The Foschini Group can’t put a foot wrong

It was a busy week for retailers, with results out from Spar and Mr Price in addition to this result from The Foschini Group. Be sure to refer to those feature articles as well to get yourself up to date with the local retail environment.

The Foschini Group is famous for two things: stealing my future stock market ticker (JSE: TFG) and investing heavily in its local supply chain. The former makes zero difference to anyone except me and the latter has made all the difference to TFG shareholders in a time of incredible global supply chain pressures.

The numbers included in this update were known to the market before Friday, as TFG released a detailed trading update in May. This is important context to assessing the market reaction to the announcement.

An overview of the numbers

In the year ended March 2022, group revenue increased by 29.7% to R46.2 billion, supported by retail turnover up 31.6% to R43.4 billion. Online revenue is now 10.2% of retail turnover and increased by 11.7%, coming off a really high base in the pandemic.

Cash turnover is 79,9% of the group total. Everyone always talks about Mr Price being the cash-focused retailer with 86.1% of group sales being in cash, but TFG isn’t exactly far behind. TFG’s impairment allowance on its credit book has improved slightly from 20.7% to 19.1%.

The highlight for me in this result is the improvement in gross margin from 45.5% to 48.5%. That’s a substantial move, which the company attributes to lower inventory markdowns due to strong consumer demand and an increasingly efficient, local supply chain. At this rate, the local supply chain is becoming a significant competitive advantage in a sector that is fiercely competitive.

By the end of March, TFG traded out of 4,351 outlets. It was very interesting to see that 377 outlets were opened and 310 were closed, demonstrating a significant reshuffle of the store portfolio. The UK business now has a much smaller footprint, down from 801 outlets to 688.

Headline earnings per share (HEPS) has increased by 409.9%, which isn’t a number you’ll see often. At 1,009 cents per share, it is still below the FY20 number of 1,174.4 cents and the similar FY19 number of 1,187.1 cents. Whenever you see a ridiculous increase like 409%, you have to go back to older periods to see what the through-the-pandemic growth looks like.

Cash generated from operations of R8.2 billion means that around 17.7% of revenue is converted into cash that is then available for capital expenditure, debt reduction and dividends. This was assisted by a reduction in inventory days from 169 days to 153 days, further evidence of an efficient inventory management and procurement function.

Net debt of R1 billion is an historic low levels. After adjusting for the stupidity of IFRS 16 that ruins financial statements of companies that have many leases, the debt : EBITDA ratio is 1.3x.

A final dividend of 330 cents per share has been declared, adding to the 170 cents per share interim dividend. This puts the group on a trailing dividend yield of 3.75% based on Friday’s closing price.

Taking a deeper look at the operations

TFG operates in Africa, Australia and the UK. It hasn’t been easy to do business anywhere in the world in the past year.

In Australia and the UK, Covid-related restrictions continued to hit the group in this period. In South Africa, the group had to contend with the civil unrest which impacted 198 stores. 176 of these stores had been reopened by May 2022. SASRIA payments of R541 million have been received and the business interruption claim is still in progress.

In Australia, TFG’s revenue increased by 24% in local currency. This business now contributes 15.8% to group turnover. The UK business grew 57.3% in local currency and contributes 14.4% to group turnover. TFG Africa is just under 70% of group turnover and is therefore still the most important segment.

In TFG Africa (which includes South Africa), clothing is the most important category with a contribution of over 75% to turnover. Cellphones contributed 9.5% and homeware 7.4%. It’s interesting to note that cosmetics only increased by 8.2% for the full year, perhaps a function of ongoing hybrid work environments. People simply don’t spend as much money on “looking good” when they are staying home for the day!

Looking ahead: a differentiated model

TFG is excited about its acquisition of Tapestry Home Brands, the holding company for Coricraft, Volpes, Dial-a-Bed and The Bed Store. This ties in perfectly with TFG’s strategy to have a localised supply chain for TFG Africa and gain exposure to new product categories. The deal is currently going through regulatory approval processes.

The group thinks that supply chain disruptions will continue for most of the 2022 calendar year. With a strong balance sheet and the localised supply chain, TFG is well-positioned to cope with that.

It feels like TFG just can’t put a foot wrong, regardless of the tough conditions. Despite this, the share price is down nearly 13.5% over the past 12 months and is up just 8% this year. The share price closed 3.8% lower on Friday on a red day for the market.

With a closing share price of R133.24 on Friday, the trailing Price/Earnings multiple is 13.2x. A cursory glance at TIKR suggests that this is similar to pre-pandemic averages. There’s a lot of macroeconomic pressure but TFG has made huge strides in strengthening its business. I don’t hold a position in the stock.