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Cash is king as TFG pulls back on credit lending and focuses on value segment

Cash is king as TFG pulls back on credit lending and focuses on value segment
The Foschini Group (TFG) head office on 24 June 2020 in Cape Town, South Africa. (Photo: Gallo Images / Jacques Stander)

The Foschini Group says that while demand is high, approval rates for new credit are down.

New customers will find it increasingly difficult to qualify for a store card from The Foschini Group (TFG) because the retailer is taking a more conservative approach to granting credit. 

While demand for TFG credit is strong, approval rates for new accounts are down to about 19% as the retailer is maintaining stringent approval criteria — largely because of the prevailing economic conditions. 

The retail group released its annual results for the year to 31 March 2023 on Friday, revealing strong growth in its retail turnover, which is up by 19.4% to R51.8-billion.  

TFG operates in 24 countries, including South Africa, the UK and Australia. All territories achieved double-digit growth. TFG Africa grew by 17.2%, London operations grew by 9.4% and Down Under surged by a whopping 29.8%. 

The group recorded 18% growth in gross profit, 4% growth in net profit and a 4.1% increase in earnings per share, which despite the strong gross margins and two international businesses were weighed down by rolling blackouts in SA, softening from 48.5% in 2022 to 47.9% this year.

In SA, TFG Africa lost, conservatively, about 360,000 trading hours to rolling blackouts during the 12 months to 31 March 2023. It estimates that the true impact is more than double this figure. The obvious reason is that customers’ moods are somewhat soured when they have to shop in the dark or have to contend with traffic lights that don’t work en route to a store. 

Because of rolling blackouts, TFG could not pass on all its product cost inflation to customers in SA and manage excess inventory. This was partially mitigated by the post-recovery demand in the group’s London and Australian businesses, which are benefiting from strong currencies that provide a valuable hedge against the prevailing headwinds in SA. 

The group estimates that rolling blackouts slashed TFG Africa’s retail turnover by more than R1.5-billion in FY2023, with a resultant effect on operating costs and inventory provisioning. The combination of the blackouts and customers under increasing financial pressure has forced the group to increase promotions to move stock, which eats away at its margins.

Cash is king as TFG pulls back on credit lending and focuses on value segment

(Image: Unsplash | TGF store card)

Alternative power

Investing in alternative power, including battery backup power, was unbudgeted for and has only partially mitigated the impact of rolling blackouts. As of 31 March 2023, at least 1,875 stores had backup power, representing about 75% of TFG Africa’s retail turnover, with plans to ensure that most key stores have backup power in place over the next few months. 

Capital expenditure of about R200-million had been spent on alternative power solutions to date.

Group revenue increased by 19.4% to R55.1-billion (up from R46.2-billion the previous year), supported by the newly acquired Tapestry brand. During the year, the group introduced credit within the Tapestry businesses, which has seen an 11% bump in credit retail turnover year-on-year. 

Credit sales made up 27.3% of total TFG Africa retail turnover. The retail net debtors’ book of R7.7 billion increased by 10.5% year on year, with better-than-expected customer payment behaviour. 

Jane Fisher, group director of financial services, explained that new accounts naturally attract a higher provision rate, and will have higher bad debts than existing accounts. 

“You want to control this within your portfolio. However, we are still growing our book and our account base and we are now up to 2.8 million customers who have a store card. 

“The credit sales growth for the year is 11%. And our gross book is R9.7-billion, which is an 11.7% increase, given that our credit sales growth of 11% is still well below our cash sales growth of 19.7%. Credit has been managed responsibly to enable merchandise sales. Obviously, credit is a huge lever for our organisation and we choose to run it conservatively,” Fisher said.

Group online retail turnover grew by 6.6% to R4.7-billion, contributing 9.1% to total group retail turnover. TFG’s recently launched online shopping platform, Bash, is motoring ahead, said TFG CEO Anthony Thunström, as they continue to future-proof and transform TFG into a true omnichannel business. 

“We believe that this will be a key differentiator for TFG as shopping habits increasingly shift to online and omnichannel.

“Bash has already achieved incredible customer traction and proven the power of having all of our brands on a single shopping app. Prior to the launch of Bash, our biggest online site was ranked number 22 in South Africa in terms of web traffic. After only a few months, Bash is already ranked number six — way ahead of all other South African fashion retailers,” Thunström said.

Headline earnings per share of 968.9c are down by 4%.

Group-wide, TFG generated more than R7-billion from operations, which was down from R8.2-billion the previous year.

Over the past three years, TFG has bagged Jet, Tapestry and Street Fever. It has subsequently refurbished Jet stores and launched home-furnishing brand Jet Home to 78 of the 464 outlets across SA. Thunström told Bloomberg on Friday that they would spend about R250-million on modernising Jet’s shopfronts and revamping another 65 Jet stores this year. 

“Where we’ve spent a little bit of money on revamping stores, the results have been almost instant,” he said.

Within the group, TFG opened 381 new stores, which added R1.7-billion and additional turnover.

Jet and Tapestry contributed R8.2-billion in turnover and R910-million in earnings before interest. Jet, Thunström said, provides them with a “meaningful sales anchor” for the TFG “value segment”, which is increasingly important given the realities of the SA market. 

“This has also opened up the opportunity for us to build out a significant value homewares offering, the Jet Home, which we know is a massive market where we haven’t played before, including Jet with our other value brands. We’ve already built a R9-billion turnover value stack and have a well-defined ambition to grow this to R20-billion over the next five or so years.”

Its sports brands, including Street Fever, which was finally approved at the end of April, produced nearly R11-billion in turnover. 

Tapestry is a cash retailer of home furnishings aimed at the middle to upper LSM markets. The group views the acquisition as entrenching its market position in the homeware and furniture market segment. DM

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