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?

Finweek English Edition - - MARKETPLACEKILLER TRADE - Ed­i­to­rial@fin­week.co.za

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.

What next?

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.

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