TFG deserves credit for bravery
When the SARS-CoV2 virus struck SA in or around March 2020, it was obvious to me that two clothing-orientated retailers would survive: TFG and Mr Price.
Both were positioned mainly at the lower end of the market, though their strategies for success were quite different. While Mr Price was retreating into a SA-only operation, TFG was making the most of its forays into Australia and the UK.
But they both exhibited brave strategic decisions in the depths of the pandemic to invest through the cycle — TFG, with its acquisition of Jet from the failed Edcon operation, and Mr Price with its acquisitions of Power Fashion and Yuppiechef.
And now, as the SA consumer economy looks set to have to contend with higher interest rates for the foreseeable future, both groups are better positioned to not only survive but to flourish in such an environment.
When TFG announced that it was going into Australia about five years ago, many investors were not impressed. After all, Australia has proved to be the graveyard for a number of SA retailers over many years.
But TFG has proved its detractors very wrong indeed. The beauty of TFG’s Australian business is that it appeals to young, upwardly mobile people who tend not to have mortgages.
Property prices in Australia are way out of reach of typical young consumers and so they spend their money on things other than real estate. With an unemployment rate there of only about 3.5%, these consumers don’t have a problem spending their money. Even with the spectre of substantially higher interest rates in Australia, they shouldn’t really be affected.
Australia emerged from the pandemic largely unscathed, even though its lockdowns were severe and ruthlessly prosecuted on occasion. With about A$160bn in excess savings in their collective pockets after the pandemic ended, much of that amount has been spent domestically on semi-durable goods such as clothing. TFG and other Australian retailers thus participated in something of a windfall after the easing of restrictions.
And in the UK, after taking huge strain for a number of years due to long coronavirus lockdowns, TFG London is now doing well, both in bricks and mortar and online.
For the six months to endSeptember 2022, group retail turnover rose 23.5% to R23.5bn. Online retail turnover rose 2.6% to R2.1bn. There was strong cash retail turnover growth of 25.5%, contributing 80.4% to total group retail turnover. Segmentally, TFG Africa remained the largest single contributor to group retail turnover at 65.2%, followed by TFG Australia at 19.5% and TFG London at 14.9%.
Market share gains were again recorded in SA.
Gross profit rose 24.8% to R11.6bn. Headline earnings per share rose 18.1% to 464.6c and a 170c dividend per share was declared, the same as at the interim stage in 2021.
Though prudent, not increasing the dividend may have been regarded as niggardly by the market. Financial gearing at 27% is not high, so the group could easily have afforded to have increased the dividend.
Perhaps management is saving the funds that would have been spent on an increased dividend for further acquisitions, but that is pure speculation.
One area that it is definitely spending a lot of money on is installing battery backups in the TFG Africa network to combat rotational power cuts. By the end of this financial year, about 70% of the store base should be insulated from load-shedding.
Even with the sustained growth of the past two years, the TFG share price is still languishing at more than 50% below its peak of February 2018. It’s completely understandable why any retail stock would attract a considerable amount of cynicism at this point in the economic cycle, but the current share price appears to be ignoring that this is a very different company from what it was five years ago.