CAIRO: Arafa Holding, Egypt's biggest garment exporter, hopes to keep sales in 2010/2011 at last year's levels of $332 million while doubling profits to $20 million on improved margins in the UK and higher US sales. "Improvements in European markets, especially UK margins, and further penetration of the US market will drive profits forward," Arafa's chief financial officer said on Sunday. The firm, which specializes in men's wear and exports 75 percent of its goods, mainly to Europe, said it was not eyeing international acquisitions, but is studying a local acquisition in the casual wear business. "It's still at an early stage. We just signed a non- disclosure agreement," Ahmed Selim said in an interview, declining to disclose the name of the target firm. Arafa said this month it had set up a venture with an Italian shirt maker to start production in October. It did not give the shirt maker's name or other details. Arafa, which recently changed its financial reporting year, posted net profit in the year to Jan. 31 of $10.2 million, compared to $27 million in the 10 months to Jan. 31, 2009. It blamed the fall mostly on weak British and European markets. "Our volumes are up, but in terms of absolute value it declined ... our functional currency is the dollar, so as the euro declined ... the value of the business declined," Selim said. Selim said Arafa was expecting profit in 2010/11 to match levels before the world downturn, which hurt retail spending. "We'd like to move back to our normal profitability range north of the $20 million range. This is our target for 2010/2011," he said, adding Arafa aimed to keep revenues steady. Arafa earlier reported revenue of $332 million in 2009/10, saying this was 14.5 percent fall on a year earlier. The firm said in May it had hedged its euro currency income for a period of 12 months ahead at an average U.S. dollar/euro rate of 1.47 versus a spot rate of approximately 1.25. US market "Going forward we'd like to move away from the UK market in order to reduce concentration risk," he said, adding that the firm would focus on the German and French markets. Arafa controls 20-22 percent of the British men's formal wear market for items like suits and shirts. Arafa, which makes garments for various European brands, has recently begun manufacturing for Zara and Massimo Dutti, owned by Spain's Inditex, Selim said. "We're just beginning to put our foot in the Iberian Peninsula," he added. He said in the US market, which generates 13 percent of revenues for the firm, Arafa aimed to boost sales above $50 million in fiscal year 2010/11 from $44 million a year earlier. Arafa is moving its factories to the qualified industrial zone (QIZ) of Beni Suef in southern Egypt. Goods made in QIZs can be exported to the United States free of tariffs and quotas provided they include a certain percentage of Israeli inputs. Helping shrink costs, labor is also cheaper in southern Egypt. Labor accounts for over 40 percent of Arafa's costs. "The US market provides me stability. There is no FX risk. We have a competitive edge against India, China, all these guys, because of the QIZ," said Selim. "We are in discussions to enter the US market via a production arrangement with one of the big department stores, but ultimately, long-term, we would like to have our own brand as well, like the UK and the Italian market," Selim said. Arafa now sells casual wear in the US market but is eyeing the formal wear market there as well, he said.
