Offshore is in fashion
It is little wonder that retailers are looking overseas, given the sluggish local economy, writes Colleen Goko
erhaps feeling the grass is always greener on the other side, three large JSE-listed retail companies have set up shop offshore, with the UK and Australia proving to be the most popular investment destinations.
All of their share prices have been downgraded and it might be time for investors to start shopping for longer-term value.
Germien du Plessis, the finance principal of niche investment bank Bravura, says it is little wonder that retailers are looking offshore, given the sluggish local economy as well as the continuing rand volatility and the threat of a ratings downgrade.
“Offshore acquisitions introduce hard-currency earnings to the income statement. A common theme is also that while Africa remains a great frontier which offers super-profits in some areas, the African expansion story is often fraught with regulatory and logistical difficulties.
“We therefore see that the trend is set to continue for South African corporates to look to First World economies, including the UK and Australia, for diversification opportunities,” she says.
TFG, Truworths and Woolworths are among the local companies that have sizeable offshore exposure, and which are making heightened moves to expand these investments.
TFG (formerly The Foschini Group) paid R2.6bn in 2015 for an 85% stake in the UK’s Phase Eight, while retaining the right to buy the remaining 15% in three
Pequal tranches in the four to six years after the completion of the initial transaction. In March this year, it also acquired High Street fashion chain Whistles for an undisclosed amount as part of its strategy to extend its operations in the northern hemisphere — and there are early suggestions that these overseas investments could provide handsome rewards, at least for now.
The company reported total retail sales growth of 31.2%. Excluding the impact of Phase Eight, the group achieved retail sales growth of 11.6% with comparable sales growth of 5.7%.
However, while Phase Eight contributed R3.6bn (17%) to group retail sales of R21.1bn, its contribution to headline earnings growth was minimal.
Chief financial officer Anthony Thunström says though the group has expanded into the UK, it should not be seen as a sign that those northern markets are trouble free. Still, TFG has big plans for Phase 8, which has 542 stores and concessions in department stores in 21 countries.
“Retailing in that region has in general been declining,” Thunström says, adding that the group will continue to look for suitable additions to its portfolio of brands.
TFG is currently trading at an earnings multiple of 12.4 times.
Truworths — which bought UK fashion footwear chain Office Retail group for R5.5bn in December 2015 (its first foray into that region) — says for the year to June 26 this year, group retail sales rose 46% to R17bn, with Office contributing sales of R3.8bn.
Operating profit increased 21% to R4.2bn. But its operating margin declined to 24.9%, from 30.5% due to higher trading costs with the UK operations accounting for 27% of revenue.
Truworths also says Office will be its springboard into the rest of Europe. Office already has stores in Germany, and it envisages a further 10-15 store openings by the end of January 2018. This will bring its total German portfolio to between 16 and 21 stores.
Truworths says Germany is a particularly attractive market for footwear as the largest European economy, and because existing competition in that market is fragmented.
Nevertheless, in Office’s main market in the UK, CEO Michael Mark has warned that operations there remain uncertain.
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