The Foschini Group has big growth plans
TFG has set itself stiff targets for growth in the five years to March 2021. The retailer is looking to increase sales by 85% to R39bn, to lift operating margin from 17% to as high as 19% and return on equity from 23.9% to 28%-30%.
If TFG achieves its 2021 sales target and a margin of 18% it implies an average annual 14.4% rise in operating profit to just short of double its level in the year to March 2016.
“Barring an economic calamity we view our targets as very attainable,” says TFG financial director Anthony Thunstrom. “They are derived from projections made by each brand and are probably conservative. Targets set over the past eight years have all been exceeded.”
TFG showed its form in its latest year, lifting headline EPS (HEPS) 17.6%. It put TFG marginally ahead of Mr Price, which reported a 17.1% HEPS rise over the same period.
For TFG, its past year was one of bedding down UK-based fashion retailer Phase 8 (acquired for £140m in January 2015).
“Integration is the make or break of an acquisition,” says Thunstrom. “Phase 8’s management has done everything we asked them to do. The integration could not have gone more smoothly.”
While Phase 8 contributed R3.6bn (17%) to group retail sales of R21.1bn, its contribution to HEPS growth was minimal.
“We expected to only break even in the first year,” says Thunstrom. “Phase 8 turned out to be mildly earnings accretive.”
TFG has big plans for Phase 8, which has 542 stores and concessions in department stores in 21 countries.
Targeted for 2021 are 820 outlets excluding those of Whistles, a UK-based high-end fashion retailer with 121 outlets, acquired by Phase 8 in March for £4.6m. Thunstrom sees Whistles as a brand with long legs.
“It is an aspirational brand with a far higher market profile in the UK than Phase 8,” he says. “Before we disclosed its purchase price many people thought we had paid R1bn. It shows how big its brand equity is.”
TFG intends running with that brand equity.
“We know all the department store groups and countries we can take Whistles into,” says Thunstrom.
Big growth plans are also in place in SA, where TFG wants to grow the 2,286-store footprint of its 20 brands to 3,090 by 2021.
Independent retail analyst Syd Vianello says: “They have too many brands to manage them all effectively.”
Thunstrom disagrees. “Our brand diversity gives us flexibility,” he says. “We can put as many as 15 brands into a mall and often do.”
It will, arguably, not be brand diversity that counts in a constrained SA market. It will be success in attracting cash customers at a time when the ability to extend credit has been curtailed by recently introduced affordability regulations.
“With reduced access to credit, consumers are turning to cash purchases and even lay-by,” says Thunstrom.
“Cash customers can spend anywhere they want to. It is all about gaining cash market share, which we are doing.”
In its latest financial year TFG upped SA cash sales by a hefty 18.4% to take them to 48.3% of total sales. TFG’s cash sales growth was double Mr Price’s 9.1% cash sales growth.
Truworths is also pushing cash sales. Excluding its recent UK acquisition, Office Retail, cash sales lifted by 16% in its half year to December. But they did so off a low base, cash sales remaining a modest 29% of total SA sales.
As matters stand TFG is something of an underdog, rated on a 13.9 p:e against Truworths’ 14.7 p:e and Mr Price’s generous 18.9 p:e. TFG’s management will be out to prove the market wrong. They stand a strong chance of doing just that.