Published Date: 2021-06-11 | Source: INCE|Community | Author: The Finance Ghost
The Foschini Group (TFG) has released results for the year ended March 2021. The clothing sector had a tough year, as certain ministers spent many weeks trying to convince us that children's' shoes were our greatest national health risk and had to be banned accordingly.
To be fair, lockdowns have hit the business in Australia and the UK as well. The UK was actually the worst-affected region in which TFG operates, with the business losing around 50% of available store trading hours during the past financial year. For the other 50% of the time when stores were open, footfall was severely down on usual numbers.
Against that backdrop, a decrease in revenue of 7.5% isn't unexpected. The more interesting number is that revenue excluding Jet was down 13% for the year, although the second half of the year (again excluding Jet) saw meagre growth of 0.8%.
Cash turnover decreased 0.8% while credit turnover decreased 23.6% as the group tightened up its acceptance criteria. This was part of the knock to group revenue, but there are no prizes for selling the clothes on credit and then recognising rampant bad debts. Cash turnover is now 78.7% of the group total.
Online turnover contributes 12% to group retail turnover although the clothing businesses face challenges in executing an online strategy profitably.
When you order groceries, you aren't likely to return the lettuce to the shop because it was the wrong size or you didn't quite like the colour. With clothing, returns are a major challenge along with the cost of last-mile delivery and the intense competition in that space with relatively low barriers to entry. The UK is a far more mature online market than South Africa, so growth in online is slower on that side of the pond.
Clothing retailers live and die by their gross margin, which needs to be substantial to allow for the risk of selling fashionable items rather than staple foods. TFG's gross margin contracted to 45.5% from 52.7%, which the company attributes to seasonal inventory issues where clearances were impacted by the various lockdowns.
Turnover pressure combined with a sharp decrease in gross margin can only lead to an ugly bottom line result. TFG recorded an operating loss before finance costs of R719m, compared to R4.7bn profit the prior year. That's a negative swing of over R5.4bn.
Banning those pesky shoes didn't do much to stop the virus and didn't do our fiscus any favours either. These companies are major taxpayers and no profits means no taxes either.
Unsurprisingly, TFG will not be paying a final dividend. The company hopes to resume dividends in the 2022 financial year. The 2020 final dividend (as a pre-pandemic reference point) was 335 cents per share, which would be a 2.4% yield on the current share price.
On the plus side, TFG took a significant strategic step with the acquisition of Jet. The benefit of buying an operation from a group in business rescue (Edcon) is that you can make an offer for exactly what you want. This is the point TFG makes in the SENS when the company talks about acquiring the "commercially viable stores and selected assets" rather than the entire business.
A bargain purchase gain of R709m on Jet (which means the value paid was below the fair value of net identifiable assets) was bludgeoned by a R2.7bn impairment in the UK operations.
At least Jet has a strong balance sheet off which to stage an offensive as things improve. Thanks to a R3.8bn rights offer (issue of new shares to shareholders) and a strong focus on cash preservation, the company only has R1.3bn in net debt on the balance sheet.
TFG is a complex group with exposure to numerous fundamental factors in various countries. Investors would need to assess a range of variables when making the decision to invest in TFG, including lower-LSM consumer health in South Africa and the impact of competitive trends in the UK.