TFG closes the credit taps
The retailer is taking a more conservative approach to applications as it waits for load-shedding to abate
It’s credit crunch time at TFG, the owner of brands such as Foschini, @home, Sportscene and Jet.
The group approved only 17% of applications for store credit cards in the six months to end-September, despite receiving a record number of 2-million applications since the pandemic. Previously it would have accepted more of these applications, it says, but has now cracked down because of rising bad debts.
TFG has also pulled back on its store rollout plans, though usually it has tried for a year-end push ahead of Black Friday and the peak holiday trading season. This year it’s planned 35 new openings about half its usual rate, says TFG CEO Anthony Thunström. “We need a bit more confidence about an end to load-shedding or stage 4 or below,” he says.
The group lost about 287,000 trading hours in the halfyear because of power cuts. Trading was also affected by rising interest rates, high inflation, taxi strikes and flooding in the Western Cape. “The single biggest impact on margins is having to move stock quickly because of load-shedding,” says Thunström.
Clearly, it wasn’t supposed to be like this.
“We were increasing like-for-like growth at 9% last year, until we reached peak season, when loadshedding was at its worst. By November and December we had already ordered and paid for our received stock and then suddenly we couldn’t trade half the day. You are faced with a choice: either to move the stock quickly or hope it keeps, so we aggressively moved stock.”
The group cancelled forward orders and kicked into promotional activity to reduce inventory on an “industrial scale”, says Thunström. While that’s done nothing for its margins, TFG says it helped the company take further market share.
Still, the impact on its half-year numbers was profound: while revenue grew by 12.9% to R28.4bn, headline earnings fell 14.9% to R1.3bn. Thunström says margins have since recovered to a more normalised range.
From cash saved by limiting new stores, TFG will pay down more debt, on which it spent R800m in the six months. It’s set capex at about 4% of total turnover, from 6% a year ago.
In total, TFG opened 199 new stores during the period and closed 91 underperforming ones. It means that actual space growth was very small, with the focus on better trading densities, which are now ahead of its listed peers.
On the digital and online front, TFG continues with full force. It’ s testing one-hour delivery through Bash, its online retail platform.
The numbers so far are promising: online turnover jumped 56%; a quarter of that growth is due to first-time buyers at Bash, which is now the fourth-most visited app in the country less than a year after launching. This places Bash slightly ahead of Checkers Sixty60 and behind only Takealot, Shein and Amazon.
TFG expects Bash to break even in three years, but the bigger game is to deliver on the company’s omnichannel ambitions and drive foot traffic into its stores.
TFG is effectively now South Africa’s largest clothing manufacturer too, given the scale of local production it owns, which has helped fatten gross margins. Local manufacturing has been “quite remarkable”, says Thunström. “Those that use our ‘quick response’ capabilities had lower markdowns and less inventory.”
TFG is using its credit and “quick response” processes at its furniture division too, as it digests the recently acquired Tapestry business (owner of brands like Volpes, Coricraft and Dial-A-Bed).
It appears to have largely sidestepped the offshore curse that has smacked just about every retailer in South Africa. Both its London and Australian businesses were up against a tough comparable base due to the buoyant sales in the post-Covid trading period. Both are performing ahead of preCovid levels. London attained a record profit despite a 10.5% drop in retail turnover; TFG Australia’s retail turnover fell 7.2% due to higher inflation and interest rates.
A report from Nedbank says it retains its neutral recommendation on TFG, in part because of the higher debt levels.
But, it says, “while net bad debt rose as a percentage of the debtor book as expected, provisions seem to be seeing an improving performance as a percentage of the debtor book In addition, higher interest rates have translated into solid growth in profit from the debtor book.”
Of South Africa’s apparel retailers, only Truworths which last week reported a 10.9% rise in sales for the first 17 weeks of its 2024 financial year has enjoyed any uplift on the JSE this year. Its shares have gained an astounding 59%, compared with TFG’s 15.4% rally, Mr Price’s 6% decline and Pepkor’s 2.8% slip.
Thunström, meanwhile, expects a difficult time for the rest of year, but tells the FM he feels “closer” to a potential upturn.