Expanding the fashion footprint
With the launch of new brands to reach new market segments and the acquisition of UK fashion, the retail chain seems wellpositioned to achieve its ambitious 2020 growth targets. Is it time to buy into management’s growth story?
despiteincreased competition from foreign clothing retailers – such as Spain-headquartered Zara, Australia’s Cotton On and British clothing brand Top Shop – fashion retailer The Foschini Group (TFG) is up nearly 22% over the past year, outperforming the JSE’s All-Share Index but lagging rival Truworths.
Following its acquisition of an 85% stake in UK fashion retailer Phase Eight for R2.6bn in January, TFG now has 2 724 outlets in 27 countries globally. It has also expanded into children’s wear, opening its first Soda Bloc store in Cape Town in August. Other brands include clothing retailers Foschini, DonnaClaire, Exact and Markham; sportswear brands Totalsports, Sportscene and Duesouth; and jewellery brands American Swiss and Sterns.
Further expansion into the rest of Africa, where it currently owns 148 stores in seven countries, mainly Namibia, Botswana, Swaziland and Zambia, is a key focus area for TFG. The group plans to operate 375 stores in the rest of Africa by 2020. In the past financial year, it opened 29 new stores in the region, including five in Ghana.
Its entry into Nigeria, however, has been challenging due to a shortage of prime retail space. Congestion in ports and poor supply chain infrastructure, such as roads and warehouses, are also hindering faster store roll-outs. Critics of TFG point out to the group’s reliance on credit sales, which represent more than half of total sales for the group. TFG has seen a 9.4% increase in net bad debt to R1.02bn in the year to end March, a significant slowdown compared with the previous financial year, when bad debts jumped by nearly 40%.
Another downside, following the acquisition of Phase Eight, is the increase in its outstanding debt by about R3.6bn, with its debt-to-equity ratio increasing to 76.8% (56.6% excluding Phase Eight) at the end of March. The intention is to bring gearing closer to a medium-term target of 40%. TFG also retains the option to buy the remaining 15% in Phase Eight, which is currently owned by management.
The UK retailer, which targets women aged 35 to 55, has achieved sales growth at a compound annual growth rate of 18.2% over the past 10 years, totalling R2.88bn in the 2015 financial year. It is targeting 770 stores by 2020, up from the 444 at the end of March. It is also seeing potential in expanding its international footprint, with standalone stores already successfully trialled in Switzerland, Germany and Hong Kong, and growing its e-commerce offerings.
Possible scenario: TFG has been consolidating in the form of a symmetrical triangle since August. It has recently bounced on the lower slope of the pattern and could be headed towards the upper slope. A positive breakout would be confirmed above 15 070c/share, with the short-term upside target situated at 17 325c/share. Alternative scenario: A negative breakout of the pattern would be signalled below 13 670c/share, and the downside target would be at 11 415c/share.