Finweek English Edition - - INVESTMENT - Brian Vambe, In­vest­ment Pro­fes­sional at Mar­riott As­set Man­age­ment

The Fos­chini Group is a South African fash­ion re­tail com­pany that opened its first store in 1924 sell­ing in­ex­pen­sive ladies’ fash­ion im­ported from the US. To­day, the group has grown to be­come a lead­ing re­tailer of some of South Africa’s most well-known brands.

The ma­jor­ity of the group’s busi­ness is re­tail cloth­ing, which makes up ap­prox­i­mately two thirds of to­tal sales. When com­pared to other fash­ion re­tail­ers on the ba­sis of fash­ion, qual­ity and price, the Fos­chini brand is po­si­tioned be­tween Tru­worths and Edgars. The group’s tar­get mar­ket is pre­dom­i­nately mid­dle- to up­per­in­come con­sumers be­tween the ages of 18 and 45. This seg­ment of the con­sumer mar­ket is grow­ing rapidly and is likely to con­tinue ex­hibit­ing strong growth over the medium term.

One of Fos­chini’s great­est strengths is brand di­ver­sity. The group of­fers mul­ti­ple brands aimed at dif­fer­ent bud­gets and tastes of fash­ion con­sumers. In ad­di­tion to this, the group is also ge­o­graph­i­cally di­ver­si­fied. Ex­pan­sion into Africa is part of the group’s long-term growth strat­egy and it al­ready op­er­ates 98 stores be­yond SA’s bor­ders. The rise in urbanisation and dis­pos­able in­come in Africa cou­pled with a grow­ing de­mand for well-known brands makes Africa a com­pelling in­vest­ment case for the com­pany.

The group is man­aged by an ex­pe­ri­enced team with an ex­cel­lent track record. Over the past three years, the group has been re­struc­tur­ing with sig­nif­i­cant at­ten- tion be­ing given to prod­uct propo­si­tion and sup­ply-chain ef­fi­cien­cies. The group is buy­ing more ef­fi­ciently and man­ag­ing the risks as­so­ci­ated with ever-chang­ing fash­ion trends. This has trans­lated into sales growth.

Through its own sourc­ing com­pany, the Fos­chini Group Ap­parel Sup­ply Com­pany, it has gained economies of scale as a re­sult of buy­ing ma­te­ri­als in bulk for its var­i­ous brands. This has helped the group to con­trol its in­put cost and to main­tain healthy mar­gins.

The group has a strong bal­ance sheet, sup­ported by good cash f lows, which al­lows it to con­tinue open­ing new stores. Th­ese fac­tors have en­abled Fos­chini to con­sis­tently in­crease div­i­dend pay­ments to share­hold­ers.

Fos­chini’s ex­cel­lent div­i­dend track record is il­lus­trated in the graph above.

Ap­prox­i­mately 60% of the group’s sales are on credit. Cus­tomers are of­fered ei­ther a six-month in­ter­est-free ac­count or a 12-month in­ter­est pay­ment plan, which is a re­volv­ing credit fa­cil­ity. Cur­rently over 90% of new cus­tomers opt for the 12-month plan, which al­lows them a larger credit fa­cil­ity, but with the same monthly in­stal­ment. We view the group’s debtor book as be­ing healthy and well man­aged with ap­prox­i­mately 10% of the book be­ing pro­vided for. Given an un­cer­tain global eco­nomic en­vi­ron­ment, we favour com­pa­nies with strong brands, healthy bal­ance sheets and ex­pe­ri­enced man­age­ment teams com­mit­ted to paying re­li­able div­i­dends. Fos­chini f its this mould well. When one con­sid­ers that the share is cur­rently trad­ing on a for­ward yield of 5.4% – a yield 50% higher than the RSA All Share div­i­dend yield – Fos­chini is an ideal busi­ness for in­vestors to con­sider hold­ing for the long term.

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