Companies & Industries

Fashion Victim

Le Château flirts with disaster, again.

lechateau665The worst crisis in the 54-year history of Le Château Inc. came to a head last June, when the only analyst still covering the company slapped a Sell rating on its stock. The downgrade came after a dismal year at the retailer—in its prime, the place to buy mesh tops and regrettable hats—and killed any chance that its moribund share price would rally. After trading as high as $15 per share in 2010, Le Château bottomed out at just over $1 last summer. In the first quarter of 2012 alone, the company lost $6.5 million. Things were so tight that in January the company tapped retired founder Herschel Segal for an unsecured $10-million loan, sparking rumours of financial troubles and possible collapse. “Investors…shouldn’t be sitting in the stock waiting for a turnaround,” Neil Linsdell, the analyst, told Reuters at the time. “Every time I think they’re going to disappoint me, they disappoint me worse.”

Throughout that summer and into the fall, an unmistakable air of doom hovered over Le Château. But those expecting the company to collapse should have looked at its own history for a guide. From its days as a lone men’s shop in downtown Montreal through the booming ’80s and into today, Le Château has flirted with disaster time after time, only to reinvent itself to appeal to a new generation. Today, the small executive team in charge of the company remains convinced they can save the chain again. To back up that belief, insiders have bought up huge swaths of Le Château stock since the dark days of last summer. In the past six months alone, company insiders have purchased more than 860,000 Le Château shares on the Toronto Stock Exchange. Only three other companies have been more heavily traded by insiders, as measured by share volume, on the TSX during that stretch.

Those who believe Le Château still has life are banking on one thing: the company’s aggressive move away from its traditional market toward a more mature one, with deeper pockets. After decades of pitching club kids a product line of tight pants and cheap shirts, Le Château is now aiming for an older customer set. To do that, it’s moving upscale, raising prices and improving its stock. “The reality is, the world has changed,” says Franco Rocchi, Le Château’s senior vice-president of sales and operations. “We’re just changing with it.” The question is: Can it change fast enough to survive?

To get an idea of where Le Château is going, head west from Toronto’s downtown to the Sherway Gardens mall in the suburb of Etobicoke. There you’ll find one of the handful of Le Château concept stores the company has opened in recent years. The location looks nothing like the clubby Le Châteaus of old. The space, split into a large womenswear section and a smaller one for men, has an Apple Store vibe to it: all-white decor, brightly lit, hushed.

On a recent Thursday night, a spare handful of shoppers perused the racks. Lindsey Armstrong, 24, was looking for a particular shirt. They didn’t have her size, but she was still impressed. The store, she says, was clean and bright, and the service friendly. The clothes were also more realistically sized, with many items available in XL or larger. The prices were higher, too. Armstrong’s friend Maggie Findlay, 21, said she thinks of the store today as the kind of place you’d shop for an expensive dress.

That’s all in line with the kind of changes Le Château is trying to make, according to Rocchi. About 10 years ago, the company started to hear from customers who had fond memories of Le Château as a place they used to shop, he says. “You know, ‘I used to shop there, but then I got married.’ ‘I used to shop there, but then I got a job.’ ‘I used to shop there, but I used to be crazy and single.’” But that market—the crazy, single, young market—is pretty niche. “And we realized that we needed to shift the brand to make it more relevant, not just to the 16-year-old, but to the 20-, 30-, 40-, 50-year-olds.”

There are some signs that that transformation is beginning to stick. According to Sasha Poljsak, an analyst with Fusion Retail Analytics in Toronto, Le Château’s unaided awareness among female clothing shoppers 35-years-old and up—though still modest—has been steadily climbing, from 1% in 2010 to 3% in 2011 to 4%, where it sat at the end of 2012. At the same time, awareness among under-35 female shoppers has been dropping, from 10% in 2010 to 9% in 2011 and 8% in 2012. And that’s without the company spending much on marketing. Instead of expensive ad campaigns, Le Château is relying on the windows in its 235 retail stores to do the talking for it. Whereas 20 years ago in a Le Château window you might have seen a guy in “shiny black pants with sort of a meshy transparent top,” as Rocchi puts it, “today you’ll see a made-in-Italy suit.”

lechateau chartAt the Sherway Gardens location, the window in front of the women’s section featured a mannequin wearing black pumps and a pink dress that hung just below the knees. On the men’s side, one model wore a striped button-up with the cuffs rolled up to reveal peach accents on the inside. On the whole, the menswear line looked like the kind of clothes someone who wore Le Château to a club in 1998 might be wearing to the office today: plenty of vests and fedoras and dress shirts in electric teal. Despite that—or maybe because of it—men’s clothing is a growth area for Le Château. Even in the company’s disastrous 2011, revenues from the division were up slightly. In a way, that’s fitting. Menswear, after all, is where Le Château got its start.

Herschel Segal opened the first Le Château men’s store on Montreal’s Craig Street in 1959 using a $100,000 inheritance and merchandise he bought from Peerless Clothing, the family business. His new venture grew quickly to four locations, but even then signs of the business’s boom and bust future were evident. “I was totally naive,” Segal told The Globe and Mail in 1986 about his early days. “I knew nothing about retailing, nothing about using markup to offset costs. I found myself minus my inheritance, almost broke.”

After his initial tumble, Segal closed all but one store, on Saint Catherine Street. His next big break came, as legend has it, when he spotted a woman at a party wearing a leather dress. He commissioned a designer to create a new line of leather clothes, and all of a sudden Le Château was thriving again. In 1966, the company expanded into womenswear. And in 1975, after another round of expansion, it was doing well enough for Segal to step away from day-to-day management of the firm.

But two years later, trouble returned. In his absence, Le Château’s sales had fallen again, and its losses had climbed. So Segal came back and reclaimed day-to-day control over the company. In 1983, with things going well once more, Segal took Le Château public. Two years later, in 1985, the company was in the middle another period of upheaval. Five senior executives either left or were fired in a short stretch, and by the summer of 1986, shares in Le Château had fallen below the issue price of $11.25.

On and on, the pattern would repeat. In the late ’80s, Le Château expanded aggressively into the United States, opening more than 20 stores and a warehouse. In the early 1990s, it bid a hasty retreat from the same market amid significant losses. Solid growth in the late ’90s gave way to a tumbling share price in 2000. By 2006, shares were back up, but sales were unexpectedly down. That same year, after exploring a sale of the company, Segal announced that he would once again step away from the business, handing the reins to his wife, Jane Silverstone Segal, now chair and CEO, and long-time company president Emilia Di Raddo.

The current crisis enveloping Le Château is the first serious one to strike the company under the new management team. Like all the others before it, though, Rocchi is confident that this one too shall pass. “I’ve been here over 30 years,” he says, and he’s never felt that the company was in danger. Rocchi isn’t alone, either. Barry Gruman, a retired retail-analyst-turned-independent-investor in Montreal, spent the last year, along with his wife, Molly, buying up ever larger chunks of Le Château stock. Today he owns 4.1 million shares, or 18% of the company’s outstanding stock, a figure second only to Silverstone Segal’s 25%. (Franklin Templeton Investments owns another 16% of Le Château’s outstanding shares. Herschel Segal holds 11%).

Gruman says there’s no big mystery behind his aggressive buying streak. “I think its selling for a lot less than it should be,” he says. “The company had had very consistent profits [until] about a year ago.” (Gruman also insists that he is nothing but a passive investor. “It would be a mistake to think I’m taking a run at the company,” he says.)

Retail watchers, too, believe there is merit in Le Château’s new upscale strategy—if the company can pull it off. “That somewhat older market, it’s a much more stable market,” says Wendy Evans, the founder of Evans and Co. Consultants. “So I think, business-wise, if they can effect the change, then there would be good rewards at the end.” Poljsak, from Fusion Retail Analytics, agrees. “The most successful retailers go after the least crowded, most profitable categories,” he says. “So while it may not be the sexy choice to walk away from young female shoppers, moving against the grain could mean big things for Le Château—and their bottom line.”

For his part, Rocchi sees big things to come from the company’s growing online store, where sales were up 92% in the third quarter of 2012. He’s also encouraged by the performance of its small stable of international locations, which are all operated by licensees. (There are 10 Le Château stores already in the Middle East, including in Dubai and Saudi Arabia. Another opened in Ho Chin Minh City earlier this year, with a Hanoi location opening soon.)

Still, the success of the company’s turnaround hinges on its Canadian bricks-and-mortar stores. And there, challenges remain. The company lost $8.9 million in the nine-month period that ended Oct. 27. That’s up from a $3.5 million loss in the same stretch a year earlier. Comparable store sales and store traffic were also down. Rocchi wouldn’t say when he expects Le Château to return to profitability, but did say “we’ve taken a lot of steps to ensure” the company returns to the black.

But this is not an easy time to be a Canadian retailer, especially a struggling one, says Ed Strapagiel, a longtime retail consultant. The retail market is weak across the country, he says, and with the arrival of Target, the competition is about to get much stiffer. Still, Strapagiel believes Le Château has reason to hope. “They’re a long-established, well-recognized Canadian fashion retailer,” he says. “They’ve weathered a lot of storms, and I’m not ready to count them down and out. Not by a long shot.”