The Foschini Group
Selling retail shares has been a popular theme for the year to date and has witnessed the likes of Truworths, Foschini and Mr Price (to name but a few) giving up a significant portion of last year’s gains over a relatively short period. But when these themes start to become echoed from housewife to dentist in the public environment, it quite often translates into capitulation and potential opportunity for the farsighted investor.
The Foschini Group (TFG) boasts a number of strong brands, which the South African consumer is very familiar with. Its Markham stores represent the largest men’s fashion retailer in the country, while American Swiss and Sterns represent the first and second (respectively) largest jewellery chains domestically. Foschini is the largest contributor to the group’s turnover (over R4bn), and the sporting division, consisting of Totalsports and Sportscene, currently contributes in the vicinity of R2bn a year in turnover amid a growing trend in sports fashion. The Exact! brand caters to the lower end of the fashion retail space, pushing strong volumes in rural communities while the relatively new Luella offering aims at the higher end, albeit a relatively small contributor to revenue at present.
Along with the remainder of its 14+ divisions, TFG offers diversity in its retail offering with regards to product and multilevel income group targeting. The group’s footprint is significant, with products ranging from furniture and household utilities through to sports equipment, jewellery and of course fashion, with prime locations in major shopping centres, high streets and rural areas. The product variety caters for the broad range of income groups making the company earnings robust in varying market conditions.
Recent economic conditions have fuelled higher inf lation from issues such as petrol hikes and a weaker rand, which in turn has pressured consumer spending. TFG has done exceptionally well in maintaining stable revenue growth in these conditions, hedging out currency risk and keeping a solid financial position in terms of its balance sheet.
Assuming a 10% growth in earnings, a basic valuation on TFG suggests that the share is trading at more than a 30% discount to its intrinsic value of R149/share. The assumed growth would be relatively conservative, if we consider that the average earnings over the last three years reflect a mean of around 13% and guidance from a recently released trading statement alludes to sales growth in excess of 19% over nine months of trading in the current financial reporting period.
The company is currently trading on an earnings multiple of 13.4, which is a discount to its 10-year historical compound growth rate of 16.8%. The p:e presents another discount relative to its peers, Truworths, Mr Price and Woolworths, which currently trade at multiples of 16.1; 21 and 24 respectively.
If growth continues anywhere near that of the last decade, the near-term weakness in share price could be presenting an opportunity to capitalise on the longer term value on offer.