Tom Tailor Adds Stores to Boost Margins, Better Absorb Production Expenses

Tom Tailor Holding AG, the German clothing company that went public in March, is adding stores under its own brand to raise profitability and offset higher production costs, Chief Executive Officer Dieter Holzer said.

Sales at Tom Tailor outlets are more profitable than the company’s clothes sold at other locations such as department stores, and an expanded chain will more than make up for increased spending on purchasing and transport, Holzer said in a phone interview. The number of Tom Tailor boutiques will rise to 120 at the end of the year from 87 in 2009, he said.

The company, whose main competitors include Inditex SA’s Zara and Esprit Holding Ltd., buys 90 percent of its clothes in Asia, Holzer said. Wages at privately owned Chinese companies will rise by as much as 17 percent annually in the next three years, according to Jun Ma, a Deutsche Bank AG economist in Hong Kong. Shipping companies including A.P. Moeller-Maersk A/S’s Maersk Line have reported profit growth as they raised prices.

“I am confident that margins can improve this year, even though it’s much more difficult due to the Asia sourcing situation,” Holzer said from Tom Tailor’s headquarters in Hamburg. He reiterated that the clothing company aims to increase full-year revenue by 8 percent to 12 percent.

First-half sales at the retail division, which includes the own-branded stores, jumped 40 percent to 42.3 million euros ($54.5 million), while revenue at the wholesale operation rose 1.2 percent to 104.9 million euros. Gross profit as a proportion of sales was 61.3 percent at the retail operation compared with 41.6 percent in wholesale. Tom Tailor’s gross margin will widen from 45.9 percent in 2009, Holzer said in the Sept. 9 interview.

‘Good Chance’

“Management has a good chance of achieving its goals, as there’s enough retail space on the market to expand the own- store business,” said Christoph Schlienkamp, an analyst at Bankhaus Lampe in Dusseldorf, Germany, with a “buy” recommendation on the stock.

Tom Tailor, which sells clothes in 35 countries, will spend some of the 143 million euros raised in the initial public offering on the own-store chain expansion, Holzer said in March.

Sales at outlets open at least 12 months have been “good” this year, with western European markets performing well and economies in eastern Europe including Russia recovering from a contraction, the CEO said in the interview. Revenue from online shops in Germany, Austria and the Netherlands is also increasing, and the clothier is considering adding Web-based stores in Belgium, France and eastern Europe next year, he said.

The net loss for the first half was almost unchanged at 13.7 million euros versus 13.6 million euros a year earlier, with the second-quarter loss narrowing as revenue increased, Tom Tailor said on Aug. 10. The company, which held the IPO mainly to fund bank-loan payments, reduced debt to 71.6 million euros at the end of June from 198 million euros as of Dec. 31.

To contact the reporter on this story: Holger Elfes in Dusseldorf at helfes@bloomberg.net.

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