Apparently apparel still suits some of us, broke or not

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INVESTMENT ANALYSIS

Apparently apparel still suits some of us, broke or not

Fashion in SA still floats TFG’s boat, helped by canny acquisitions in the UK and Australia

Chris Gilmour


Realising that pinning its hopes on a moribund SA economy for growth was futile, retailer TFG, which owns the Foschini brand, began expanding into the UK and more recently Australia. Both jurisdictions have tended to be graveyards for SA consumer companies but not so for TFG. And besides its successful geographic strategy, it has also gone for diversification that lessens dependency on any specific merchandise category, and additionally reduced exposure to credit sales.
Clothing accounts for over 83% of group turnover with cellphones accounting for 5.5%, homeware 4.5%, jewellery 4.2% and cosmetics 3.2%. For the interim period to end September 2018, turnover rose by 29%, helped by the acquisition of Hobbs in the UK and RAG in Australia. Headline earnings per share increased 8% to 506c. With the SA economy in recession its jewellery market is contracting, reflecting the lack of discretionary consumer income. The Western Cape had its lowest comparable store turnover growth ever, at 2%, exacerbated by the severe drought which affected employment. Massive fuel price increases and the April VAT increase were other detractors.
CEO Anthony Thunstrom notes that currently in SA there are more companies closing stores than opening them. He observes an element of reality creeping into the retail property segment and TFG Africa pushed back heavily on landlords during the period, with escalations only averaging 5.9% compared with 7.2% in the prior interim. While the background SA economy makes trading very difficult, it is even tougher in the UK, according to Thunstrom. Brexit uncertainty remains; the traditional department store model is under extreme pressure, with House of Fraser going into administration and Debenhams posting its biggest ever loss; and store rentals have been too expensive for too long. But TFG London appears to be making solid progress in this challenging environment, taking market share from competitors.
The Australian picture is a mixed one. While TFG is doing particularly well here, there are indications that the economy may be cooling. Annual GDP growth is holding steady at around 3.4% and while house prices are softening due to increasing interest rates, they remain far out of reach of the typical TFG younger consumer. Concluding that saving to buy a house is often futile, these appearance-focused spenders are instead opting to buy attractive clothing with their discretionary income. TFG Australia opened its first SA concept store earlier this year in the shape of an American Swiss store. It plans to open a further six in Brisbane, Melbourne and Sydney. Early indications have been extremely positive.
Online retailing penetration differs significantly throughout the group. While online accounts for only 1% of TFG Africa, TFG London enjoys a 30% online exposure. The group recently launched MyTFGWorld.com, an ambitious online retailing platform that will eventually showcase not only the group’s 20-plus in-house brands but also third-party vendors, with the intention to take on Amazon and Takealot.com. TFG has been a good performer in the past few difficult years, with only Mr Price beating it in terms of share price performance. Truworths and Woolworths have disappointed in comparison. The offshore expansion has been cleverly conceptualised and executed and this helps to insulate it from the underperforming SA economy. And when the local landscape eventually turns around, TFG’s huge SA footprint should help it to outperform its peer pack. Chris Gilmour is an investment analyst.

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