What’s next for Foschini, Jet after Covid-19? TFG update

With millions of South Africans losing jobs or taking large pay cuts, the month-end shopping spree has lost its appeal. Those who are working no longer have to don suits and skirts as they work from home. Clothing retailers like The Foschini Group are feeling the pinch and tightening their belts. The retailer has imposed stricter credit criteria on account holders. Credit spend amongst customers is down almost 35%. TFG says cellular and homeware sales improved while clothing sales were heavily impacted by the ‘stay at home’ rules this year.- Melani Nathan

Media statement: 

TFG remains resilient through unprecedented times

Group revenue R13,9 billion at half year

  • Group retail turnover down 26,1% to R12.5 billion
  • Group online turnover now contributes 14,4% to Group retail turnover with strong growth for TFG Africa and TFG Australia at 116% (ZAR) and 67% (A$) respectively
  • Gross margin declined 8% to 45,2% (Sept 2019: 53.2%) mainly as a result of dealing with seasonal inventory where clearances were impacted by the various lockdowns
  • EBITDA margin decreased only 1.1%
  • Trading expenses down 23% to R5,9 billion (Sept 2019: R7,7 billion)
  • Strong cash generation from operations of R4,9 billion
  • Debt to equity position significantly improved to 11.2%

2020 has been a year of profound global change as the COVID-19 pandemic created unprecedented uncertainty and placed tremendous strain on communities and business. Trade was heavily impacted by significant store closures in April and May, equating to 8 weeks lost turnover and there was further lockdowns in international countries. Trading expenses were reduced by 23% following government furlough schemes and landlords COVID-19 related support, together with the continued business optimisation at Head Office.

Cash turnover decreased by 23,0% while credit turnover, which was purposely restricted by stringent and reduced acceptance criteria, decreased by 34,7%. Cash turnover now contributes 76,6% to total Group turnover.

Read also: From stocks to consumer spending – SA VAT hike could deepen economic malaise

Gross margin reduction of 8% was as a result of the heavy promotional environment, COVID-19 and further stock provisions of which close to R1 billion was carried at Group level for local and especially in the international businesses.

Lockdown and working from home drove a change in the product mix with cellular and homeware both performing strongly; contributions up 3% and 1% respectively compared to September 2019. Clothing performance was impacted by the heavy promotional activity in retail and the subdued demand for occasion and formal wear as a result of the tight Covid related social distancing rules implemented worldwide, the lack of social gatherings and the increase in work-from-home.

Basic earnings per share and headline earnings per share decreased by 69,7% and 117,1% respectively.  Earnings performance was impacted by the COVID-19 pandemic and outlet closures as well as by the following non-comparable events:

  • The dilution impact of the successfully concluded rights offer as announced on SENS on 11 August 2020; and
  • The acquisition of certain commercially viable stores and selected assets of Jet in South Africa as announced on SENS on 25 September 2020. The effective date of the acquisition was 25 September 2020 and the inclusion of a purchase gain on acquisition of R694.3 million as well as acquisition costs of R14.3 million has impacted specifically on basic earnings per ordinary share and diluted earnings per ordinary share.

TFG Africa’s turnover, contributing 66% to Group turnover, decreased by 22%  when compared to the same period in the previous financial year. TFG Australia’s turnover, contributing 18,5% to Group turnover, decreased by 26,9% (AUD) when compared to the same period in the previous financial year, while TFG London’s turnover, contributing 15,5% to Group turnover, decreased by 56,2% (GBP) when compared to the same period in the previous financial year.

Whilst we are very cognisant of the current retail challenges in the UK, we do believe that our UK brands remain very strong within their specific categories and we are in the process of further reviewing our cost base and operating model for TFG London, to ensure that we are well positioned for recovery.

E-commerce evolution and digital transformation

TFG continues to reap the positive impact of a clearly defined digital strategy and R500 million investment into its disruptive digital transformation, with the roll out of invaluable retail technologies which have placed it well ahead of competitors.

The progressive plan, launched three years ago, meant TFG was fully geared to weather the changes brought about by the pandemic.

Key focus areas that have positioned TFG as more agile and fit for the future include:  RFID (Radio Frequency Identification), the Yoobic visual merchandising system; apps for staff: TFGLearn (digitised training) and TFG-on-the-go (remote access to HR information) and to fast-track ecommerce growth through a number of online launches including the launch of TFG’s jewellery brands, myTFGworld and Sportscene apps, and Johnny Bigg in the USA.

Growth of local manufacturing

TFG continues to drive sustainable economic growth through a myriad of initiatives to offset the effects of the pandemic on South Africa, through local manufacturing. Over the past five years, TFG has invested in excess of R2 billion working with the South African government, the Department of Trade and Industry especially, to strategically create a diversified local supply chain thereby reducing its reliance on China and other international suppliers and positively influencing local job creation and upskilling. This focused strategy has led to an increase in the contribution of locally manufactured product, local employment and skills advancement to a significant 35% of TFG’s apparel and expected to grow significantly over the next few years.

 TFG’s Quick Response Manufacturing innovation uses science to create shorter lead times through the use of innovative production processes, lean manufacturing principles, IT systems and digitisation allowing a move away from the traditional 150 to 180 day international supply chain lead time to 35 to 40 days on average when locally produced. Further it has the added benefit of protecting / insulating TFG margins in fast fashion apparel.

Jet acquisition

TFG successfully concluded its acquisition of Jet’s South African operations from Edcon for a consideration of R333.2 million, recognizing a provisional gain on purchase of R694.3 million in profit or loss for the current period. This included the transfer of 382 stores which collectively employ approximately 4 800 staff.

Commenting on the current trading environment, Anthony Thunström, CEO of TFG said:

“Although Group turnover and earnings have clearly been negatively impacted by the COVID-19 pandemic and in particular the associated store closures, we are satisfied with both the strategic and tactical steps that our management teams have successfully undertaken in an unprecedented environment, and humbled by the continued support of our shareholders, as evidenced by the substantial oversubscription in respect of the recently concluded rights offer. Our balance sheet has never been stronger and the group’s previous and on-going investments into digital transformation; product, brand and category diversification and vertical, quick response supply chain development will continue to benefit the Group in the future, both during and post COVID-19. Our strong management teams have responded to these challenges as evidenced by the trading results we have managed to achieve under very difficult circumstances, especially in the United Kingdom.

We responded with urgency, showed great resilience in the last six months, such as the Jet acquisition which provided TFG with a strategically important expansion into the value segment of the South African retail apparel market. The Group is well positioned to take advantage of any economic recovery and will continue to invest organically in its brands, its digital transformation initiatives as well as in its vertically quick response supply chain capacity, which has the added benefit of creating and preserving more South African jobs, at a time where every job is precious. We remain on the lookout for further inorganic growth opportunities that meet our strict acquisition criteria”.

Outlook

The outlook for trading conditions and consumer confidence remain under pressure with further job losses expected and further lockdowns as a result of the second wave of COVID-19 infections have already been experienced in TFG Australia and are currently being experienced in TFG London. The UK is likely to remain under pressure until their lockdown is lifted in December. Australia has weathered the storm and is well positioned for further growth, especially their Rockwear and Johnny Bigg brands.

Jet stock purchases are to increase and this will boost turnover growth. The integration of Jet into TFG is expected to be completed by the end of this financial year.

TFG will continue their strong focus on expense and capital management.

TFG is well positioned to capitalise on the re-opening of the economies in the geographical areas where they trade. They have the benefit of brand diversification, which has always been a strength. TFG remains one of the most successful retailers with a myriad of brands each with strong market positioning. Strategic investments in digital transformation will continue to be prioritised as well as localised quick response manufacturing capacity build.

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