The Fos­chini Group

Finweek English Edition - - INVESTMENT -

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.

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