KappAhl to Add New Market Within Five Years as Margin Widens

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KappAhl AB plans to enter a new market within five years as Sweden’s second-largest listed clothing retailer bets on a new store concept, a television show and lingerie inspired by “Fifty Shades of Grey” to boost profits.

The chain, which has almost 400 stores in Sweden, Norway, Finland and Poland, is currently focusing on improving its operating margin to 10 percent and will then start expanding into additional countries, according to Chief Executive Officer Johan Aaberg. That will happen within five years, he said.

“When we reach our profitability target there will be focus on growth and new markets,” Aaberg said in an interview at KappAhl’s headquarters in Gothenburg, south-western Sweden, on March 3. The company will reach the target within the coming years with its current operations, he said.

Such a move would mark KappAhl’s first new foreign foray since its failure in the Czech Republic, which it entered in 2009 and left four years later as profitability lagged targets. The company, which is Sweden’s second-biggest publicly traded clothing retailer after Hennes & Mauritz AB, was founded as a ladies’ coat store in Gothenburg in 1953. The company then entered Norway in 1988, Finland in 1990 and Poland in 1999.

“They have an ambition to grow in all of Europe -- that’s a fundamental ambition although they haven’t achieved it yet,” Christian Anderson Blink, an analyst at Swedbank AB in Stockholm, said by phone on Tuesday. “Austria would probably be the main target -- it’s been part of their plan before -- though one cannot exclude Germany in the longer term.”

Baltic Expansion?

Anderson Blink, who has a buy rating on KappAhl shares, said it’s also probable that KappAhl would expand in eastern Europe, for example in Estonia, Latvia and Lithuania. The U.K. could also be of interest for the company, the analyst said.

The company will first expand its online and e-commerce offerings to include Poland and countries where it currently doesn’t have any stores, which Aaberg said is a good way to test new markets before opening any shops there. He declined to comment on which new countries KappAhl may enter once its operating margin reaches the targeted 10 percent.

The company, which Aaberg said was a “turnaround case” when he took over in November 2011, is getting closer to target.

Its operating margin rose to 8.1 percent in the fiscal first quarter from 8.0 percent a year earlier and compared with a margin of 5.3 percent in the fiscal year 2012/2013 and a negative 1.4 percent margin in 2011/2012. KappAhl shares have gained more than 50 percent since Aaberg joined.

Shares Gain

KappAhl’s shares advanced as much as 1.6 percent to 39.1 kronor in Stockholm trading, their steepest gain since March 2, and increased 1 percent as of 11:01 a.m. local time. The OMX Stockholm All-Share Index declined 0.2 percent.

To help boost sales and profits further, Aaberg is now completely revamping shops. KappAhl has visited as many as 600 retail stores across the world to get inspiration for changes including the logotype and the interior design of shops.

“A store today is a perishable,” Aaberg said. “You need to constantly modernize both technology, inspiration and the experience in the store.”

The company converted nine stores last year and plans to transform about another 40 in 2015, which will contribute to a doubling of the 98 million kronor ($12 million) KappAhl spent on investments last year. The retailer has already seen improved sales in converted shops and the long-term plan is to revamp all at a high pace, Aaberg said.

‘Fifty Shades’

To boost demand, KappAhl in 2013 teamed up with “Fifty Shades of Grey” author E.L. James for an underwear collection including a black lace eye mask. Last year, it focused on a Swedish television show called “She’s Got the Look,” in which women aged 35 and older competed for a modeling contract with the retailer. Its next project is a collection called “Dreams Through a Lens,” shot by photographer Mary McCartney.

“We’ve tried to find a twist and not just approach designers,” Aaberg said about the company’s collaborations in recent years. “It’s a very generic industry and we were thinking about what we could do to be different.”

KappAhl, which targets women “in the prime of life” who also shop clothes for their partner and children, is also developing its product range. It opened a separate store for childrenswear concept Newbie last year and this month expanded that to include interior decoration products. KappAhl plans to add more Newbie shops and is considering other concepts.

The entire retail industry has changed “incredibly much” in the past few years with altered attitudes, behavior and channels, Aaberg said. “If you just stand on the sidelines you won’t be there for that much longer,” he said.