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top 1000 spotlight

West 49, located in the Vaughan Mills Mall, north of Toronto.Ryan Enn Hughes

Generating revenue has never been West 49's problem. The hip clothing retailer saw revenue increase 735 per cent in the past five years - the fastest rate of any Canadian company, according to the Report on Business magazine's recent Top 1000 - as it absorbed rivals and opened new stores. Converting sales into profits, however, has been another issue.

"It's not an uncommon problem at the smaller retailers," says Desjardins Securities analyst Keith Howlett. "Inventory management can be a problem, and they end up in a situation where they need to reduce prices in order to sell things. So, even though sales are good, profits are not necessarily."

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What is West 49? The specialty clothing retailer targets the 12-to-16 age group through its stable of stores: West 49, Billabong, Off The Wall, Amnesia/Arsenic and D-Tox. Under all of its various banners, it operates 134 stores across Canada.

"Our customer is certainly not recession proof, but they are certainly a little recession resistant," chief executive officer Sam Baio said yesterday. "Usually parents stop spending on themselves first, and when families wring out the rag the children get the last drops."

In the last quarter, which ended in May, sales increased from the same quarter a year earlier by 4.9 per cent to $40.8-million. The company lost $2.6-million, an improvement from a loss of $4.2-million last year.

"We've been growing our sales and we know we need to start taking care of the profit side of the business," Mr. Baio said.

Inventory management is key; Mr. Howlett said West 49 could make more money if it had a better way of keeping track of what's on its shelves and what has been selling. Too often, he said, goods sit unsold and end up being offered at clear-out prices. The company is in the early stages of installing a point-of-sales system that will track such information at its Billabong and Off The Wall locations.

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"Its sales per square foot are extremely good, but they're not getting that over to the bottom line," Mr. Howlett said. "They generate enough cash that they should eventually become profitable as they get their system in place and exercise some discipline. They should make money in a normal economy."

Mr. Baio warned that any rollout would be cautious because employees need to learn the new system and reports need to be tested before he would be willing to use it in all his stores. "It's a slow process, because you could really hurt yourself if you rush it out too quickly," he said.

Stock performance West 49's lightly traded shares are up 11 per cent this year, although they are close to 50 per cent lower than their 52-week high.

Adrenalina Inc. offered to buy out profit-starved investors for 55 cents a share in the spring, but West 49 rejected the $35-million offer, pointing out that the Florida-based company had money problems of its own. Another offer could arrive this fall, some analysts say. But Mr. Howlett said: "I really can't see that going anywhere. I'd suggest it's just noise at this point."

There is also speculation that Michael Gold, who owns the Stitches, Sirens and Bluenotes chains, could try to take over West 49 after amassing slightly more than 20 per cent of the company's shares over the past year.

"He's accumulated a lot of stock and nobody is sure what his intentions are," Mr. Howlett said of the low-profile retailer.

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Only three analysts follow West 49 shares, all with "hold" ratings. Their average price target, according to Bloomberg, is 37 cents. However, the analysts have revised their expectations higher for the company; in the past two months, analyst-tracking service StarMine shows they have boosted their earnings-per-share estimates by 85 per cent for the next year.

Fastest 5-year revenue growth