Foschini: None the worse for wear
While retailers struggle in the tough UK and Australian markets, TFG is styling, thanks to some smart acquisitions
In an ambitious offshore diversification drive, The Foschini Group (TFG) has pumped R6bn into acquisitions over the past three years. This has taken the group into two of the world’s toughest retail markets: the UK and Australia.
TFG has encountered its biggest challenge in the UK, where consumer confidence — hit by the June 2016 Brexit vote — is the weakest of any major economy in the region. Reflecting the severity of conditions, the British Retail Consortium reported a 4.1% like-for-like fall in in-store nonfood sales in May.
"The UK is an incredibly difficult market to trade in," says Doug Murray, who steps down as TFG CEO in September after almost 11 years in the job. He will be succeeded by company CFO Anthony Thunström.
TFG entered the UK in January 2015 through the £140m purchase of women’s fashion retailer Phase Eight. A smaller bolt-on acquisition, Whistles, was added a year later.
Phase Eight — the core of TFG London — operates 157 stores and 416 concessions in the UK and Ireland. In TFG’s past year, it generated sales of about £260m. The retailer operates a further 22 stores and 636 concessions in 18 other countries. Its aggressive expansion plans include a possible move into China.
"Concessions are a capital-light, low-risk model," says Murray.
Phase Eight more than held its own in TFG’s past year, lifting sales 4.1% in the first half and 4.4% in the second half in a market in which nonfood retail sales grew 1.5%.
Sales growth was driven primarily by its online channels, which accounted for a third of sales — well above the 22% national average for nonfood retailers.
But things did not all go the company’s way. Pressured by competition and a shift to the more costly online channel, TFG London’s adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) fell by 0.7%.
Compared with many of its competitors, Phase Eight sailed through its past year. A number of fashion retailers were placed under administration during this time, including Jacques Vert (470 outlets), Agent Provocateur (100 outlets) and East (49 outlets).
Other fashion retailers are in a desperate dash to scale down. Among them, Marks & Spencer is set to close 100 clothing stores by 2022 and downsize many more. In a fight for survival, New Look — in which Christo Wiese’s investment vehicle Brait has an 89% stake — is closing 60 of its 593 stores.
Clearly confident of its abilities in the UK, TFG went ahead in November with its third UK acquisition, buying upmarket women’s fashion retailer Hobbs for £28.5m. Hobbs added 188 stores and concessions, and in a full year will contribute about R2bn in sales.
Hobbs is likely to be TFG’s last UK acquisition for now. "It’s time to consolidate," says Murray.
TFG also has Australia on its plate. It entered the market in grand style with its A$302.5m (then R3bn) acquisition of the country’s largest menswear retailer, Retail Apparel Group (RAG), in July 2017. The deal was funded in part by a strongly supported share issue in which TFG raised R2.5bn.
RAG, trading through 431 stores under the Connor, Tarocash, Johnny Bigg and yd brands, has a 9% share of Australia’s menswear sector. A fifth brand added three years ago, Rockwear, specialises in women’s leisurewear.
RAG came with an outstanding record, having grown revenue 14.3%/year and Ebitda 10.7%/year for its past three financial years. In the first eight months after RAG was consolidated by TFG, it recorded sales of R3.1bn and a pretax profit of R253m — R52m more than TFG London’s full-year pretax contribution.
RAG is keeping up the cracking pace.
"In the past eight months [to May] we grew sales by 14% and are gaining significant market share," RAG CEO Gary Novis said at a recent results presentation.
It was an exceptional showing in a national clothing market in which sales at current prices were down 0.3% year on year in April.
"We dominate the midmarket value sector," said Novis. "That’s where Australians are spending their money."
While RAG makes it look easy, other retailers are making heavy weather in Australia. Among them is Mr Price, which has been playing around with different test store formats since October 2015. After opening its third MRP Apparel store in March 2017, the retailer did a sudden about-turn that has left it with only one MRP Apparel store and two MRP Home stores.
"It does not seem that Mr Price will be staying in Australia," says Sasfin Securities’ Alec Abraham.
For TFG, Australia seems set to be a key growth driver.
"RAG’s growth will be primarily through growing its store footprint," said Novis. "We believe we can add 30 [stores] a year for another five years across our five brands. We will also add new brands and will this year pilot a TFG brand."
Despite TFG’s heavy offshore involvement in its past year, it did not take its eye off the ball in SA. In a solid showing, TFG Africa turned in a 6.3% rise in sales to R20.1bn, despite 3.5% merchandise price deflation, and it upped pretax profit 4.4% to R3.97bn.
With SA consumer confidence showing significant improvement recently and proof of income no longer needed to extend credit to customers, Thunström says he is "cautiously optimistic on the outlook for our SA operations".
On a 17.2 p:e TFG is not at a bargain level, but for investors wanting retail exposure to solid businesses across a broad spectrum of geographies, the group has a lot to offer.