TRADE OF THE MONTH
Try layering your portfolio look by contrasting two fashion retailers
Long on TFG, short on Truworths
We have The Foschini Group (TFG) and Truworths squaring up to each other. We recommend going long on TFG and short on Truworths.
Both great companies, the long-standing rivals in the fashion retail world are separated by one crucial factor: innovation. While TFG has reinvented itself in recent years, Truworths has stuck to its credit-driven model in a market undergoing radical change.
In-store credit is no longer king. Sales growth is becoming increasingly cash-driven and it shows in the figures.
TFG in its year to March 2015 romped home with cash sales up 19,6%, a pace that beat even the predominantly cash sales-driven Mr Price’s 14,9% cash sales rise over the same period. A muted 4,3% rise in TFG’s credit sales left overall SA turnover up 10,8% with cash accounting for 46% of the total, a far cry from the 61% just two years earlier.
Truworths remains stuck in the credit rut, credit sales accounting for over 70% of total sales, a level little changed over the past decade. It is also failing to grow cash sales, managing no more than a 5,4% increase in its 26 weeks to March 2015. Depressed credit sales growth left total sales up a feeble 5,2%.
Truworths’ bottom line suffered, headline earnings falling 0,4% compared with TFG’s 11,1% rise in the second half of its financial year. It was the first earnings decline Truworths had suffered in 15 years.
Another flaw is showing in Truworths’ business model. It is the dominance of high-price fashion products in a market where consumers’ focus is on value. Truworths’ exposure to the value sector is limited to its 212-store Identity chain, which produced just 16% of group sales in its past financial year.
TFG’s approach has been very different, broadening its reach across the product price spectrum through a line-up of 17 brands in SA trading through 2 280 stores. At a time when foreign fashion retailers targeting the women’s fashion segment are pouring into SA it has given TFG brand flexibility and placed it in a more defensive position than Truworths.
Highlighting this, Truworths through its Truworths chain alone generates a third of its total sales in the women’s fashion segment. By contrast the segment accounts for just over 10% of TFG’s total sales in SA, according to its chief financial officer, Anthony Thunstrom.
Truworths’ bias towards upper income sectors places it even more directly in the line of fire of foreign newcomers. Inditex, the world’s largest clothing retailer, left little doubt about it when in 2011 it opened its first Zara store in SA opposite Truworths’ flagship store in Sandton City.
Arguably of equal importance in our long/short recommendation is TFG’s strategy to reduce its reliance on the SA market. TFG did this in grand style in January through its acquisition of an 85% stake in UK-based up-market women’s fashion retailer Phase Eight for R2,56bn in January. In one fell swoop TFG added almost R3bn in annual sales to its R15,7bn SA and African sales base. Also added were 107 stores and 203 outlets in leading department stores in the UK and Ireland and 331 stores in 16 other countries. TFG plans entry into a further eight countries and at least 1 000 Phase Eight stores.
Overall Truworths has been left looking in sore need of a remake. It may come under Frenchman Jean-Christophe Garbino, who has just succeeded Truworths’ CEO of 23 years standing, Michael Mark.
Prior to joining Truworths, Garbino was CEO of Kiabi, a French fashion retailer. With a business model as different from Truworths’ as it could be, Kiabi is an aggressive cash-only discounter with stores outside major cities.
Garbino could be what Truworths needs, but his strategy has yet to be revealed. It adds to uncertainty at a time when the market’s tolerance for risk is low.