segment and the profits therefrom
The Group does not have objective data regarding the overall scope of activity in this
segment and/or its profits.
d.
Market developments in the operating segment or changes in the nature of the
customers therein
In recent years, due to the relative saturation in the Israeli market, there is a trend of
Israeli companies such as Laline that attempt to break the international markets
barrier.
e.
Critical success factors in the operating segment and changes therein
Laline believes that there are several critical success factors underlying the operating
segment as follows:
(1)
Creating a variety of innovative products with a wide spectrum of scents,
sensations and designs.
(2)
Investing resources in advertising in order to retain and enhance power,
distinction and dominance in the aromatic bath and body care industry.
(3)
National deployment of Laline's stores in strategic locations inside major
shopping malls and commercial centers in Israel in order to allow prospective
customers maximum exposure to Laline's products.
(4)
Utilizing Laline's economies of scale both in order volumes and in the number
of items ordered from each product type to assist in minimizing acquisition
costs and offer competitive prices to customers.
(5)
Maintaining and using advanced, automated state-of-the-art management,
control, information and logistics systems.
(6)
Maintaining an effective quality control system for the products.
- 41 -
f.
Changes in the system of suppliers and raw materials in the operating segment
The manufacturing of Laline's products is conducted by subcontractors in Israel.
Laline has no dependency on a specific supplier and/or subcontractor since all its
products can be manufactured at the desired quantities by a large number of other
suppliers and/or subcontractors in Israel. The Company has no dependency on a single
material supplier since Laline possess all knowhow related to product development
and production planning, however, due to size considerations (purchase costs and
production volume), Laline produces about 28% of production at one producer. Yet,
as mentioned, production of any of the products can be transferred from one producer
to another. This process is estimated at five to six months including the license.
Laline is constantly acting to recruit new suppliers on the one hand and monitor the
manufacturing and quality control of the products manufactured by existing suppliers
on the other.
g.
The main barriers to entry and to exit in the operating segment and changes
therein
Laline estimates that there are no significant barriers to entry in the industry in which
it operates. The barriers to entry in setting up a single store are low since it does not
require any special resources. However, the transition from operating a single store or
several locally deployed stores to nationwide deployment requires making large
investments in infrastructures and in logistics, having financial strength and entering
into engagements with vital suppliers.
Laline estimates that it does not face any material barriers to exit.
h.
Alternatives to the operating segment products and changes therein
Laline's products have many alternative products by local manufacturers and/or
importers that are marketed throughout Israel in numerous and diversified points of
sale. Laline acts to retain and enhance its competitive edge over alternative products
through market differentiation, originality, innovation, quality and market leadership
and by attributing added value to its brands by adhering to leading and innovative
designs, offering competitive prices, developing a variety of products, advertising,
public relations and managing a members' club as part of the Company's consolidated
customers' club, the Dream Card (for additional information, see paragraph 3.2.5 c
below). .
i.
The structure of the competition in the operating segment and changes therein
The aromatic bath and body care industry is characterized by competition several
branded chains (some of which department stores and others retail chains) and local
private shops.
- 42 -
In addition to retail chains that market competing products in Israel such as Sabon and
Body Shop, the nationally deployed pharm chains and department stores also sell
competing products as well as a large number of retail stores that do not form part of
the national competing chains. Laline's relative advantage in this competitive market
has been reinforced in the reporting period and it is now a leading and recognized
factor in this market.
3.2.2
Products
Laline's products include body care products - lotions, soaps, candles, diffusers and life style
products all sold under the Laline brand name.
Laline has ten suppliers and subcontractors that manufacture its products. Substantially all of
Laline's products are developed and designed by Laline itself and manufactured by suppliers
and subcontractors. Laline's products can be classified into the following seven categories:
a.
b.
c.
d.
e.
f.
g.
3.2.3
Body care products - lotions, body lotions, body oils.
Liquid and solid soaps - hand soaps, body soaps, peeling soaps, gel soaps.
Candles - ornamental, scented and aromatic candles.
Incense products and air fresheners - diffusers, scented oils for burners.
Beauty products - eye shadows, face powder, blush, fragrances, nail polish.
Textiles - bathrobes, towels.
Bath products - ceramic bath accessories, shower curtains.
All of Laline's products in the aromatic bath and body care products segment do not differ
materially in terms of risks, development, acquisition, marketing and the decision making
process.
Following are details of revenues and gross profit according to types of customers:
Aromatic bath
and body care
operating
segment
Directly operated
stores
Wholesalers and
others
Foreign
franchisees
Total
2013
2012
Revenues
(NIS in
thousands)
Gross
profit
margin
Revenues
(NIS in
thousands)
Segmentation
of revenues
120,281
89%
72.6%
114,757
92%
72.4%
5,001
4%
58%
5,232
4%
57.6%
10,216
7%
27.2%
4,761
4%
33.1%
135,498
100%
68.8%
124,750
100%
70.3%
Segmentation
of revenues
Gross
profit
margin
The decrease in gross profit rate to foreign franchisees derives form the increase in discounts
granted to foreign customers in 2013.
- 43 -
Below are details of proceeds data per sq. m. in directly operated same stores and per
employee in 2013 and 2012:
Aromatic bath and body care operating segment
Total sales in directly operated stores (NIS in thousands)
(100%)
Total sq. m. in directly operated stores - annual average
Sales per sq. m. per annum - directly operated stores - annual
average (NIS in thousands)
Sales per sq. m. per annum - directly operated same stores
(NIS in thousands)
Monthly proceeds per employee (NIS in thousands)
Change in same store sales
2013
2012
120,281
4,166
114,757
3,531
29.8
32.5
32.6
15
-2.4%
33.7
12
0%
The sq. m. numbers presented in the table above are in gross numbers, consisting of public
spaces and storage areas. The calculation of total average sq. m. per annum is proportionate
to the number of months of operation for each store. The calculation of sales per sq. m. of
same stores in 2013 is based on stores that have not changed in terms of sq. m. or of the sub
brands sold therein in 2013-2012. Similarly, the calculation of sales per sq. m. of same stores
in 2012 is based on stores that have not changed in terms of sq. m. or of the sub brands sold
therein in 2012-2011. Accordingly, the stores underlying the calculation for 2013 are not
necessarily identical to the stores underlying the calculation for 2012. In 2013, Laline
operated 75 same stores. The proceeds per employee do not include subcontractors'
employees.
3.2.4
Customers
Laline's customers can be classified into three main groups:



The end consumers at the stores managed and operated by Laline
Institutional buyers
Foreign franchisees
Laline is not dependent on a specific customer whose loss would materially affect its
operating segment, including any foreign franchisee.
- 44 -
The condensed table below presents the credit terms granted to Laline's non-retail customers:
Operating
Customer
segment
type
Wholesalers
Aromatic
bath
and
body
care
products
Foreign
franchisees
3.2.5
No. of customers
as of 31.12.12
About 70
customers
4 countries
Payment terms
Substantially all - cash or credit
cards.
Customer obligo initiated for large
loyal institutional buyers and for
customers with coupons marketed by
a distributor, secured by personal
guarantee
Payment in cash if no guarantee is
provided or in credit card against
bank guarantee.
Fixed credit terms are current + 90 150. There are bank guarantees in
favor of Laline against most of the
open obligo. In special cases, the
customer is given long-term credit as
part of business development support
in target countries.
a.
General
Marketing channels
Laline has three major marketing channels:



Direct sales to the end customers in stores that are managed and operated by
Laline in Israel ("directly-operated sales" or "directly-operated stores").
Sales to institutional buyers in Israel (workers' committees etc.) ("sales to
institutional buyers").
Sales to Laline's foreign franchisees ("sales to foreign franchisees").
Distribution in Israel
The distribution of products in Israel is done from Laline's state-of-the-art storage and
logistic center at the Airport City near Ben-Gurion Airport.
- 45 -
Laline's products are stored at the logistic center and distributed to Laline's stores in
Israel based on predetermined distribution procedures issued by Laline's HQ according
to sales forecasts, targets and actual sales. Distribution is carried out on a daily basis
and includes products that have been ordered based on each store's specific needs and
items that have been re-ordered. The IT systems allow online supervision and control
in order to provide a quick response, inventory management and operation flexibility
and inventory shifting between stores and from the logistic center to stores. These
tools enable better utilization of inventories, reduction of items returned from the
stores to the logistic center and optimization of store spaces. Laline's logistic center in
Israel and its computerized systems and conveyance machinery enable customized
gathering of items for each store individually based on each store's specific needs and
actual sales.
On July 15, 2012, the Company and Laline signed an agreement for the provision of
logistic services according to which he Company will grant Laline logistic services
that consist of the following: storage at the Company's logistic center, supply chain
management and distribution to stores. The agreement allows Laline, as a member of
the Fox Group, to use the Company's logistic systems and infrastructures for the
purpose of optimizing Laline's logistic, storage, distribution and supply chain
procedures in the Company's IT systems. The consideration for the Company's logistic
services was determined as a percentage of Laline's total operations and will be
reviewed and updated annually if needed.
Sales to institutional buyers are made through Laline's logistic center at Airport City
as described above.
Distribution overseas
The distribution of Laline's products to foreign franchisees is performed directly from
Laline's logistic center at Airport City. Laline delivers the manufacturing orders to the
subcontractors and sells the products to the foreign franchisees from its logistic center
in Israel at ex-factory terms. Each franchisee is responsible for collecting its order
from the logistic center. Laline's import department issues sale invoices to the
customers based on the pricelist. Invoices issued by Laline are delivered to the
customer overseas to be used for clearing the goods through customs in the target
country.
Marketing Laline's products in Israel
Laline markets its products to Israeli customers through a chain of stores managed and
operated by Laline and through sales to institutional buyers who make bulk purchases.
Directly-operated sales are made under one type of branded store: Laline.
- 46 -
Laline's stores are mostly located in leading shopping malls and commercial centers in
Israel. The stores are all designed under a uniform and unique concept which is
occasionally updated and adapted to Laline's marketing objectives. Sales and
marketing in the actual stores are performed by the sales teams who have been
specifically trained in the sale and service fields. In addition, Laline provides special
offers at the stores (advertised at the points of sale) and holds special sales events
(Valentine's, holidays etc.).
Laline's marketing activity in Israel consists, among others, of advertising on
television, issuing catalogs, advertising in the written press, in magazines, in
billboards and in shopping malls and stores, operating a website, collaborating with
various commercial companies, internet campaigns, partnering with retailers in
offering coupons, operating the Dream Card customers' club etc. The marketing
activities, their nature and scope vary from time to time and are determined at Laline's
management's discretion.
As of December 31, 2013, Laline entered into rent agreements for opening five new
stores. The new stores are expected to open in 2014-2015 after the completion of the
construction of the shopping/commercial centers in which they will be located. From
time to time, Laline looks into opening new stores once new commercial centers are
erected in attractive locations or when an opportunity arises for opening a store in a
city where Laline does not have an active store.
The gross profit derived from the sale of Laline's products under the Laline brand
name does not differ materially between the various products.
Following are details of the stores opened and closed in 2013-2011 as of
December 31, 2013:
Fashion
and home
fashion stores
56
- Average cost of setting up one sq. m. of new store 2010
about NIS 6,000
NIS 1.7 million
13
Stores closed in 2011
69
about NIS 5,800
NIS 3.8 million
7
76
about NIS 5,800
NIS 2 million
11
(1)
86
about NIS 6,000
NIS 2.8 million
- 47 -
Details of the rent agreements for Laline's stores:
Rental agreement term
(without the extension option)
Up to one year
One-three years
Three-five years
Over five years
Total rented
area (sq. m.)
919
2,137
562
811
Total number
of stores
17
43
10
16
Laline does not have a single store that accounts for more than 10% of revenues or net
income in this operating segment.
b.
Pricing of Laline's products in Israel
Laline's products have uniform prices that are determined by Laline for all products
once a year. The pricelist states the final consumer selling price (including VAT)
("Laline's pricelist"). Laline's pricelist applies to products sold in directly operated
stores in Israel and serves as a base price before discount for institutional buyers and
foreign franchisees.
c.
Marketing and direct sales in the stores managed and operated by Laline in
Israel
Sales are made directly by Laline to the end consumer through store managers and
employees. As of December 31, 2013, Laline manages and operates 86 stores in all
parts of the country, mainly in commercial centers (shopping malls and power
centers).
Sales made through each of Laline's stores in the various commercial centers do not
exceed 5% of total revenues from Laline's sales.
The rent periods in the rent agreements for Laline's stores do not share a common
feature. The agreement period varies but most of the agreements include an option for
a unilateral extension by Laline (the lessee). Simultaneously with the rent agreements,
management agreements are signed with the commercial centers' management
companies.
Given the large number of stores operated by Laline, it does not deem any of the
agreements to be material.
Customers' club
As part of the sale and marketing system in the stores managed and operated by Laline
in Israel, in August 2009, Laline launched a customers' club ("Laline Body Card").
According to the club's rules, membership entitles the members of Laline Body Card
to credit points/shopping discounts and the right to participate in special sales offers
initiated by Laline from time to time. Joining the club requires paying a membership
fee.
- 48 -
As of December 31, 2013, Laline has 320 thousand club members, of whom about 280
thousand active members.
On January 1, 2014, the Company launched a consolidated customers' club which
encompasses all of the Group's brands (apart from Marcha Ballerine and Sacks) so
that an existing member of the club can enjoy the club's benefits in each of the brands
without additional fee. Former customers' clubs (Laline, Body Card) will stop recruit
new members and will terminate within three years.
Laline distributes catalogs and leaflets informing the club members of special offers
and new products. In this context, Laline operates in conformity with the
Communications Law (Bezeq and Broadcasting) (Amendment No. 40), 2008 (above
and hereunder, "the Spam Law").
According to the club's rules, Laline may change the club's rules and/or the benefits
offered to the members from time to time, at its exclusive discretion.
Laline registered the club members' data as a database pursuant to the provisions of
the Law for the Protection of Privacy, 1981, as specified in paragraph 3.2.14 below.
For additional details, see paragraph 3.1.5 a above.
d.
Sales and marketing through institutional buyers in Israel
Laline sells its products to several institutional entities around Israel. The engagement
is generally signed with large workers' committees (such as the Israeli Teachers'
Union), members' clubs (such as Hever) and credit card companies (such as Isracard).
These engagements are usually signed in advance and in bulk quantities right before
holidays and special events chosen by the buyer.
e.
Sales and marketing abroad
As elaborated below, Laline enters into franchise agreements with foreign companies
which grant the franchisees an exclusive, limited and non-transferrable license for
distributing and reselling Laline's products in the relevant countries and the right to
use the Laline brand name as well as other brand names and trademarks owned by
Laline. The franchisees bear all the costs relating to transport, insurance, taxes,
customs etc. as well as costs relating to construction, operation and advertising of the
chain in the relevant territory. In most cases, the franchise is granted for retail sales
only. As of the reporting date, Laline operates in four countries as follows:
(1)
California, USA
On March 25, 2010, Laline signed an agreement with a US franchisee which is
a company controlled by Zemach Holdings LLC for setting up a chain of stores
in north California, USA ("the US franchisee"). According to an addendum to
the agreement from late 2012, the territory was reduced to North California bay
area only.
- 49 -
The US franchisee is not related to the controlling shareholders in the Company
and/or Laline. The US franchisee will locate and prepare the leasehold
properties in which the stores will be opened at its expense and operate the
chain using a professional brand manager and a local team. The US franchisee
will bear all the set up and operation costs. As of the reporting date, the US
franchisee has opened two stores in San Francisco and expects to open two new
stores in 2014. The agreement is in effect for a period of three years with an
option for extension by another three years.
(2)
The Virgin Islands
On August 5, 2010, Laline signed an agreement with a franchisee in the Virgin
Islands ("the BVI franchisee") for setting up a store chain in the Caribbean's.
The BVI franchisee is not related to the controlling shareholders in the
Company and/or Laline. The BVI franchisee will locate and prepare the
leasehold properties in which the stores will be opened at its expense and
operate the chain using a professional brand manager and a local team. The BVI
franchisee will bear all the set up and operation costs. As of the reporting date,
the BVI franchisee has opened two stores in St. Thomas. The agreement is in
effect for a period of six years with an option for extension by another six years.
(3)
Japan
On September 4, 2010, Laline signed an agreement with a franchisee in Japan
("the Japanese franchisee") for setting up a store chain in Japan. The Japanese
franchisee is not related to the controlling shareholders in the Company and/or
Laline. The Japanese franchisee will locate and prepare the leasehold properties
in which the stores will be opened at its expense and operate the chain using a
professional brand manager and a local team. The Japanese franchisee will bear
all the set up and operation costs. On December 10, 2010, the trademark was
registered in Japan. As of the reporting date, the Japanese franchisee has opened
11 stores and expects to open four new stores in 2014. The agreement is in
effect for a period of five years with an option for extension by another five
years.
(4)
Singapore
On April 1, 2011, Laline signed an agreement with a franchisee in Singapore
("the Singapore franchisee") for setting up a store chain in Singapore. The
Singapore franchisee is not related to the controlling shareholders in the
Company and/or Laline. The Singapore franchisee will locate and prepare the
leasehold properties in which the stores will be opened at its expense and
operate the chain using a professional brand manager and a local team. The
Singapore franchisee will bear all the set up and operation costs. The agreement
is in effect for a period of five years with an option for extension by another five
years. Also, the parties agreed that at the end of an operation period of several
months, the franchisee activity will be examined. As of the report date, after
opening three stores and examining the franchisee activity, the parties are
testing the feasibility to their engagement.
- 51 -
Discontinued operations:
(5)
Switzerland
On February 7, 2011, Laline signed an agreement with a franchisee in
Switzerland ("the Swiss franchisee"). The franchisee did not fulfill its
undertaking under the franchise agreement and did not comply with Laline's
requirements. In the second quarter of 2012, the activity in the country was
discontinued and in 2013 the balance of remaining proper merchandise was
returned.
(6)
Italy
On November 12, 2011, Laline signed an agreement with a franchisee in Italy
("the Italian franchisee"). The franchisee did not fulfill its undertaking under
the franchise agreement and did not comply with Laline's requirements. In
August 2013, the franchise agreement was cancelled due to a fundamental
breach.
f.
Wholesales abroad
In 2013, no wholesales were mad abroad except for sales to franchisees as detailed in
sub-paragraph (e) above.
3.2.6
Order backlog
The institutional buyers may purchase Laline's products by making advance bulk orders or
on an ongoing basis based on their specific needs. Laline's foreign franchisees order the
products they need from Laline based on actual sales volumes, as encouraged by Laline and
with the franchisee's approval.
Details of order backlog from Laline's foreign franchisees (NIS in thousands)
Expected
revenue
recognition
period
Q1 2014
3.2.7
Order backlog as of
December 31, 2013
1,750
Orders supplied by
the report date
760
Order backlog at
the report date
990
Competition
The competition in the aromatic bath and body care industry is great and versatile. There are
many entities, including manufacturers, importers, department stores, pharm chains, special
retail chains and private stores that compete with Laline's activities in this segment.
- 51 -
Laline's management does not have data regarding the scope of the Israeli aromatic bath and
body care market but compared to the special retail chains, pharm chains and national
department stores, it is estimated that Laline is one of the leading players in this market in
Israel. Although the pharm chains and department stores market aromatic and body care
products, there are material differences in the method of marketing, display and sale
compared to Laline. While these chains sell the products separately in several departments
around the store's area (which is usually hundreds or even thousands of sq. m. in space),
Laline's stores are uniformly decorated to provide a clean and intimate look & feel. Laline's
stores are all designed in white wood and the products are displayed in groups according to
categories. Each store has a toiletry station for the customers' personal experimentation with
the various products. The stores' sales teams have been trained in advance to provide each
customer personalized consulting on relevant products. The ambiance in Laline's stores,
along with the scents of candles and soaps, is very relaxing and calm.
Laline's main competitors include but are not limited to pharm chains such as Super Pharm
and New Pharm, department stores such as Hamashbir and special retail chains such as
Sabon, Body Shop and Golf & Co.
Laline deals with the competition from pharm chains and department stores in the method of
marketing, displaying and selling its aromatic bath and body care products as explained
above. It deals with the competition with the special retail chains mainly by utilizing its
economies of scale in terms of order volumes and the number of items ordered from each
product while continuously considering the feasibility of production by the various suppliers
which is reflected in reduction of production costs and consequently Laline's ability to sell its
products at competitive prices. In addition, the product development and design department
at Laline's HQ continuously updates Laline's line of products, focusing on developing
innovative products and designing them to provide the specific feel which best serves the
products.
Laline also makes special investments in advertising in order to enhance public exposure and
awareness to its brands by creating added value, projecting an appealing image,
distinguishing itself from its rivals and using leading designs and public relations. Total
investments in advertising and marketing in 2013 and 2012 amounted to NIS 5,016 thousand
and NIS 5,546 thousand, respectively. Laline also makes sure to position its stores in prime
locations across Israel and to maintain and utilize advanced computerized management,
control, information and logistic systems, an effective quality control system and a solid,
reliable and flexible production infrastructure.
See a discussion of the positive factors that promote Laline's competitive edge in paragraph
3.2.1(e) above.
The negative factors that are liable to affect Laline's competitive position include: unforeseen
changes in demand volumes, the strengthening of local aromatic bath and body care brands
and chains and the introduction of new international brands into the Israeli market.
- 52 -
3.2.8
Seasonality
Laline's revenues are affected by seasonality, mainly depending on the timing of the holiday
seasons.
Data of sales in the aromatic bath and body care products segment in 2013 and 2012
according to quarters based on Laline's financial statements:
Q1
Q2
Q3
Q4
Total
2013
NIS in
%
thousands
of sales
34,843
25.7%
32,262
23.8%
38,505
28.4%
888
22.1%
135,498
100%
2012
NIS in
%
thousands
of sales
29,432
23.6%
30,859
24.7%
34,909
28.0%
29,550
23.7%
124,750
100%
Data of gross profits in the segment in 2013 and 2012 according to quarters:
2013
Q1
Q2
Q3
Q4
Total
2012
% of gross
profit from
sales
68.9%
67.5%
68.6%
70.2%
68.8%
NIS in
thousands
24,007
21,768
26,418
20,977
93,170
% of gross
profit from
sales
7101%
7102%
6906%
7103%
8.07%
NIS in
thousands
216634
216961
246317
216779
786,78
Data of operating income in the segment in 2013 and 2012 according to quarters:
2013
Q1
Q2
Q3
Q4
Total
NIS in
thousands
6,464
5,056
7,756
4,501
23,777
- 53 -
% of
operating
income from
sales
18.6%
15.7%
20.1%
15.1%
17.5%
2012
NIS in
thousands
5,033
6,014
6,716
4,210
21,973
% of
operating
income from
sales
17.1%
19.5%
19.2%
14.2%
17.6%
3.2.9
Production capacity
The vast majority of Laline's products are manufactured on an ongoing basis throughout the
year by several suppliers and subcontractors and therefore there is no material limitation
imposed on Laline's production capacity.
The Company has no dependency on a single material supplier since Laline possess all
knowhow related to product development and production planning, however, due to size
considerations (purchase costs and production volume), Laline produces about 28% of
production at one producer. Yet, as mentioned, production of any of the products can be
transferred from one producer to another. This process is estimated at five to six months
including the license.
manufacturing and quality control of the products manufactured by existing suppliers on the
other.
Quality control
Laline exercises several quality control levels for its products both for controlling production
processes in subcontractors' factories and for controlling the quality of products
manufactured by them. Quality control is performed by Laline's QC department managed by
the Chief Quality Officer ("QCO"). The first phase of quality control commences with the
receipt of a prototype from the subcontractors which is based on the product file prepared by
Laline's development and design department at Laline's HQ with the desired product specs.
The preliminary examination inspects the quality of raw materials, product packaging and
product quality compared to purpose (in body care products - texture, scent, feel and tests of
outcome) by Laline's QC staff. After obtaining approval for commencement of work and
receipt of goods, the majority of goods received from all subcontractors are inspected.
Laline's QCO is responsible for submitting a quality control report on a monthly basis
(categorized according to soaps, body care products, candles etc.) which reviews findings of
any deficiencies in the goods received. Moreover, the QCO inspects the production and
ongoing work processes at the subcontractors' factories. Laline operates a customer service
department that is in charge of detecting flaws in products and classifying them according to
the various suppliers as well as preparing a customer service report which specifies the
products returned due to flaws in production.
3.2.10
a.
General
Laline does not own any real estate properties and its activities (offices, warehouses
and stores) are performed on leased real estate. In order to secure rental agreements,
Laline provided the building lessors bank guarantees in a total of NIS 2,365 thousand
as of December 31, 2013.
- 54 -
b.
Offices and warehouse
In November 2008, Laline moved the office, management, design, manufacture,
storage, logistic and marketing activities from Moshav Rishpon to Fox House at
Airport City. The sublease agreement was signed with the approval of Tnuvot Keshet
Ltd. (the lessor which leased the property to the Company) under the same
commercial terms as those in the Company's rent agreement and calculated according
to the space occupied by Laline.
On July 15, 2012, the Company and Laline signed an agreement for the provision of
logistic services. See also paragraph 3.3.6 above.
c.
Retail stores
As of December 31, 2013, Laline rents 86 active stores across Israel, most of which in
shopping malls and commercial centers. The rent terms for each store are determined
in negotiations between Laline and the lessors. The rent period lasts from one year to
fourteen years. The initial rent period in most rent agreements is between three and
five years. In addition, in most rent agreements, Laline has an option for extension of
the rent period by additional periods of 1-14 years.
The rental fees for most stores are calculated as the higher of a fixed percentage of
proceeds or a fixed amount and are mostly linked to the Israeli CPI. In addition to
rental fees, Laline generally also pays additional fees for the leasehold's management
and maintenance.
Total rental fees and management fees in respect of the stores paid by Laline in 2013
amounted to approximately NIS 17,000 thousand and in 2012 approximately
NIS 16,559 thousand.
d.
Investments in fixed assets, set up and equipment expenses
Laline owns equipment and fixed assets (mainly leasehold improvements). The
adjusted depreciated cost of Laline's fixed assets as of December 31, 2013 totals
approximately NIS 28,225 thousand.
Cost
depreciation
cost
offices
Motor vehicles
improvements
Total fixed assets
- 55 -
28,682
903
19,900
229
17,782
674
15,632
45,217
5,863
16,992
9,769
28,225
Cost
depreciation
cost
offices
Motor vehicles
improvements
Total fixed assets
3.2.11
236843
913
86751
188
156193
715
136162
7867.7
36876
816781
96186
116441
Intangible assets
Trademarks
Laline's policy is to achieve proprietary protection over its various trademarks and brand
names and it is therefore acting to have them registered in its name in Israel and worldwide.
Laline's signature brands in Israel are closely identified with it and represent its main
trademarks. They are imprinted on Laline's products and ad campaigns as a means of
recognizing and differentiating Laline's products and attributing value to Laline and its
products.
As of the reporting date, Laline owns 13 different types of trademarks registered in Israel.
Laline also owns 18 trademarks registered in the EU and in other countries. In addition, four
applications have been filed for registering Laline's trademarks in Puerto Rico, the
Philippines and Korea.
3.2.12
Suppliers
a.
General
As of December 31, 2013, Laline has outstanding engagements for purchasing
merchandise in an amount of approximately NIS 6,000 thousand.
b.
Suppliers and subcontractors
Laline has ten main suppliers and subcontractors in Israel which manufacture the
products ordered by it. Laline does not have a long-term agreement with any of the
suppliers and subcontractors and the orders are made on an ongoing basis based on
negotiations between the parties. Laline pays the suppliers and subcontractors for
manufacturing the products, either through advance payments or on at different credit
terms without collateral, all based on the negotiations between the parties and in
keeping with economic considerations.
- 56 -
Laline engages with several suppliers simultaneously on a regular basis, which
contributes to diversification of acquisitions, another reduction in the dependency on a
specific supplier and potential reduction in acquisition costs.
The Company has no dependency on a single material supplier since Laline possess all
knowhow related to product development and production planning, however, due to
size considerations (purchase costs and production volume), Laline produces about
28% of production at one producer. Yet, as mentioned, production of any of the
products can be transferred from one producer to another. This process is estimated at
five to six months including the license.
manufacturing and quality control of the products manufactured by existing suppliers
on the other.
The following table specifies the percentage of purchases of finished goods abroad out
of total purchases of finished goods made by Laline according to main suppliers and
subcontractors:
Supplier A
Supplier B
Supplier C
3.2.13
About 28%
About 19%
About 12%
About 36%
About 19%
About 17%
Working capital
a.
Policy of holding inventories of finished products
Laline holds inventories of finished products for the supply of its products for an
average period of about six months based on the following considerations: (1) past
experience; (2) future sales forecasts in relation to existing inventories, opening new
stores, changes in customer preferences etc.; and (3) product supply time (usually
three-four months from date of order). The inability to foresee future demands for
products might expose Laline to high inventory levels. Laline's products have a long
shelf life which allows holding inventories in the long term.
In 2013 and 2012, inventory days were 236 and 223, respectively.
b.
Inventory data (NIS in thousands)
31.12.2013
27,465
Finished goods
31.12.2012
22,696
Laline periodically evaluates the condition and age of inventories and makes sure that
inventory items are sold beforehand so as to avoid a situation of surplus inventories
that cannot be sold.
- 57 -
c.
Merchandise return policy
Agreements between Laline and foreign franchisees do not confer a right of return,
except special cases which will be approved by Laline.
Laline allows customers of chain store to return products subject to the provisions of
the Consumer Protection Law, 1981 and Consumer Protection Regulations
(Cancellation of a Transaction), 2111. In cases of flawed products, Laline accepts
returned merchandise and grants the customers a monetary refund or a credit voucher
for repurchasing.
d.
Credit
(1)
Credit from suppliers
Laline accepts credit from suppliers under current + 90 day terms. In the year
ended December 31, 2013, the average credit term from suppliers was about 83
days as opposed to about 93 days last year. The weighted credit received by
Laline from suppliers in the reporting period did not change materially
compared to the reporting periods. Laline's average scope of credit from
suppliers in 2013 totaled approximately NIS 10,600 thousand compared to
approximately NIS 9,800 thousand in 2012.
(2)
Credit to customers
Directly-operated stores in Israel - Laline allows customers using credit cards to
use a payment plan free of linkage or interest based on the scope of purchase.
Laline periodically enters into engagements with issuers of coupons and
magnetic gift cards (not payment cards) that allow making purchases in a large
number of institutions and chains. These issuers pay Laline the consideration
for the transactions less a discount at current + 30-45 day terms. As a rule, sales
to wholesalers in Israel are not provided on credit. Sales to others in Israel
generally use average credit terms of current + up to 60 days.
Sales overseas - sales to foreign franchisees are made at credit terms of up to
90-150 days from the date of receipt of the goods by the customer or from the
date of issuing the invoice. Laline has full guarantees in respect of outstanding
debt in a total of NIS 5,550 thousand as of December 31, 2013.
In the year ended December 31, 2013, the weighted credit granted by Laline to
customers totaled about 49 days compared to about 37 days last year.
(3)
Doubtful accounts
Laline's management makes ongoing assessments of credit granted to
customers. The financial statements include specific allowances that adequately
reflect, according to Laline's management, the loss inherent in debts whose
collection is doubtful.
- 58 -
3.2.14
3.2.15
Limitations on and supervision of Laline's activities
a.
Pursuant to the Business Licensing Law, 1968 (in this paragraph only - "the Law"), an
individual cannot operate a business that requires a license unless they hold a license
pursuant to the Law and the terms prescribed thereunder. In February 2013, Laline
received an exemption pursuant to the Law. According to the Decree of Business
Licensing (Businesses the Require a License), 1995, Laline's activities in the stores in
the shopping malls and commercial centers do not require a business license.
b.
Laline's activities are subject to specific legal provisions in the Consumer Protection
Law and the Supervision Law, including decrees issued thereunder, regarding nondeception of consumers, mandatory labelling of components and mandatory price
presentation in Hebrew. Laline strictly complies with these legal provisions through
procedures, controls and automated solutions.
c.
In September 2009, Laline launched the a customers' club and had it registered as a
database pursuant to the Law for the Protection of Privacy, 1981 whereby data
included in the database can only be used for the purposes for which the database was
founded. Laline is subject to certain reporting duties vis-à-vis the Registrar of
Databases and is required to maintain the confidentiality of the information held by it
and to secure the data in the database.
d.
Laline's activities are subject to specific legal provisions such as the Law for
Supervision of Commodities and Services (Cosmetics), 1973 for obtaining a general
and specific license to sell cosmetics and the Decree for Labelling Merchandise
(Cosmetics Packaging), 1960 regarding the mandatory sale of cosmetics only in a
container that is packaged with its entire contents by the manufacturer or importer and
without manipulating the product's packaging, the Pharmacists Ordinance, 1981 and
the Pharmacists Regulations (Cosmetics), 2013.
In the context of the expansion of Laline's activities into foreign markets, Laline entered into
franchise agreements with several foreign companies. See information in paragraph 3.2.5(e)
above.
- 59 -
3.3
Additional information regarding the entire Group's activities
3.3.1
Human capital
a.
A diagram of the Group's organizational structure
The Group's organizational structure, as relevant for the Group's needs, is as follows:
Fox Group CEO
Laline CEO
VP Operations
VP Chain
Subsidiaries
Group VP
Marketing and
Advertising
Billy Haus CEO
Sacks CEO
VP Marketing
(*)
b.
CFO
Group VP
Group CFO and
Operations and
CIO
Logistics
Group VP
Human
Resources
TCP CEO
VP
International
VP Production
and Purchasing
Fashion and
home fashion
American Eagle
CEO
VP Business
Development
Fox Israel CEO
VP Product
Development
Fox Home CEO
VP Sales Fox
Israel
VP
International
Marketing
The brands FOX, Fox Home, AE and Laline have similar organizational
structure comprising VP of Sales and VP of Commerce.
Employee count
As of December 31, 2013 and 2012, the Group has 3,938 and 3,405 employees,
respectively, according to the following departments:
31.12.2013
Management (including marketing, advertising and
business development)
Finance
Brand, design and acquisition management
Sales headquarters
Store sales teams12
Operations and logistics
Total Fox employees
Total Group employees
(*)
41
20
53
57
2,486
184
2,841
1,097
3,938
31.12.2012
33
19
51
56
2,217
164
2,540
865
3,405
The majority of employees of subsidiaries are store staff.
From time to time, the Group also hires temporary employees through manpower
companies.
12
This group of people includes a large number of part-time employees.
- 61 -
c.
Material changes in employee count in the reporting period
No material changes occurred in the employee count or in the organizational structure
in 2013.
d.
Material dependency on employees
Mr. Harel Wizel, the controlling shareholder in the Company, a director and the
Company's CEO, is a key officer in the Group owing to his business and managerial
skills. In view of Mr. Wizel's understanding and experience in marketing and sales, his
contribution to the development and innovation of new products and to the Group's
advertising and PR efforts is considerable. Should Mr. Wizel cease to serve in the
Company, this might have a potentially detrimental effect on the Group's revenues and
profits.
e.
The Group's investments in employee training and coaching
The Group organizes periodic training courses to all of the Group's employees.
Employee training is performed in accordance with the Company's training program
and annual work plan. In addition, there are employees in the Group who are required
to pass the qualification tests such as cashiers, shift supervisors, LOD leaders and etc.
In addition, all store managers are required to take basic management courses and
several ad hoc trainings according to the position's requirements. The Group's
investments in training and coaching its employees are immaterial.
f.
Employee remuneration plans
1.1
On July 25, 2013, following the recommendation of the Company's
Remuneration Committee, the Company's Board approved a remuneration plan
for senior officers and senior executive members of the Company. On
September 2, 2013, the general meeting approved the remuneration plan. The
plan replaces the non-equity plan approved in 2011 and any other plan.
In August 2011, following the recommendation of the Remuneration
Committee and the approval of the Audit Committee, the Board and general
meeting, the Company adopted an option plan to senior officers.
1.2
About 643,640 share options with a value of approximately NIS 10,995
thousand that are unlisted and that may be exercised into 643,640 Ordinary
shares of the Company of NIS 0.01 par value each were allocated, at no
consideration, to the Company's officers.
For additional details regarding the Company's remuneration policy and option
plan, see Regulation 21 to Chapter 4 to this periodic report and Note 18 to the
- 61 -
g.
Adoption of internal compliance program
On March 19, 2013, the Company's Board approved the final version of an internal
securities law compliance program. Among others, the program includes procedures
that define the operations of the Board and its committees and forbid the use of inside
information. Moreover, the Company's Board adopted a code of ethics at the Group
level which introduces standards of behavior. See the Directors' Report in Chapter C
paragraph 5.4 to the periodic report for 2012 as published on March 19.
h.
Loans to employees
The Company provides loans to employees based on their salaries and in conformity
with procedures. As of the reporting date, loans provided by the Company to
employees are in immaterial amounts.
i.
Employment agreements
In this context, the Company's employees can be classified into four main categories:
stores, logistics, HQ and senior management:
Store employees - the vast majority of the Company's employees (about 88%) are
employed at the Company's stores, consisting of store managers, shift supervisors and
sales staff. The employment agreements signed with the sales teams and shift
supervisors include a base salary with the addition of overtime. The employment
agreements signed with store managers who hold positions of trust include a global
gross monthly salary and require the managers to maintain the Company's
confidentiality for the duration of the employment period and thereafter and to commit
to non-competition for the duration of the employment period and for a certain period
thereafter.
Operations and logistics employees - these employees sign personal contracts, some of
which based on work hours whereas the contracts relating to employees who hold
positions of trust are based on a global gross salary. Some of these employees are
subcontracted from manpower companies (see details below).
HQ employees - the majority of HQ employees hold positions of trust and sign salary
agreements based on global gross monthly salaries. These employees are entitled to
certain benefits from the Company such as vehicles, cellular phones and participation
in executive insurance policies (in addition to the expansion order of pension
insurance discussed below). These employees are also committed to maintain the
Company's confidentiality for the duration of the employment period and thereafter
and non-competition for the duration of the employment period and for a certain
period thereafter.
- 62 -
Officers and senior management - certain senior officers in the Company, including
controlling shareholders, are employed according to personal labor contracts and
covered by executive insurance policies. The employment terms of controlling
shareholders and senior officers in the Company are described in paragraph 9.3.19.3.9 to the Company's prospectus of May 29, 200613.
All of the Company's officers, as they will be from time to time, are insured by the
Company under officers' and directors' liability insurance policies. In addition, the
Company granted acting officers a letter of indemnity according to which the officers
will be indemnified for any liability or expense imposed on them due to an action
and/or failure in connection with their service as officers in the Company. The overall
indemnity amount payable by the Company to all the directors and officers on a
cumulative basis as per the Board's decision of December 16, 2004 shall not exceed a
cumulative amount equivalent to 25% of the Company's equity according to its
financial statements as of December 31 of the year which preceded the date of
payment.
j.
Collective agreements and expansion orders
Collective agreements - the Company and its employees are subject to general
collective agreements and expansion orders that apply to all employees in the private
sector in Israel, including a pension insurance expansion order issued on
December 30, 2007 which requires the Company to make contributions to pension and
severance pay funds in respect of its entire employees. The Company provides for the
minimum amount of contributions prescribed in this order for almost all its employees
(except for several HQ employees for whom the provision is made based on personal
contracts). In 2013, the rate of the employer's provisions was 10% (5.00% - severance
pay and 5.00% - pension). In 2012, the rate of the employer's provisions was 8.34%
(4.18% - severance pay and 4.16% - pension).
The Company's accrued severance pay is fully covered by executive insurance
policies, severance pay funds and the amounts recorded in the financial statements.
Manpower companies - Israeli law requires the Company to directly hire
subcontracted employees at the end of nine months of labor. The seniority of the
subcontracted employees hired by the Company is retained. In the first nine months,
the employees are employed by the manpower company and the latter pays their
wages and related social benefits.
13
The Company's prospectus of May 29, 2006 is available on the magna website at www.magna.isa.gov.il reference: 2006-01071961.
- 63 -
3.3.2
Credit financing
See Note 25 to the financial statements.
3.3.3
Insurance
The Company insures its assets and liabilities under insurance policies prepared by leading
insurance companies. The Company's insurance policies include:










Fire damage and consequential loss (including coverage for fire damage, burglary,
earthquake and natural disasters).
Goods in transit.
Funds and employee loyalty.
Terrorism related damage.
Third party liability.
Employers' liability.
Product liability.
Contracted work.
Marine and/or air cargo import.
Directors' and officers' liability.
The Company estimates that based on the risks to which it is exposed and as customary in
the insurance industry for its type of business, it is adequately insured and is not subject to
underinsurance.
3.3.4
Taxation
See Note 27 to the financial statements.
3.3.5
Limitations on and supervision of the Company
a.
According to the Business Licensing Law, 1968 (in this paragraph only - "the Law"),
an individual cannot operate a business that requires a license unless they hold a
license pursuant to the Law and the terms prescribed thereunder. In February 2007, the
Company received a business license for the Fox House pursuant to the Law which
was renewed on September 15, 2013. According to the Decree of Business Licensing
(Businesses the Require a License), 1995, the Company's activities in most of the
stores in the shopping malls and commercial centers do not require a business license.
b.
The Company's activities are subject to specific legal provisions in the Consumer
Protection Law and the Supervision Law, including decrees issued thereunder,
regarding non-deception of consumers, mandatory labelling of components and
mandatory provision of washing instructions and price presentation in Hebrew. The
Company strictly complies with these legal provisions through procedures, controls
and automated solutions.
- 64 -
c.
In September 2008, the Company launched the Fox-Friends customers' club and in
January 2014 the Company launched a consolidated customers' club which
encompasses all of the Group's brands (apart from Marcha Ballerine and Sacks). The
Company registered the clubs' members, as above, as a database pursuant to the Law
for the Protection of Privacy whereby data included in the database can only be used
for the purposes for which the database was founded. The Company is subject to
certain reporting duties vis-à-vis the Registrar of Databases and is required to maintain
the confidentiality of the information held by it and to secure the data in the database.
As for the distribution of advertising pamphlets to customers, the Company acts
according to the provisions of the Law for the Protection of Privacy and the Spam
Law.
See details of legislative limitations and regulations applicable to the Company
according to operating segments in paragraphs 3.1.14 and 3.2.14 above.
3.3.6
Material agreements not in the ordinary course of business
On January 4, 2004, the Company signed an agreement with Tnuvot Keshet Ltd. ("Keshet")
for the lease of a plot (in an area of some 15,682 sq. m.) including a state-of-the-art logistic
center, offices and a central distribution warehouse (in an overall area of some 12,900 sq. m.)
in Airport City known as Fox House. The lease period is for a period of ten years but the
Company has an option to extend the period by five additional periods of two years each.
In January 2006, the Company moved the office, administrative, design and manufacturing
activities to the new Fox House at Airport City. In September 2006, the Company also
moved the remaining storage, logistic and marketing activities to the Fox House.
In November 2008, Laline moved its office, administrative, design, manufacturing, storage,
logistics and marketing activities from Moshav Rishpon to Fox House at Airport City. The
sublease agreement was prepared with the approval of Keshet under the same commercial
terms as those in the Company's rent agreement and calculated according to the space
occupied by Laline.
The rental fees in respect of Fox House
According to the rent agreement, the monthly rental fees approximate NIS 380 thousand.
Also according to the agreement, during the rent period, the rental fees will be updated at the
end of each year of rent at a real (cumulative) rate of 1.25% in excess of CPI linkage
differences.
It was also determined that the Company will pay the lessor monthly management fees of
NIS 4.80 (plus VAT) per sq. m. of leasehold, linked to the CPI. In December 2013, the
monthly rental fees and management fees totaled approximately NIS 561 thousand.
- 65 -
American Eagle Outfitters retail chain
On June 30, 2010, the Company signed a franchise agreement with Aeo Management Co.
("Aeo") according to which the Company was granted an exclusive license for selling the
American Eagle Outfitters and Aerie brand names in Israel. See additional information in
paragraph 1.2.1 above and in the Company's immediate report of July 1, 2010 (TASE
reference: 2010-01-539400).
The Children's Place retail chain
On June 29, 2013, an agreement to grant a franchise was signed between a wholly owned
and controlled subsidiary of the Company and The Children's Place International LLC
("TCP"), according to which TCP granted the Company an exclusive franchise to set up
chain stores in Israel that will sell clothing of the children's clothing brand "The Children's
Place". See additional information in paragraph 1.2.1 above and in the Company's immediate
report of June 29, 2013 (TASE reference: 2013-01-076803).
3.3.7
Litigation
a.
The Group is holding several litigation proceedings in the ordinary course of business.
The Company's exposure in respect of these proceedings is immaterial to the Group's
business.
b.
In February 2010, a class action claim of NIS 108,818 thousand was filed against
Laline regarding sale of product with a wrong label. In February 2013, a request to
approve a compromise agreement in the claim was filed with the District Court. The
compromise agreement was approved by the Court pursuant to an initial approval
however, at the request of the legal advisor to the Government, it is now being reexamined. The parties are currently examining this position. Laline's legal counsels
believe that it is obvious that there are better chances that the request to approve the
class action claim will be dismissed than accepted.
In December 2013, a class action claim of NIS 6,633 thousand was filed against
Laline regarding sale of body lotion for girls which contains a caption that in the
opinion of the plaintiff constitutes breach, among others, of the Consumers Protection
Regulations, 1991 and Consumers Protection Law, 1981. The legal proceeding is at a
very early stage. However, on the initial reading of the request, Laline's legal counsels
believe that it is obvious that there are better chances that the request will be dismissed
than accepted.
On December 31, 2013, a class action claim of NIS 10 million was filed against FoxWizel Ltd. regarding credit vouchers from May 1, 2012. The legal proceeding is at a
very early stage and the Company did not yet present its response. However, on the
initial reading of the request, the legal counsels believe that it is obvious that there are
better chances that the request will be dismissed than accepted.
- 66 -
3.3.8
Business strategy and targets
The Group's target is to increase its profits, among others by improving the competitiveness
of the Company and its subsidiaries and by purchasing and/or developing additional
activities, if and when found suitable.
The Group's management intends to continue taking measures for positioning itself in Israel
as a top retail group with leading brands. The Group's steps for achieving this target are
based on structured processes of analyzing and drawing conclusions in order to constantly
improve the design and purchasing activities, adopt advanced marketing strategies and
optimize logistic and distribution processes. The Company is also taking steps to continue
developing the Fox Home chain and deploying American Eagle Outfitters stores and
launching The Children's Place store chain according to its strategic plan.
The Group's management aims to continue operating to reinforce the Company's and Laline's
positioning in the foreign countries in which the Group operates by closely cooperating with
and assisting its franchisees in reinforcing the Group's brands in these markets.
The Group aspires to enhance the deployment of the FOX and Laline branded stores in
international markets, mainly by collaborating with exclusive franchisees in each country
which possess appropriate financial, logistic and marketing infrastructures and specialize in
the local retail sector. Setting up the stores overseas is carried out by the franchises and they
bear all the costs relating to the stores, including logistic and advertising expenses.
The Group periodically examines prospective acquisitions and/or mergers whenever
appropriate opportunities present themselves in the retail market.
The Company's management headquarters provides support for the subsidiaries'
managements as part of the mindset that subsidiaries are likely to benefit from the
Company's/Group's skilled and experienced personnel and means. The Group aims to expand
this vision.
The Group explores potential acquisitions/mergers/business development opportunities with
leading international brands through franchises or collaborations in Israel.
The targets discussed above consist of forward-looking information as defined in the
Israel Securities Law, 1968 and as such they represent a vision and goals which are
largely based on expectations and estimates regarding future economic, social and
other developments and their mutual effects. The Company has no certainty that it will
be able to realize these vision and goals since they are inherently based on factors that
are not under the Company's control.
- 67 -
3.3.9
Expected developments in the coming year
The Group intends to complete the deployment of all its branded stores across Israel. It is
studying the continued consolidation of the Company's brands under a one-stop ship format
and acting to improve the deployment of the FOX, Fox Home and Laline chains in Israel.
Moreover, the Group intends to continue expanding its activities in additional foreign
markets by granting franchises or by partnering with local companies with the needed
financial resources, knowhow and experience in the local retail market in those countries.
In addition, the Company continues to explore the possible acquisition/merger/import of
additional products, if appropriate retail opportunities are found such as opening the
Children's Place stores in early 2014 after the signing of a franchise agreement with the
owner.
The expected developments in the coming year consist of forward-looking information
as defined in the Israel Securities Law, 1968. These expectations are largely based on
expectations and estimates regarding future economic, social and other developments
and their mutual effects and on the information held by the Company As of the
reporting date. The Company has no certainty that these expectations will be realized.
The Company's operating results may materially differ from the estimated or implied
results.
3.3.10
Discussion of risk factors
The Company's activities are subject to the following risk factors:
Macro risks
a.
Economic and financial crisis in Israel and worldwide
A relative recovery is seen in the Israeli market in the reporting period following the
crisis of 2008 and 2009. In 2013, the Israeli market grew by about 3.3% (based on the
forecasts of the Central Bureau of Statistics as of the reporting date and similar to the
growth rate in 2012). Yet, the financial market in Europe, the United States and
Southeast Asia continues to operate in environment with high level of instability. The
Company's management believes that it is too early to declare the end of the global
crisis and there can be no certainty as to whether another deterioration will occur.
Such market developments and turmoil are liable to have prolonged adverse effects on
the Group's business results, liquidity, equity and asset value, ability to dispose of
assets, business position (and demands for products), ability to distribute dividends,
ability to raise capital for financing operating activities and long-term activities and
potential financing terms.
b.
Political and security issues
Most of the Group's points of sale are located in shopping malls and commercial
centers. Any deterioration in the political and security situation in Israel will reduce
the number of potential shoppers and impair the Group's sales. Moreover, such
situation will pose challenges for the Group's foreign manufacturing and/or sales.
- 68 -
c.
Political and economic changes in foreign markets
Political and economic changes in foreign markets in which the Group sells its
products might impair the Group's profits, burden and/or increase its production costs
and obstruct the sale of the Group's products abroad.
d.
Foreign currency exchange rate fluctuations
The Group is exposed to fluctuations in foreign currency exchange rates, mainly the
U.S. dollar, arising from purchases made from foreign suppliers and subcontractors in
foreign currency and from purchases made from local suppliers whose product costs
are sensitive to currency fluctuations as opposed to sales to local customers in NIS
and/or in unlinked NIS credit. In addition, the Group is exposed to changes in the
Chinese Yuan in relation to the U.S. dollar and to the risk that the Company's purchase
costs from suppliers and subcontractors in China will be increased accordingly.
e.
Changes in interest and CPI
From time to time the Company receives borrowings from banks which partly bear
variable interest. From time to time the Company enters into store rent agreements that
are partly linked to the CPI and also part of the Company's liquid balances are
invested in government bonds and corporate debentures that are linked to the CPI.
Consequently, the Company is exposed to changes in the CPI. The credit extended by
the Company to its customers in Israel is in NIS and in interest and linkage free and,
therefore, the Company is exposed to changes in the CPI. Also part of the Company's
liquid balances are invested in government bonds and corporate debentures that are
linked to the CPI and, therefore, the Company is exposed to changes in the CPI.
f.
Disruptions in seaports
Since most of the Company's products and raw materials are manufactured abroad and
shipped to Israel by sea, any disruptions in seaport activity in Israel and/or in origin
ports and/or in target ports will adversely affect the manufacturing and/or marketing of
the Company's products and its profits. Moreover, seaport disruptions might also
impede the supply of the Group's products to its franchisees and wholesalers abroad.
- 69 -
Segment risks
a.
Manufacturing restrictions and economic-political changes in countries of Far East
and Southeast Asia
Most of the Company's products are manufactured by suppliers and subcontractors in
Far East and Southeast Asia. The Company is exposed to any limitations and/or
changes in legislation and/or in political processes in these countries and/or in Israel
which might affect the possibility of manufacturing the products, shipping the
products and/or the manufacturing costs in Far East and Southeast Asia. Moreover,
any significant shifting of production from U.S. and EU markets to Far East and
Southeast Asia within a relatively short period of time will lead that subcontractors in
these countries will raise their prices. In addition, fluctuations in the exchange rate
might cause an increase in subcontractors' production costs in Far East and Southeast
Asia.
b.
The fashion industry and the competition therein
As discussed above, the Company is mainly engaged in the design, manufacture,
acquisition and marketing of clothes and trendy accessories. As a result, the Company
is exposed to changes in market demands and in fashion trends. The fashion industry
is based on strong and multiple competitors such as international and local chains and
private stores. The level of competition and supply surplus might cause the Company
to lower its prices which will affect its profits. The Company is competing with three
new and well recognized international brands - GAP, H&M and Forever 21. The fact
that these new brands entered the Israeli market and that other international brands are
contemplating doing the same will increase competition in the Israeli fashion industry
even further. See more about competition in paragraph 3.1.7 above.
c.
Raising the minimum wage
Most of the Group's store employees receive minimum wage or slightly higher wages
and therefore the Group is exposed to increased selling expenses if minimum wage is
raised. In keeping with the announcement issued by the President of the
Manufacturers Association of Israel and the Chairman of the Histadrut in Israel of
January 2, 2011, the minimum wage was increased in April 2011 from NIS 3,850 to
NIS 3,890 a month, in July 2011 to NIS 4,100 and in October 2012 to NIS 4,300 a
month.
d.
Increase in customs duty rates
Most of the Company's products are manufactured abroad and therefore increasing the
customs duty rates on import of goods will increase the Company's expenses and
impair its profits.
e.
Exposure to climate and weather changes
The Company plans its activities based on the different seasons (winter and summer
collections). Accordingly, uncharacteristic climate changes in the seasons might
reduce the Company's sales and increase surplus inventories in those seasons.
- 71 -
f.
Increase in prices of raw materials
An increase in prices of raw materials, particularly cotton, might impair the
Company's profits from products and consequently adversely affect its financial
results and business operations.
g.
Credit risks
The Group's revenues derive from a larger number of customers in Israel and abroad.
The majority of sales are made in cash or credit. A large part of customer debts derive
from sales to foreign franchisees.
h.
Exposure to high inventory levels
Miscalculation of future demands might expose the Company the high inventory
levels. The inability to foresee demands for products might leave the Group with
surplus inventories.
Group specific risks
a.
Dependency on key personnel
Mr. Harel Wizel, the Company's CEO, is a key individual in the Group. In the event
that he ceases to serve in the Company, this will adversely affect the Group's revenues
and profits, see paragraph 3.3.1 above.
b.
Dependency to the stability of the grantors of franchise
The Company is exposed to the economic and market stability of the grantors of
franchise (AE and TCP). A significant deterioration in their economic or market
conditions could have a considerable effect on the Company.
- 71 -
The following table summarizes the potential risks and the degree of their potential effect on
the Group's profits. The Group's estimates are based on reasonable expectations and exclude
any irregular events in terms of scope, size and duration:
Degree of effect on the Group
Large
Medium
Small
Risk
Macro risks
1. Political-security situation
2. Foreign currency exchange rate fluctuations
3. Changes in interest and CPI
4. Recession
5. Seaport disruptions
Segment risks
6. Manufacturing restrictions and economic-political
changes in China
7. The fashion industry and competition therein
8. Raising the minimum wage
9. Increase in customs duty rates
10. Climate changes
11. Increase in prices of raw materials
12. exposure to high inventory levels
Company specific risks
13. Dependency on key personnel
14. Credit risks
15. Political and economic changes in foreign
markets
Harel Wizel
CEO and Director
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
Avraham Zeldman
Chairman of the Board
Date: March 9, 2014
F:\W2000\w2000\12553\OTR\13\‫ אנגלית‬2112 ‫ברנע‬.docx
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fox-wizel ltd. periodic report for 2013

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