Hering Bets Kids Clothing Counters Gap’s Debut in Brazil

Cia. Hering, the slowest-growing Brazilian retailer, is betting that children’s clothing will spur revenue gains as consumers pull back on spending.

Expanding the Hering Kids store line as much as fourfold to 200 outlets is part of a broader turnaround bid that includes a new distribution strategy to keep shelves filled and the creation of executive teams to manage the company’s four brands, Chief Financial Officer Frederico Oldani said in an interview.

Hering needs the help. Same-store sales at Hering brand stores slid 1.2 percent last quarter, part of an industrywide pullback as inflation crimps Brazilians’ purchasing power, and a lack of inventory marred the 2012 Christmas shopping season. Adding to the pressure: Gap Inc., the biggest U.S. specialty-apparel retailer, opens its first Brazilian store tomorrow, in Sao Paulo.

“We have to figure out which products to send to which stores -- we can be competitive in certain products in certain locations,” Oldani said in Sao Paulo on Sept. 19. “There’s very little offer in the way of children’s clothing stores at malls.”

Slower growth for Blumenau, Brazil-based Hering follows a boom period in the past five years, a period that included annual revenue gains of 41 percent in 2010 and 34 percent in 2011. Growth decelerated to 10 percent in 2012, the slowest among specialty-apparel retailers in Brazil, where the average was 17 percent, according to data compiled by Bloomberg.

Refocusing Inventory

Revenue for 2013 is projected to rise 14 percent, according to the average of analysts’ estimates compiled by Bloomberg.

“The consumer won’t open his wallet much this year,” Oldani said. “But even with a weak macroeconomic scenario, we will still grow in some markets.”

At yesterday’s close, Hering traded at 17 times estimated 2013 earnings compared with 15 times for San Francisco-based Gap. The U.S. company’s 32 percent increase this year through yesterday beat Hering’s 17 percent decline, while Brazil’s benchmark Ibovespa index slid 11 percent. Hering fell 1.6 percent to 34.12 reais at 12:17 p.m. in Sao Paulo.

Hering is targeting its basics apparel inventory toward smaller cities and bringing costlier and more fashionable items into big cities where consumers want better-quality products. It has also hired Luis Bueno, an executive from cosmetics company Natura Cosmeticos SA, to lead its Hering brand.

Slower Growth

“Their initiatives are right on,” Vitor Paschoal, an analyst at Itau Corretora de Valores SA in Sao Paulo, said in an interview. “Before, the structure was focused on cost-cutting. Today, as we see slower growth, the company needs to refocus from dilution of expenses to each individual brand.”

New locations, including about 30 Hering Kids stores, will open this year and will “be drivers of growth,” Sandra Peres, a Sao Paulo-based analyst at Coinvalores, said in a telephone interview. She is reviewing her hold recommendation now and has no target price for Hering. “Operational numbers like earnings before taxes and other items and revenue have been strong, but margins have suffered as the price of imported goods has risen.”

Passing along some of those costs to consumers this year may hurt results, said Paschoal, whose outperform rating on the shares is the equivalent of a buy.

‘Too Far’

“Hering increased prices a lot and there is a concern that it went too far and the product became too expensive and lost the cost-benefit that made it attractive,” Paschoal said. “We don’t agree with this.”

The Gap also looms as a competitor in Latin America’s largest economy. Employees at the U.S. company are “excited that Gap has opened up this year in Brazil,” Chief Executive Officer Glenn Murphy said at a Goldman Sachs Group Inc. conference on Sept. 10.

Oldani said Hering learned lessons from late 2012, when its failure to get enough goods onto shelves produced a bust in what is usually retailers’ best season. Fourth-quarter sales at Hering-brand stores fell 0.2 percent, and Oldani said next quarter’s results would improve, without offering specifics.

“Last year, we couldn’t meet fourth-quarter demand because we failed to provide stock,” Oldani said. “That should change this year.”

Same-store sales growth for the Hering brand in all of 2013 will be in line with inflation, said Oldani, who didn’t give a figure. Consumer prices have risen 6.1 percent this year, according to data compiled by Bloomberg.

Hering now plans to invest about 75 million reais ($34 million) in 2014 on technology, logistics and production capacity as its kids stores open, Oldani said. The company has about 700 stores now, including 600 under the Hering brand and about 50 for the Hering Kids line, he said.

“Hering Kids will grow the most, as part of our strategy,” Oldani said. “The potential is there. We are the beginning of the expansion.”

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