TRADE OF THE MONTH

Try lay­er­ing your port­fo­lio look by con­trast­ing two fash­ion re­tail­ers

Financial Mail - Investors Monthly - - Contents - Stafford Thomas

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.

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