Daily Equity Report
Seed Weekly - The Foschini Group ? Cash sales and African operations picking up
The Foschini Group (TFG) is a well-known retailer in SA, with 17 brands in its stable spanning the clothing, jewellery, sporting apparel, cellular and homeware segments of the market. The Group caters primarily to the middle and upper income groups, and sales are nearly evenly split between cash and credit. The group operates 2,071 stores in SA and 134 in the rest of Africa, with the majority of stores located in Namibia, Botswana and Zambia.
TFG was founded in 1924, and in 1941 became the first of SA’s fashion retail brands to list on the JSE. Various acquisitions followed, including American Swiss Watch Company, Markham and Sterns in the earlier years, and Sportscene and Totalsports more recently. Brands such as DonnaClaire, Matrix, DueSouth and Luella were launched at regular intervals through the years to serve different consumer groups.
As a result, TFG has built up an impressive collection of brands that are well diversified across product types and target markets:
Latest Financial Results
The Group has recently released its financial results for the half-year ended 30 September 2014. Despite a tough trading environment, including low real GDP growth, inflation at the upper edge of the target band and rand weakness affecting imports, the Group has performed admirably.
Retail turnover is up 9.7% to R 7.3bn compared to the previous period, while continuing HEPS is up 8.0% and the interim dividend has increased by 8%.
As can be seen in the table below, clothing turnover contributed 67% to total turnover but grew at a relatively modest 8.5%. Cellphones have overtaken Jewellery to become the second-highest contributor at 10%, with good growth of 21% over the previous reporting period.
Over the past two and a half years of trading, growth in cash sales have picked up significantly, while growth in credit sales have slowed down owing to the constrained credit cycle. Cash sales now represent 44.2% of total sales - compared to 40.3% in Sept ’13 – after strong growth of 20.3%.
TFG’s African operations have performed well, with 26% total turnover growth and 16% same store turnover growth providing a boost to the consolidated results outlined above. Fourteen new stores were opened during the year, and all regions are profitable except Nigeria’s two stores. Further expansion is planned in Ghana, Kenya, Mozambique and Angola, with management aiming to have between 280 and 300 stores established by 2018.
TFG sold its stake in the credit provider RCS Group to BNP Paribas during the reporting period, realising R 1.4bn in proceeds and a profit on disposal of R 273m. The funds were used to reduce borrowings in the short term, while management evaluates other opportunities to employ the cash.
Outlook and Fundamentals
Management sees the growth in cash sales as a major benefit, as the local credit environment is likely to remain challenging for the rest of 2015. The recent drop in the fuel price will provide welcome relief to consumers, with revenue increasing accordingly. Growth in retail space for the full year is estimated at around 7%, with 100 new stores planned for the second half of the financial year. A key focus area is e-commerce – TFG plans to launch @Home and TFG Mobile sites during the year and will eventually phase in all of its brands.
TFG currently trades at a PE of 19, which is slightly more expensive than the JSE’s 17, while the dividend yield is a healthy 3.4% compared to the JSE’s 2.9%.
The Foschini Group has been included as a value holding in the Seed Equity Fund in the past, but is currently included at a 2.8% weighting due to strong recent price momentum.
Cor van Deventer
Wed, 28 Jan 2015- 12:35
021 914 4966