Le Chateau Inc

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Le Chateau Inc.

5695 Ferrier Street
Montreal, Quebec H4P 1N1
Canada
Telephone: (514) 738-7000
Fax: (514) 577-7419
Web site: http://www.le-chateau.com

Public Company
Incorporated: 1959 as Le Chateau Men's Wear
Employees: 2,400
Sales: $142.4 million (2003)
Stock Exchanges: Toronto
Ticker Symbol: CTU.A
NAIC: 448110 Men's Clothing Stores; 448120 Women's Clothing Stores; 448130 Children's and Infants' Clothing Stores; 448150 Clothing Accessories Stores; 315223 Men's and Boys' Cut and Sew Shirt (Except Work Shirt) Manufacturing; 315233 Women's and Girls' Cut and Sew Dress Manufacturing

Le Chateau Inc. is one of Canada's leading clothing retailers. The chain operates more than 160 stores, mostly in Canada, with a cluster of stores in the northeastern United States. Le Chateau sells almost exclusively its own branded clothing, in lines for women, men, and preteen girls. It also sells shoes and accessories. Its retail formula has been likened to The Gap in that both chains rely primarily on their store brand. Le Chateau designs and manufactures most of its store brand goods. Le Chateau made its mark as a store catering to youth, featuring moderately priced faddish designs that often changed from week to week. The chain evolved to include clothes for more mature shoppers, and it defines its core customer base as people between the ages of 15 and 35. Le Chateau is an innovative marketer, using music, film, and television events to promote its lines. The company began a push into U.S. markets in the late 1990s, with the goal of setting up as many as 300 new stores across the country. With an impressive rise in sales and profits in the early 2000s, the chain was one of the brightest lights in a generally sluggish North American retail clothing market.

Bringing Carnaby Street to Canada in the 1960s

The Le Chateau chain was founded in Montreal in 1959 by Herschel Segal. Segal was born in Montreal in 1931, and grew up working in his family's clothing business, Peerless Clothing Manufacturing Ltd. Segal studied economics and political science at McGill University, then returned to work at Peerless after graduating with honors. But Segal was unhappy working in the family business, where he felt trapped by the expectations of his elders and uninterested in the fashions the company purveyed. Segal resigned his position at Peerless in the early 1950s and moved to New York City. He enrolled at the New School for Social Research and soaked up the burgeoning art and music scene of New York's radical hotbed, Greenwich Village.

After a few years in New York, Segal returned to his home-town. Following his father's death in 1955, Segal again went to work for Peerless Clothing. Segal apparently liked the company even less in this second stint, and he began to plan to go into business for himself. Segal had inherited money from his father, and he sank this into a store in Montreal's Victoria Square, on St. Catherine's Street. He called it Le Chateau Men's Wear, a name that played up the francophone feelings budding in Quebec at the time. The Victoria Square neighborhood was a bustling shopping district, but at first Le Chateau was not much of a fashion-forward store. Segal sold overstock from Peerless. In an interview with Canadian Business (February 17, 2003), Segal described a core group of his early customers as "blue-haired ladies." Le Chateau did well at first, and Segal was able to open three more shops. But Segal overreached, and was forced to close down the new stores. By the early 1960s, he had only the original store left, he had spent his inheritance, and his new business was close to bankruptcy.

At this point, Segal changed the fashion concept behind Le Chateau completely. The company became a vanguard for youthful fashions, bringing in the very latest in English and European trends. The transformation came when Segal, in trouble with his lenders, was letting loose at a fashionable party. There he encountered a woman wearing something he had never seen before, a leather dress. The woman informed him that he had not seen much leather yet because it was new, but it was all the rage in certain circles. Curious, Segal got the address of the partygoer's tailor, and the next day bought a leather coat from him. Segal put the leather coat in the front window of Le Chateau, and promptly sold it for $135. This was more than four times the going price for a similar jacket made of cloth. For the next eight months, Segal sold all kinds of leather goods out of Le Chateau, and did brisk business.

After his success with leather, Segal took a trip to Europe to find other new fashion trends. He was enchanted with London's Carnaby Street, an old-time tailoring district that by 1965 had become the epicenter of youth-oriented fashion. Segal imported French suits, Italian turtlenecks, and all the latest goods from the London scene. Segal claimed he introduced bell bottoms, the era's ubiquitous wide-bottomed pants, to Canada, and that Le Chateau sold fashions direct from Europe that had not even arrived in New York yet. Le Chateau became a mecca for youth, while for a time Segal continued to stock his traditional fashions from Peerless. The Le Chateau store was for a time an odd mix of the outrageously fashionable young and sedate old people looking for bargains. Segal decided to drop the kinds of clothes that had appealed to his older customers, and focus entirely on youth. This was a wise decision, and Segal was able to move into more locations. By 1972, Le Chateau had ten stores, all in metropolitan shopping areas.

Expansion in the 1970s and 1980s

Le Chateau grew in fits and starts. It had started with one store, expanded to three, went back down to one, and then grown to a small chain of ten retail outlets. Over the mid-1970s, Le Chateau had another growth spurt, and it opened stores rapidly in shopping malls and suburban areas. By the end of the decade, Le Chateau had more than 50 stores across the country. Its fashions became somewhat more mainstream and moved more toward women's clothing. The company had been steadily profitable until 1977. That year, the company registered its first loss. Determined to get Le Chateau back on track, Segal hired an executive assistant to help him plan. Jane Silverstone had been a sales clerk and understood the business from the inside. Segal eventually married her. (In 2001 Silverstone was named the company's vice-chairman.) Together they brought the company back to financial health. In 1983 they took Le Chateau public. The initial public offering raised some $7.3 million for the company.

Le Chateau continued to expand across Canada, and now in the mid-1980s it moved into the United States as well. Beginning in 1985, Le Chateau opened stores in Boston, New York, Chicago, Baltimore, and other U.S. cities, until it had 26 U.S. locations. Segal admitted that the company's southern foray was badly planned. The stores were in badly chosen locations, and the fashions were not adequately adjusted for the tastes of U.S. consumers. The push into U.S. markets did not work the first time around, and Le Chateau quietly closed the U.S. stores as their leases expired. The only one it left in operation was a store on Houston Street and Broadway in Manhattan, a heavily trafficked shopping district.

The number of Le Chateau stores in Canada continued to grow, until by the early 1990s the company had approximately 160 locations. Le Chateau was vertically integrated, doing all its design and most of its manufacturing in its own facilities. This allowed the company to hold down costs and to turn out new designs quickly. These were competitive advantages, but the company nevertheless had problems, and the late 1980s and early 1990s were difficult times. Poor economic conditions overall made the retail sector difficult. Consumer confidence sank in Canada through the early 1990s as a prolonged recession kept people out of stores. A headline from Canada's Financial Post newspaper (August 15, 1992) declared, "Clothing Sector in Tatters." The industry struggled with sluggish sales, while some prominent chains, such as Town & Country (owned by huge retailer Dylex Ltd.) and Ayre Ltd., filed for bankruptcy. In 1997, Canada's venerable department store chain Eaton's, which had been in business since 1869, filed for bankruptcy and quickly disappeared from the retail scene.

Le Chateau blamed the recession for poor sales, and also acknowledged mistakes handling inventory. The quality of some of Le Chateau's goods slipped in the 1990s. Le Chateau's clothes had always been moderately priced, and the chain emphasized the very latest trends, bringing in new collections every two or three weeks. An article in This Magazine (November-December 2002) characterized Le Chateau's specialty as "cheap, trendy, disposable clothes." This in itself was not pejorative. The chain had thrived on selling faddish goods that by definition went quickly out of style. But by the late 1990s, the formula had perhaps become overdone, and the stores earned the nickname "Le Crapeau." In 1999, Le Chateau designers miscalculated what their youthful customers wanted, and the company took a large and unexpected quarterly loss. The company's stock fell to its lowest point since the early 1990s.

Company Perspectives:

Our fashions are as eclectic as your lifestyle. We know it's not all about Saturday night, anymore than it's all about your Wednesday business luncheon. It's about living life, seven days a week. So we offer something for every day, for everyone. So come in, take a look around. We think that would look great on you. Le Chateau. We are international. And we are proudly Canadian.

New Directions in the 2000s

Galvanized by the serious misstep in 1999, Segal began instituting changes in top management. Jane Silverstone became vice-chairman, while the vice-president for finance, Emilia Di Raddo, became the firm's president. Le Chateau beefed up its quality control process, improved store design, and made changes to the mix of merchandise. Then the company began building its brand image. The firm needed to change consumers' perception that Le Chateau's goods were only for wearing to nightclubs. Le Chateau hoped to bring back more mature customers, men and women in their 20s and 30s who were appreciative of cutting edge style. In the early 2000s the company began a series of innovative marketing campaigns. In 2003 the company designed an entire collection around the movie Down with Love, a Renee Zellweger vehicle set in the 1960s. The collection premiered with a star-studded party at Le Chateau's Montreal flagship store, and much media attention drew shoppers in droves. The "Down with Love" collection sold out in six weeks. Le Chateau also tied its brand to the popular television show Canadian Idol. The show's top contestants all wore Le Chateau goods as they competed to be Canada's next musical star. Le Chateau put fashion, film, and music together in these promotions.

Although Le Chateau instituted many changes in its management, inventory process, and quality control in the early 2000s, it also reconsidered the U.S. market. Le Chateau had stepped back from its expansion into the United States in the 1980s, leaving in place only a store in lower Manhattan. That store had done well, and in 1997 Le Chateau began opening several new stores in Manhattan and New Jersey. The plan this time around was for the company to cluster stores in one geographical area. In the 1980s, the stores had opened in many metropolises, from Boston to Chicago. Le Chateau now planned to concentrate on the northeastern United States, beginning with the New York metropolitan area. The New York area stores were a little different from the Canadian stores, offering more goods from other brands. This was because of difficulties importing some lines, such as sweaters. Le Chateau opened a New York office to coordinate the U.S. market push. By 2003, the company had five stores in the United States. But the company told the fashion weekly WWD (November 2, 2000) that it planned to open as many as 300 stores in the United States.

By the early 2000s, Le Chateau had recovered from the problems that plagued it in the 1990s, and it was growing at a time when the North American retail market remained difficult overall. For its final quarter of 2002, Le Chateau doubled its profits over the same period a year earlier. In addition, its same-store sales (a key indicator of retail growth, measuring sales of stores that have been open at least one year) were up over 19 percent for the same period. Its 2002 holiday sales rose almost 14 percent over the year previous, yet for the retail sector overall, 2002 was one of the worst holiday sales seasons ever. Le Chateau was now doing very well, while many competitors were still stymied. The company's stock price rose, from a low of $2.10 in 2000 to a high of $11 in early 2003. Sales continued to climb over 2003, at a modest 4.2 percent, while earnings climbed more than 40 percent. The company seemed to have found its footing. Now industry analysts wondered if founder Herschel Segal, who had turned 70 in 2001, would sell the chain.

Key Dates:

1959:: Herschel Segal opens the first Le Chateau store.
1972:: The chain grows to ten stores.
1983:: The company goes public.
1985:: The company begins its first push into the U.S. market.
1999:: Quarterly losses spark a company turnaround.
2002:: Company doubles its fourth-quarter profits over the same period in 2001; same-store sales rise over 19 percent; holiday sales increase by almost 14 percent.
2003:: The company's stock price climbs to a high of $11.