Our opinion on the current state of TFG

The Foschini Group (TFG) is an international retailer of 28 fashion brands. It has 4083 trading outlets in 32 countries around the world. It has a division in London and one in Australia, aside from its extensive presence in the South African market. One of the notable achievements of TFG is that it has managed to establish a successful business in Australia where many other retailers (like Woolworths) have failed. TFG bought the Retail Apparel Group (RAG) in Australia for just over $300m in 2017. TFG has allowed the Australian management team virtual autonomy in the management of the business and has not attempted to manage it from South Africa. Over the long term, TFG has been a consistent performer in one of the most difficult industries in South Africa, with stiff competition from overseas brands and local clothing retailers. Consumer spending has also been under enormous pressure in South Africa. The company completed an over-subscribed rights issue to raise R3,95bn to reduce debt and pursue the company's growth strategy. The company has bought 382 JET stores from the Edcon liquidators for R480m which are now performing very well for TFG. TFG faces competition from the Chinese company, Shein, which only sells online, but has a very rapid response to changes in fashion. On 7th March 2022, the company announced that it had acquired 100% of Tapestry Home Brands for R2,35bn. Tapestry owns brands like Dial-A-Bed and Coricraft. In a voluntary update on the impact of loadshedding on 13th March 2023 the company said, "For the 2- month period (excluding the non-comparative Tapestry Home Brands ("Tapestry") retail turnover growth has decreased from 12,6% (excluding Tapestry)* for the nine months ended 31 December 2022, to low-single digit growth for these 2 months. This has in turn reduced retail turnover growth for the 48 weeks ended 25 February 2023 to 11,4% (excluding Tapestry)*". The company expects to lose R1bn as a result of loadshedding in the current financial period. In its results for the six months to 30th September 2023 the company reported revenue up 12,9% and headline earnings per share (HEPS) down 15,3%. The company said, "Group online retail turnover up 23,9% to R2,6 billion, contributing 9,8% to total Group retail turnover, the growth largely attributable to strong growth in South Africa". In an update on the 3 months to 31st December 2023 the company reported TFG Africa sales up 5% and same store sales up 0,7%. December month sales were up 12% and 6% on a like-for-like basis. Sales were affected by Transnet's logistics problems and a poor showing on Black Friday. We regard TFG as the best of the retail clothing companies and it is well diversified overseas which gives it a rand hedge element. Retail is normally very much impacted by the business cycle, but the TFG board has shown its ability to manage the business profitably in many difficult environments where others have failed. Following COVID-19, the share moved up steadily until October 2022 when it began to reflect the impact of rising interest rates and loadshedding on the South African consumer. We believe that this remains a very well-managed company which should be accumulated on weakness.