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.