TFG: White Stuff acquisition masks R750m written off on past purchases

Key topics:TFG boosts sales via White Stuff acquisition, but organic growth lags.Africa digital sales surge 55%, offset by margin pressure from discounts.R750m impairments hit EPS, reflecting struggles in UK and Australian stores..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Alec Hogg.In retail, timing is everything. For The Foschini Group (TFG), the acquisition of British fashion retailer White Stuff late last year couldn't have been timed better. The group’s latest trading update, released on SENS yesterday evening, paints a picture of a retailer fighting hard in a constrained environment, using smart deal-making to bolster the top line while cleaning up legacy issues on the bottom line.If you scan the headline numbers, things look robust. Group sales for the nine months to late December are up 7.5%. But, as is often the case with complex multinationals, the devil is in the details. Strip out newly acquired White Stuff—which has been consolidated since late October—and that growth number thins dramatically to just 2.0%.This divergence tells the story of the current retail landscape: organic growth is hard to come by, both in SA and abroad.The Home Front: Bash brings the heatAt home, consumers are still gasping for air. Despite the optimistic talk of "green shoots" in the SA economy and the structural relief of the Two-Pot retirement system, the shoppers remain under immense pressure. TFG Africa’s sales grew a modest 3.5% in the critical third quarter (Q3) - the Christmas Season..Read more:.South Africa’s $4bn beauty market emerges as a retail battleground.However, a gleaming diamond does exist in the local portfolio: the digital Bash platform. TFG’s aggressive pivot to digital is paying off handsomely. Online sales in Africa rocketed by nearly 55% in Q3. In the physical world, retail has become a battle for inches, so growing a digital footprint by half in under a year is a significant win. It suggests that TFG is not just competing for wallet share but is also successfully migrating its customers to higher-efficiency channels.But this volume growth has come at a cost. Gross margins in Africa have slipped, down 90 basis points year-to-date. This is the classic retailer’s dilemma: as Shoprite is proving so comprehensively, the best way to move stock and grow market share in a cash-strapped economy is from discounting. TFG has also chosen to clear the decks, prioritising cash flow over margin protection in the short term.Offshore: Structural shifts and the "R-word"It is in international operations that the update turns from a trading report into a strategic lesson. UK-based TFG London saw sales jump 6.5% in Sterling terms, but again, this is entirely the "White Stuff effect." Strip out that acquisition, and London sales actually contracted by 2.4%.Which leads us to the sting in the tail in last night’s announcement: Impairments.TFG management has taken a hard look at its older assets and decided this is as good a time as any to take the hit. The group warns shareholders it will recognise non-cash impairments of up to R750 million in the current financial year. The culprits? Phase Eight in the UK and the menswear brands Tarocash and yd. in Australia.The Phase Eight story is particularly instructive. When TFG bought it in 2014, its sales came mainly (70%) from department stores. Today, that channel accounts for less than 45%. A collapse of the traditional department store model in the UK has forced a painful, albeit necessary, evolution. With Phase Eight being forced to pivot, the TFG carrying value on its balance sheet simply no longer matches the new reality.Same story in Australia where sales contracted 2.6% in Q3. The "cost of living" crisis in Oz appears to be biting just as hard as it is in SA. Also, the group is moving its "big and tall" offering from Tarocash to the Johnny Bigg label—a strategic realignment that necessitates a write-down.The Bottom LineBecause of these three-quarters-of-a-billion rand in impairments, TFG warns that Earnings Per Share (EPS) for the full year ending 31 March 2026 will drop by at least 20%.However, shrewd investors will note the distinction TFG makes: this is a non-cash charge. It does not affect Headline Earnings Per Share (HEPS), which strips out such one-off capital items (why is still beyond me, because good money was spent to buy the assets in the first place, but it's as though that is now forgotten). The business's cash engine remains intact, even if accounting profits take a hit.OutlookCEO Anthony Thunström and his team are looking past the immediate storm. They argue, with some merit, that the medium-term outlook is "constructive." Interest rate cuts are filtering through, inflation is moderating, and the Rand has strengthened, which should help lower import costs for the next season's stock.For now, though, TFG is a business in transition—buoyed by a smart acquisition and a booming online division, but anchored by the weight of struggling consumers and the necessary write-downs of retail models that are no longer fit for purpose. The group is facing a new, uncertain future. Not a unique challenge in retail or elsewhere.

TFG: White Stuff acquisition masks R750m written off on past purchases

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