Author: Patrick Cairns|
18 January 2012 00:49
Article from The Money Web
More than you may think.
Orapa – Most South African's will be familiar with the fashion retail brand Foschini. Fewer may know that the listed Foschini Group (JSE:TFG) includes businesses that extend well beyond clothing.
The group's retail interests extend from fashion to jewellery, and from homeware to furniture. It also has a majority interest in the RCS financial services business, which amongst other activities extends credit to the customers of a number of other retailers, including Massmart, Pep and Edgars.
“Brand diversity is one of Foschini's greatest strengths,” says Efficient Select analyst Stuart Sinclair. “The company's businesses, particularly homeware and jewellery, are highly geared to a South African consumer recovery.”
Foschini's brands include Markham, donna-claire, exact!, Fabiani, Sterns, American Swiss, @home, DueSouth and Totalsports
History
The first Foschini store opened in Johannesburg in 1925, carrying inexpensive women's fashion imported from the USA. In a little over a year, the chain had grown to nine branches across the country. Foschini listed on the JSE in 1941, becoming the first of South Africa's fashion retail brands to become a public company.
The group's first major acquisition was made in 1967 when the American Swiss Watch Company was brought into the group. Markhams was taken over the following year, and in 1968 Pages Stores was launched to cater to lower income groups.
Sterns was acquired in 1993, shortly before a period of rapid growth for Foschini. During the 1990s, the sportscene and donna-claire brands were launched, Pages Stores was rebranded exact!, and RCS Group was established to offer personal finance and card facilities to customers of merchants outside of the group.
In 2000, Foschini took over Totalsports and launched the Matrix jewellery brand. The fashionexpress brand was created the following year, and @home was launched to take advantage of the growing homeware market. Outdoor brand DueSouth began operating in 2004, and the Luella accessory brand was created in 2005.
Last year, the group acquired men's fashion retailer Fabiani and entered into a franchise agreement with international footwear and accessory brand Charles & Keith
The group now comprises a total of 16 trading brands and over 1,700 stores in South Africa, Botswana, Zambia, Namibia and Swaziland.
Dividends
Between 2008 and the middle of 2010, Foschini kept its final and interim dividends pegged at R1.70 and R1.18 per share respectively. However, for the first six months of the 2011 financial year, Foschini upped its interim dividend to R1.38 per share and followed this with a final dividend of R2.12 per share.
For the six months to 31 September 2011, the group again lifted its payout to shareholders, announcing an interim dividend of R1.90 per share. The counter offers a dividend yield around 3.9%.
Which funds hold this stock?
Foschini enjoys spotty exposure amongst South Africa's best performing unit trusts over the last three to five years. Only one of the three leading industrial equity funds has a position on the stock. The Old Mutual Industrial Fund has been increasing its exposure over the last year and currently holds 4.2% of its funds in Foschini.
Two of the best four value funds include the stock in their portfolios. The Momentum Value Fund holds 3.7% of its funds in the counter, and the Prudential Dividend Maximiser Fund 1.8%.
Foschini is held by only one of the top five general equity funds. The Prudential Equity Fund gives it a weighting of 2.1%. The Absa Select Equity Fund sold out of its position on the stock during the course of last year.
To see which funds are buying and selling the counter, visit Moneyweb's Unit Trust Portfolio Tool.
Why would an individual consider investing in this company?
Although Foschini was significantly affected by the credit crisis (over 60% of sales are credit sales) and it suffered from the downturn in consumer spending, the group has rebounded strongly. Improvements in its supply chain and cost management have produced noticable benefits.
“One of the undertakings that management has embarked upon is better supply chain management, which is optimising cash conversion,” says Efficient Select's Sinclair. “Furthermore, by improving its merchandise planning frequency and fashion assortment, Foschini has grown its local market share.”
Even through the downturn, the group maintained a strong balance sheet, supported by good cash flows, which enabled it to continue an aggressive store roll out and maintain its good dividend yield. In addition, as Sterns and American Swiss are two of the largest jewellery chains in the country, their dominance allowed them to gain market share when smaller retailers were struggling.
Foschini has also partnered with six local manufacturers in a project funded by the Industrial Development Corporation. The manufacturers are producing “fast fashion” or “cut-make-and-trim” goods that have been designed by Foschini, with fabric supplied by the retailer.
This is not only about supporting local industry, but should significantly improve the group's supply chain by creating a much quicker turnaround of goods into its stores This means it can respond more swiftly to fashion trends and will need to carry less stock.
What risks does this company face?
Foschini's credit retail model means that it is a highly cyclical business. The group's earnings boomed between 2000 and 2007 when consumers were spending liberally, but fell off notably in the three leaner years that followed.
The group's fortunes are therefore closely tied to the state of the South African economy. High levels of unemployment and elevated household debt levels all weigh on the group's fortunes. A potential spike in food inflation could also be bad news for Foschini as consumers would be forced to direct more spending to food purchases.
Competition in the local fashion retail market is also fierce. Not only are established competitors such as Truworths, Woolworths and Mr Price performing well, but Foschini also has to deal with the prospect of growing international interest. Spanish brand Zara, the world's largest fashion retailer by sales, opened its first South African store in Sandton in November.
“With Zara having entered South Africa, competition within the industry is set to intensify,” Sinclair notes. “This could potentially result in Foschini losing market share if they don’t get their fashion mix right.”
Where does this company’s growth potential lie?
Real wage increases in South Africa and lower inflation are translating into an uptick in consumer spending. Banks are also relaxing their lending criteria, which is particularly good news for a credit retailer like Foschini.
“In the near to medium term, Foschini should be set to benefit from the recovery of the South African consumer and rising interest rate cycle,” Sinclair believes. “If management continues to improve the supply chain, the company would be able to improve their cash conversion, which in turn would result in the stock re-rating. Furthermore, with RCS writing up new business, management is confident that they will be able to generate earnings growth given a better economic backdrop and increased access to funding capital.”
Foschini has also engaged in a massive store roll out in recent years, opening hundreds of new stores across its brands. Although this translated into poorer trading densities and increased costs during the economic downturn, it has created the potential for greater earnings as the cycle turns.
Over the next three years Foschini plans to take this expansion north of the border, with plans to open a further 57 stores in Africa outside of South Africa. Most of these will be in the countries in which it already has a presence, but it will also be starting operations in Lesotho, Mozambique and Nigeria.
The acquisition of Fabiani also gives Foschini a foot in the door at the high-end of the fashion market. The group has indicated that it sees tremendous potential to grow the brand from its current seven stores, and is hoping to increase this to as many as 40 within the next few years.
At its last results announcement, Foschini revealed that it plans to unbundle the RCS Group into a separate listing within the next two years. This will significantly improve Foschini's debt profile and therefore improve the group's return on equity ratio.
For more, visit Moneyweb's click-a-company profile on The Foschini Group Ltd.
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