|By the book|
Cia. Hering repositions its brand, wins consumers and investors and watches its margins soar.
There is a popular saying in Brazil: there is no evil that lasts forever and no good that never ends. But Cia. Hering, one of the largest apparel retail companies in the country, seems to have no knowledge of the second half of the adage. The company has been attaining expressive operational results in recent years, which has been reflected in the behavior of its shares, accumulating a rise of 185% in 2010 (up to 13 December). “It is the best performance of the year among retail companies listed on the Stock Exchange”, says investment analyst Franco Abelardo, of Banif Brokerage.
The stellar performance stems from a strategy of brand revitalization, underway since 2007, which has been a gold mine for the company, leveraging sales and the opening of new stores. According to Frederico de Aguiar Oldani, financial director at Hering, the main initiatives have included a repositioning of prices and products, with an expansion in the range of options in the concept of accessible fashion; the launch of new collections every 60 days; the adoption of a new store format, combining a more modern architectural model and better techniques that have increased the efficiency of the operation; the creation of marketing campaigns that explore the sales argument “I have always used Hering”.
“It is a successful business case. Hering used to offer products considered expensive by the C and D social classes, but, at the same time, they were perceived as being of inferior quality by the A and B social classes. Its repositioning eliminated this distortion and aggregated value to the brand”, says Marcelo Varejão, of Socopa Brokerage. The strategy of increasing the more accessible product range covered not only the Hering Store, the flagship of the group, but also the other brands that make up the company portfolio: dzarm., Hering Kids and PUC.
According to analyst Renato Prado, of Fator Brokerage, there was also a change in the perception of the company profile by investors: from industry to a retail company. “Accordingly, the metrics to ascertain the capacity to deliver results has become the increase of the number of stores and sales, which has been happening constantly and sustainably for months”.
Hering’s third quarter 2010 report, released at the end of October, was a basket of good news. The four brands of the group registered double-digit growth compared to the same period last year: Hering Store, 37.9%; Hering Kids, 35.8%; PUC, 21.6%; and dzarm., 25.4%. Overall, net profit rose 46%, to R$ 33.5 million, surpassing the R$ 100 million mark for the year. Ebitda reached R$ 57.7 million, with a margin of 24.5%, compared to 21.9% in the third quarter of 2009.
In the unanimous opinion of the investment analysts, the highlight of Hering’s performance has been the evolution of sales in accordance with the “same stores” concept, that measures the performance of consumption, not including the opening of new units. “The company has been growing at extremely high rates, with regards to this point, 32.4% in 2008, 27.2% in 2009 and 33.6% in the third quarter of 2010”, says Abelardo of Banif. The results are much greater than the sector average, which oscillates between 10% and 12%.
The number of new Hering Stores opened in recent years is another highlight of the company statement: 62 in 2008, 54 in 2009 and 65 planned for 2010. “Most of this expansion has been carried out by the franchise system, which represents an intelligent alternative, because it enables the company to expand its chain of stores and its volume of sales without spending anything”, says Varejão, of Socopa.
But Hering does not live by its own stores or franchisees alone. Sales in multi-brand retail outlets account for about half of the consolidated revenue of the company in the domestic market. “This channel also works as an efficient thermometer for monitoring the best points of purchase, with the aim of opening company or franchised stores”, says Prado of Fator Brokerage.
Despite the elevated comparative base, which progressively tends to narrow margins for the improvement of results, the market still sees plenty of room for the expansion of Hering this year. “The perspectives are positive, not just with regards to the favorable macroeconomic scenario, but especially for the good foundations of the company, which has an interesting growth platform, with a strong synergy between brands and products”, says Varejão. Prado adds an important distinction to these qualities: the fact that the company maintains an industrial park, which means flexibility to opt between its own production and outsourcing.
Among the factors that could threaten the extended honeymoon between Cia. Hering and consumers and investors, analysts highlight the growing challenge in obtaining more profitable outlets and the high price of some raw material, such as cotton, which could pressure margins in the medium term. Furthermore, everybody agrees that the increase in sales through the “same stores” concept tends, over time, to converge to the sector averages. Aware of this, and far from resting on its laurels, the company is doubling its efforts to listen to and serve the market: “There is no infallible formula. It is essential to keep delivering a combination of products, accessible prices and a unique buying experience to consumers, details that make all the difference in the retail operation”, says Oldani.