Long4Life seeks sporting chance in youth market
In the long term, millennials could be a key market for Long4life's latest acquisition
In the past few years sales have been muted for apparel retailers globally, with young consumers spending more on electronics and branded takeaway coffees than on clothing, but one area where they are still willing to spend is wellness.
And this might be what Brian Joffe's Long4Life is counting on with the company's bid for Holdsport, which owns Sportsmans Warehouse and Outdoor Warehouse, as well as Performance Brands, an outdoor apparel and equipment design manufacturer and wholesaler.
"Athleisure" is a new buzzword and local analysts are taking note of its potential. It's a trend in which clothing designed for workouts and sport is worn at work or socially.
The investment holding company's share price slumped over 20% after the Holdsport announcement last week. The offer, which was revised upwards, was regarded as too generous by some.
Holdsport jumped 11%, the biggest increase in the only listed sports goods retailer in nearly 16 months.
This week, Long4Life was at R6.18, up nearly 3% from a month ago, and Holdsport was at R66.75, up 14% from a month ago.
Joffe was not surprised at the slump in the share price.
"There was a lot of arbitrage opportunity" and Long4Life was trading at a premium to its cash flow, he said when the offer was announced.
Long4Life, with R2-billion in cash to make acquisitions, signed its first deal, to buy beauty franchise business Sorbet, in July. "We're obviously working hard to find assets we can build on and hopefully create something special out of this," Joffe said.
He sees Holdsport as a springboard.
"It's got some other features other than sporting goods.
"This is the start of something, a base from which we can go into other things. The other important part is this company has a very good cash flow."
Other advantages of the deal for Long4Life, according to the company, are that Holdsport is among the best dividend-paying ordinary stocks on the bourse; it is good at growing revenue per square metre of store space; and it operates mostly in value centres, thus avoiding high rentals.
"For us, this is the beginning of something. Hopefully we'll be able to do more with it than they've been able to," Joffe said.
Long4Life "is a company that is aggressive on acquisitions. We want accelerated growth and the only way we're going to do this is [through] acquisitions ... We want to be in the wellness space, outdoors space."
Discretionary spending by consumers is under pressure, even when it comes to sportswear or having your nails done.
But in the long term, millennials could be a key market for Long4life's latest acquisition.
"Sporting equipment and technical gear are probably the first things you cut out when things get tougher," said Atiyyah Vawda, a retail analyst at Avior Capital Markets.
"They have a stronger link to consumer confidence than any other product category."
Millennials had had a significant impact on the sporting industry.
The nature of sport was changing in line with wearable technology.
There were more hi-tech, fast-paced sporting goods than traditional items and, in line with the global trend of health awareness, you saw that mix between leisure and fashion called "athleisure".
"It's a big trend over the past three to four years," said Vawda.
Growth prospects in sporting goods were challenging in the short term.
"It depends on consumer confidence at this point," Vawda said.
"The South African environment is very conducive to the outdoors, so on a long-term view it's still a good environment."
Fairtree Capital's Jean Pierre Verster said Holdsport's performance had been pedestrian in the past few years.
"But this acquisition [bid] implies that Joffe is more bullish about the outlook for sporting goods.
"Long4Life is trading under cautionary, so they might be eyeing further acquisition opportunities in sporting/outdoor goods retailers," Verster said.
Sports apparel retailers such as Totalsports and MRP Sport have been more resilient than retailers that sell solely sporting equipment.
MRP has been gaining market share over the past few years as it continues to invest in developing its own private label line within the affordable clothing range.
According to Euromonitor statistics, the total sportswear market in South Africa grew in value from R47-million to R63.6-million between 2012 and 2016.
Totalsports, which is owned by TFG, does not disclose sales figures.
For the year to April, MRP Sport increased sales 7.7% to R1.4-billion, although comparable sales were down 1.8%.
Weaker trade in the second half required higher markdowns to manage stock levels, but annual profit growth was achieved, the company said.
In the year ended February, sales at Holdsport were up 5.8% to R1.8-billion from the previous year, but core earnings per share before foreign exchange effects were down 2.3% to 522.3c.