GREENER PASTURES
Truworths eyes expansion in the UK to counter fallout from rand weakness
FASHION retailer Truworths International has started talks to acquire the UK-based Office Retail Group, which has raised questions about the wisdom of the company’s move to broaden its geographical spread and diversification.
In an announcement yesterday, Truworths said it was in preliminary non-binding negotiations regarding the potential acquisition of Office Retail Group, a fashion footwear retailer based primarily in the UK and offering mens, womens and sports footwear at the midlevel price range.
Office, which has 150 stores, would be Truworths’ first foray into Europe.
“No binding offer has been made, neither has any transaction been concluded with Office or its shareholders,” Truworths said. No further details were offered.
Truworths had approached Office’s management to discuss the £300 million (R6.3 billion) bid, the London-based Sunday Times reported on September 13, without saying where it got the information.
Expansion
Truworths shares on the JSE yesterday advanced as much as 5.25 percent to R90.79, but closed 3.85 percent higher at R89.58. The general retailers’ index gained 2.34 percent.
Research analyst at Gryphon Asset Management, Casparus Treurnicht, said there was an increasing trend among local retailers, including Foschini and Spar, of expanding geographically.
This year Brait bought British fashion retailer New Look for $1.2bn (R16.2bn). Last year, Woolworths bought Australian chain David Jones for about $2bn.
In January, The Foschini Group agreed to buy UK chain Phase Eight for $212m.
Truworths, which has acquired two South African children’s clothing companies this year, had cash and cash equivalents of R1.5bn as of June 28.
Treurnicht said one concern about the diversification move was for international shareholders who had originally acquired South African assets in order to take advantage of the country’s booming retail sector.
“What is the point if the companies will be expanding back in that direction?” Treurnicht said, pointing out that shareholders generally allocated resources to companies that were focussed on a certain geographical region.
But Treurnicht said he understood the need, from a company’s perspective, to diversify earnings and obtain a hedge against the weakening of the rand against major currencies.
Local shopping chains have been struggling to grow sales at home as unemployment of more than 26 percent, power shortages and rising inflation stifle consumer spending. Those expanding abroad are benefiting from diversifying their sources of revenue beyond the rand, which has weakened 15 percent against the dollar this year.
Treurnicht wondered if the company’s management properly understood the UK market. “In this case the management is going into unknown territory so the question is how well they know the market.”
Sasfin Securities senior retail analyst Alec Abraham said, for him, Truworth’s move was very positive and he had anticipated it for a long time.
He said Truworths was probably prompted by its vulnerability in the local market with consumers under increasing pressure, and the added concern of new entrants looking to carve their niche in the limited market.
Abraham said for him the move was positive in principle as it represented Truworths’ first (and arguably, long overdue) move to address the threat to its core market from the numerous new entrants.
Office
Chris Gilmour, an investment analyst at Absa Wealth, said the company had been hardest hit by the entry of foreign retailers, such as Australia’s Cotton On and Inditex’s Zara, to the South African market.
Buying Office would help Truworths diversify away from its home market, but the shoe retailer had “a bit of debt attached to it”, Gilmour said.
Sasfin’s Abraham said of all fashion retailers, Truworths was the most vulnerable as its last two acquisitions, Earthchild and Naartjie, did not help to mitigate this. “From that point of view, this is definitely a good move. It gives them access to a different growth market and also helps to rand hedge their earnings.”
He said this move should provide a valuable rand hedge and a new geographical source of income in the face of mounting pressure on domestic consumer spending amid sub-par gross domestic figures (GDP) of about 1.5 percent in recent years.
GDP trend line
“It is also clear that the GDP trend line and the lowering trend in consumer spending is putting retailers under pressure and that spending is to be diluted further by new entrants to the market,” Abraham said.
He said while hedging against the rand weakness was one factor in the diversification strategy, the low GDP of about 1.5 percent in recent times was putting pressure on retailers to invest offshore for new geographical sources of income.
“It looks like it may be an expensive deal at a peak exchange rate, so the timing doesn’t appear as attractive as their peers,” Kyle Rollinson, an analyst at Avior Capital Markets, said.
“The South African business could still face pressure for the next 18 months and the cash Truworths has was a buffer for the weak local environment.” – Additional reporting by Bloomberg and Reuters