TRADE of the MONTH

The Fos­chini Group’s de­ci­sion to di­ver­sify in­ter­na­tion­ally is bear­ing good fruit

Financial Mail - Investors Monthly - - Opening Bell - Stafford Thomas

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)

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