TRADE of the MONTH
The Foschini Group’s decision to diversify internationally is bearing good fruit
C lothing and footwear sales fell off a cliff in the first quarter of the year, plunging 6.4% year on year. More than ever it highlights the wisdom of a strategy in which international diversification plays a key role.
It is an approach The Foschini Group (TFG) has taken with great success, but one that Mr Price has failed to in any meaningful way. This is a shortcoming of Mr Price’s that comes at a time when its performance in its home market is far from being up to scratch.
It makes TFG the clothing retail sector share to buy and Mr Price the one to go short on. This is all the more so given the difference in the two shares’ ratings: TFG on a 13.2 p:e and Mr Price on a demanding 17.2 p:e, despite its share price having fallen over 20% in the past 12 months.
From a performance perspective, TFG had the edge on Mr Price in their latest financial years, which ended on March 31 and April 1 respectively.
TFG crossed the finishing line with its headline EPS (HEPS) up 4.1%, and while that was not earth shattering, it was far better than the 10.4% fall in HEPS recorded by Mr Price.
The big swing factor for TFG was its international exposure. In its latest financial year it lifted retail sales 11.6% (14.3% in constant currency terms) to R23.55bn, a growth rate which, if not for an international sales contribution of R4,64bn (19.7% of total group retail sales), would have been 8%.
The difference was even more pronounced at the pretax profit level. Were it not for the contribution from international sales, TFG’s reported pre-tax profit growth of 6% to R3.2bn would have been 2.8%.
TFG made its first international move in January 2015, when it acquired UK-based international fashion retailer Phase Eight for £140m. Phase Eight is active in 26 countries, with a fast-growing footprint of more than 730 stores and concessions, including 139 under the Whistles brand.
In another major step to reduce dependence on the SA market TFG has just agreed to buy leading Australian menswear specialist Retail Apparel Group (RAG) for A$302,5m (R3.025bn). Operating 400 stores under the brands Connor, Tarocash, Johnny Bigg and yd., RAG has a 9% share of the menswear sector. It comes with a solid track record, having over its past three financial years grown revenue at 14.3%/year in an almost zero-inflation environment and earnings before interest, tax, depreciation, amortisation (Ebitda) at 10.7%/year. RAG is forecasting a 19.5% rise in Ebitda to A$43m in its current financial year.
“RAG’s low-risk strategy is paying off,” proclaimed Inside
Retail Australia in a recent story. The trade publication highlighted that RAG had greatly reduced the risk of fashion seasonality by having an 80% year-round product mix.
With RAG in its fold TFG will have 28 brands across 3,700 retail outlets, 2,406 of those in SA, 183 in seven other African countries and about 1,100 in 28 other countries. Had RAG been consolidated for 12 months in TFG’s latest financial year, international operations would have contributed about 27% of retail sales and 20% of pre-tax profit.
Mr Price’s move to internationalise has so far been ten- tative, and confined to Australia, where two pilot MRP apparel stores were opened in October 2015. A MRP Home store was opened in October 2016 and a third MRP store in March this year.
To build a meaningful presence in Australia armed with two unknown brands is a big ask and it is uncertain that Mr Price will push ahead.
In its results statement the retailer noted that it would have “a clearer view of the potential” of the Australian market by year end.
Right now, Mr Price has its hands full in its home market, where its key objective is to regain lost market share. This is a far cry from the group that for three decades boasted that its primarily cash value fashion model enabled it to gain market share continually in both good and bad times.
In its 2016 results release Mr Price confidently stated: “As a value retailer, our prices will rise less, so, comparatively speaking, we are well positioned.” That was certainly not the case in Mr Price’s past year, during which retail sales across its five brands fell 0.5% to R18.6bn. Like-for-like store sales fell 3.6%. This was despite internal price inflation of 10.7%, considerably higher than the 7.2% recorded by TFG in its local and African operations.
Hitting Mr Price hard was a combination of fashion errors and intense price competition. The retailer noted in its results release: “In the earlier part of the year, the product offer did not resonate with customers and competitor promotional activity during the mild winter brought prices closer to ours.”
Following release of Mr Price’s results there was a sudden flurry of interest from investors, who boosted its share price from R144 to R160. It could just be providing a great selling opportunity.
In a step to reduce dependence on the SA market TFG has agreed to buy leading Australian menswear specialist Retail Apparel Group for A$302,5m (R3.025bn)