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We take a look at the interim results for the period ending end of September 2018 of listed clothing and fashion retailer Foshini Group. The group owns some of South Africa's biggest clothing brands and outlets
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About The Foshini Group
The Foshini Group is one of South Africa's biggest clothing and fashion retailers. They own a wide variety of brands in South Africa including (but not limited to):
- Foshini
- TotalSports
- Fabiani
- @home
- Sportscene
- DueSouth
- SODA
- Markham
- Exact
The Foshini Group (TFG) brands
TFG has been listed on the JSE Limited since 1941 and is regarded as one of the foremost independent chain store groups in South Africa. We have a successful track record when it comes to delivering acceptable returns to investors and we strive to continue to do so. We aim to achieve this through a strategic focus that will improve customer experience. This is done by constantly developing our merchandise offerings to consistently meet our customers’ needs, and by targeted expansion of our store base.
So to the numbers we go
• Group retail turnover up 28,6% to R15,9 billion
• Gross margin expansion to 53,6% (Sept 2017: 51,0%)
• Net profit margin of 7.27% (Sept 2017: 8.12%)
• Headline earnings growth of 14,3% to a record R1,2 billion (excluding acquisition costs* +9,1%)
• Headline earnings per share up 8,3% to R5.06
• Free cash flow generated equal to 85% of net profit for the period
• Cash generated from operations R2.08 billion
• Cash generated per share of R9.05
• Interim dividend declared of R3.30 cents per share (up 5c or 1.5% from R3.25 a year ago)
• Gross margin expansion to 53,6% (Sept 2017: 51,0%)
• Net profit margin of 7.27% (Sept 2017: 8.12%)
• Headline earnings growth of 14,3% to a record R1,2 billion (excluding acquisition costs* +9,1%)
• Headline earnings per share up 8,3% to R5.06
• Free cash flow generated equal to 85% of net profit for the period
• Cash generated from operations R2.08 billion
• Cash generated per share of R9.05
• Interim dividend declared of R3.30 cents per share (up 5c or 1.5% from R3.25 a year ago)
So any comments from management on the results?
The following extracts were taken from their financial results as published earlier today.
PERFORMANCE OVERVIEW
In all three of our major territories, South Africa, the United Kingdom and Australia, trading conditions remained difficult and constrained during the first half of our financial year. Notwithstanding, the Group delivered a strong result for the period with good performance in each of the territories relative to our respective peer groups. The Group’s outlets increased to 4 041 outlets in 32 countries as at the end of September 2018.
PERFORMANCE OVERVIEW
In all three of our major territories, South Africa, the United Kingdom and Australia, trading conditions remained difficult and constrained during the first half of our financial year. Notwithstanding, the Group delivered a strong result for the period with good performance in each of the territories relative to our respective peer groups. The Group’s outlets increased to 4 041 outlets in 32 countries as at the end of September 2018.
TFG London’s comprehensive omni-channel offering enabled online turnover growth of 15% for this channel, in a market where trading has shifted rapidly from high street to online retail. With the launch of online selling for two additional
TFG Africa brands, Donna and The FIX, online turnover through 22 of the Group’s 28 brands now contributes 7,9% of Group turnover. Group cash turnover growth of 39,9% was achieved for the period with good growth of 9,8% (ZAR) for TFG Africa. In line with the Group’s strategy, the cash versus credit turnover split is well diversified at 72:28 with a split of 55:45 for TFG Africa. The adoption of the IFRS 15 revenue accounting standard referred to above, resulted in a c.4% shift in contribution from credit to cash turnover at a TFG Africa level. Group credit turnover growth of 6,8% was driven by growth in the active account base following the setting aside of the Affordability Regulations with regard to the submission of proof of income.
The Group’s gross margin expanded to 53,6% compared to 51,0% at September 2017. An encouraging increase from 46,6% to 47,6% was achieved for TFG Africa, with improved gross margins across most merchandise categories. TFG London’s gross margin was 63,0% (Sept 2017: 63,6%) and TFG Australia’s gross margin was 64,4% (Sept 2017: 63,9%).
Turnover growth of the various merchandise categories of TFG from September 2017 to September 2018:
TFG Africa brands, Donna and The FIX, online turnover through 22 of the Group’s 28 brands now contributes 7,9% of Group turnover. Group cash turnover growth of 39,9% was achieved for the period with good growth of 9,8% (ZAR) for TFG Africa. In line with the Group’s strategy, the cash versus credit turnover split is well diversified at 72:28 with a split of 55:45 for TFG Africa. The adoption of the IFRS 15 revenue accounting standard referred to above, resulted in a c.4% shift in contribution from credit to cash turnover at a TFG Africa level. Group credit turnover growth of 6,8% was driven by growth in the active account base following the setting aside of the Affordability Regulations with regard to the submission of proof of income.
The Group’s gross margin expanded to 53,6% compared to 51,0% at September 2017. An encouraging increase from 46,6% to 47,6% was achieved for TFG Africa, with improved gross margins across most merchandise categories. TFG London’s gross margin was 63,0% (Sept 2017: 63,6%) and TFG Australia’s gross margin was 64,4% (Sept 2017: 63,9%).
Turnover growth of the various merchandise categories of TFG from September 2017 to September 2018:
- Clothing: 36.1%
- Jewellery: 2.7%
- Cellphones: -2.6%
- Homeware & furniture: 7.8%
- Cosmetics: 1%
- Total Turnover: 28.6%
So should you buy their shares?
One would be hard pressed not to find TFG in most large unit trusts run by fund managers. Its one of those go to stocks that needs to be in every well balanced portfolio as their product and brands covers such a wide variety of tastes and consumers. And while consumers only spend around R4.00 out of every R100 earned on clothing and related items, one can be pretty sure that there is a very good change that part of not all of the R4 out of every R100 spent on clothing is spent at one of their stores. They have a very strong fit print and brand presence in South Africa and one can only assume the brand loyalty will continue to help them through tougher times with more competition and brands looking to enter a pretty lucrative market with relatively low barriers to entry. A net profit margin of over 7% is pretty strong, but it ha declined somewhat from the levels reached last year, showing margins are under pressure, either due to tough trading conditions or greater competition.
Currently trading at a dividend yield of 3.9% and a forward PE of around 15.3, which is very middle of the road for the current market. Not the highest nor the lowest PE ratio around. Strong cash generation, a very strong balance sheet with R1 billion in cash lying on the books they do look in pretty good shape considering the decline in consumer discretionary spending. A drag on the balance sheet is the trade and other receivables outstanding to the group of close to R8.2 billion (up from R7.7 billion a year ago). Their provisions for impairments on their debtors book is close to R2 billion) or 21.5% of their debtors book. Essentially the are saying for every R10 in credit issued for those buying on account, they expect to lose R2.15 to those who are unable to pay off their accounts/credit. Potential investors should keep this in mind when looking at the group.
But all things considered, we would recommend buying TFG, at levels a little lower than the current R171 a share, if TFG does not currently feature in their long term portfolio. If investors hold TFG, we would recommend that they keep holding the share, but not to add at these levels as we are worried about the debtors book becoming a problem in their future earnings reports.
Currently trading at a dividend yield of 3.9% and a forward PE of around 15.3, which is very middle of the road for the current market. Not the highest nor the lowest PE ratio around. Strong cash generation, a very strong balance sheet with R1 billion in cash lying on the books they do look in pretty good shape considering the decline in consumer discretionary spending. A drag on the balance sheet is the trade and other receivables outstanding to the group of close to R8.2 billion (up from R7.7 billion a year ago). Their provisions for impairments on their debtors book is close to R2 billion) or 21.5% of their debtors book. Essentially the are saying for every R10 in credit issued for those buying on account, they expect to lose R2.15 to those who are unable to pay off their accounts/credit. Potential investors should keep this in mind when looking at the group.
But all things considered, we would recommend buying TFG, at levels a little lower than the current R171 a share, if TFG does not currently feature in their long term portfolio. If investors hold TFG, we would recommend that they keep holding the share, but not to add at these levels as we are worried about the debtors book becoming a problem in their future earnings reports.