TFG, Truworths look offshore for growth

Image credit: Sunday Times

Continued political uncertainty and SA's credit downgrades have lent urgency to the country's apparel retailers in diversifying their revenue streams with hard currency to reduce dependence on the local market, which is in pronounced economic slowdown. TFG has been looking for international acquisitions and has appointed a dedicated head of mergers and acquisitions in 2016.

The newspaper quoted sources as saying that Truworths, another JSE-listed retailer, was the frontrunner in the race to buy struggling chains Oasis, Coast and Warehouse, all of which were owned by failed Icelandic bank Kaupthing. t said TFG was "unwilling to fork out the full asking price", and that 3i, which had hired NM Rothschild to find buyers, was expected to lose money on Hobbs.

In an e-mailed response to Business Day, TFG said: "At this point in time we are not talking to anyone, but in any case, we do not comment on any potential acquisitions."

Truworths said it was not its policy to comment on rumours or media speculation.

Alec Abraham, Sasfin's senior retail analyst said that based on SA economic outlook relative to that of the UK, it seemed the UK was potentially the "cleaner dirty shirt", although it was also highly uncertain because of the potential consequences of Brexit.

The buyout by Christo Wiese-backed Brait of high street stalwart New Look has been an unmitigated disaster. This was mostly blamed on Brexit and the subsequent fall of the pound and consumer confidence, as well as rising inflation in a promotion-led retail market. The highly geared brand, which was acquired in June 2015 for 780m, is now banking on Asian growth.

Truworths's R5.5bn buyout of UK footwear chain Office has not drastically shifted the needle for the group, whose share price has fallen nearly 20% in the past nine months.

Though developed markets are not necessarily a high growth shoo-in, a geographic foothold does afford scale and a rand hedge for companies. Listed property groups have also been boosting their offshore presence. There are about 20 rand hedges on the JSE.

The UK risk, however, is that if the pound depreciates and the rand strengthens, foreign buyouts become pricier. This reduces any initially expected offshore revenue.

TFG has already made plays in the UK, first with its acquisition of Phase Eight and then Whistles. In 2017, TFG bought Australia's Retail Apparel Group for R3.025bn. Abraham said that based on his last interaction with TFG chief financial officer, Anthony Thunstrm, the company was still acquisitive and continued to find high-quality opportunities.

"At the current level of gearing a capital raising may be necessary if an acquisition is pursued," he said.

TFG acquires Australian menswear group RAG

25 May 2017

In TFG's latest financial year, retail sales gained 11.6% to R23.55bn, a growth rate which, if not for an international sales contribution of R4.64bn - 19.7% of total group retail sales - would have been 8%.

At a pretax profit level, the difference was even more pronounced. Without the contribution from international sales, TFG's reported pretax profit growth of 6% to R3.2bn would have been just 2.8%.

The expansion in SA of global players, including Zara, Cotton On and to a greater extent H&M has hindered sales growth at domestic players. H&M's cheap 'n chic offering has found favour with local consumers, across lifestyle measures. Since its opening two years ago, the Swedish brand has brought differentiation to the market, which was historically dominated by entrenched local players.

Source: Business Day