Dressed for future success

You know times are tough when sales are down 2.9% in the first six months of the year at the Foschini Group and 4.2% at Foschini itself, yet management and analysts consider it a reasonable showing under the circumstances.

This is because the results were in line with market expectations and because it looks as if the retail group may have at last hit the bottom and now be on the up. And because trading for the first four weeks of the second half was significantly better than it was this time last year.

“I'd like to present results with earnings growth,” says CEO Doug Murray, “but we did predict the 1.3% drop in headline earnings.” However, he says that full-year earnings (to March) would not drop. “We are expecting an average Christmas, little relief from interest-rate cuts in 2009 and a turnaround in 2010.”

The question that everyone's asking is, are these results an early indicator of a bottoming out of the retail cycle?

Analysts are careful not to suggest that Foschini is a bellwether for retail sales — they prefer to look at Truworths or Edcon. But Truworths reports only next February while Edcon reports in a few weeks. Its most recent results, for the quarter that ended in June, showed retail sales up by 8% to R4,8bn. Comparable store sales were flat.

Interim results are due from the Mr Price group next week. As a cash retailer the company is benefiting from consumers' move away from credit. A trading update for the first four months of the financial year shows sales up 17% and comparable sales up by 9%.

Foschini is in the midst of a turnaround and management believes at least another two reporting periods must pass before trends can be identified.

However, Absa Asset Management analyst Chris Gilmour believes some trends can be discerned. “This is probably the last or second-last set of results we will see before we start noticing signs of a turnaround,” he says. “This sector is very interest rate-sensitive and if rates drop as expected next year, we will be looking for a turnaround to start next year, and continue into 2010.”

Under the economic circumstances, RMB equity analyst Evan Walker was also not too concerned about Foschini's poor results. “To get back to flat or nearly flat headline earnings when profit for the period was down by 10% and sales were down is not bad at all,” he says.

“You can't read too much into the group's poor top-line numbers,” he says, “because they have been fixing merchandising as well as operational and supply chain issues [at Foschini, the largest contributor to group earnings].”

What is positive, he says, is the unchanged gross margin. “For management teams to maintain gross margins when sales are declining is good going.”

One positive trend is the 12% rise in spending across the group in October. “This gives us an indication of what's up in the market and it looks like consumers' ability to buy good clothing, if the retailers have delivered it, is intact,” says Walker.

Murray warns that the growth witnessed in the first four weeks of this half may not be sustained. “The retail environment will remain difficult for the rest of the year. That makes Christmas trading, on which all retailers are heavily dependent, more difficult to predict.”

Source: Financial Mail

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