Foschini fit to allow growth

In part, low interest rates helped drive recovery in demand. But the key factor was wage increases well in excess of inflation, says Foschini financial director Ronnie Stein Clothing prices, for instance, rose by barely 1% in 2010.

In its 2010/2011 financial year Foschini played catch-up with its biggest rival in the credit fashion retail space, Truworths, which even during the darkest days of the recession kept its EPS growing. This left Truworths' EPS in the 12 months to December 2010 27.8% higher than three years earlier, while Foschini's comparable EPS at that stage were a meagre 2.4% higher.

But from here on Foschini has the potential to take the lead in profit growth, if only for one reason: the superb level of efficiency Truworths has attained. This is reflected in performance metrics that make it a world leader and appear to leave little room for improvement.

Truworths' 44% return on equity (RoE) is exceptionally high, as are its 60% return on capital (RoC) and 49% return on assets (RoA). To put that in perspective, the RoE of the world's largest clothing retailer, Inditex, in its year to January 2011 was 29.5%, its RoC 24.2% and RoA 15.8%.

By international standards Foschini's performance metrics are also outstanding, with its RoE at 25%, RoC at 28.4% and RoA at 23.7%. But within the context of what Truworths has shown to be attainable in the SA market there is much room for improvement and this is clearly Foschini's objective.

"One of our focus areas is the supply chain and increasing speed to market," says Stein. Here the key indicator is stock turn, the annual level of sales that generate profit relative to stock on hand, which ties up costly capital.

Improvement in Foschini's stock turn is evident. For example, in the clothing segment, which accounts for two-thirds of sales, the company reported annualised stock turn just short of 3.7 times in March 2011, up from just over 3.1 times a year earlier. But a lot more can be achieved. Inditex's stock turn is 4.6 times and Truworths' in the six months to December 2010 an incredible 6.6 times.

Foschini's potential to achieve solid efficiency improvement and its strategy to grow trading area at about 6%/year are reflected in the forecasts of 13 analysts surveyed by I-Net. The consensus is that Foschini's EPS and dividends will rise by almost 23% in its current financial year, 22.4% in its year to March 2013 and 12% in the next year to give average growth of 19%/year.

Truworths' EPS are expected to come in 18.8% higher in its year to June 2011, increase by 15.9% in the year to June 2012 and rise 17.6% in the following year. Dividends are expected to increase at a slightly faster pace.

Foschini is trading on a 13.9 price:earnings (p:e) ratio and a 4.1% dividend yield while Truworths, based on the consensus forecast to June 2011, is on a 15.9 p:e and 3.4% dividend yield. While Truworths' track record probably justifies its higher rating, on forecast growth and relative value considerations Foschini stands out as the better bet.

Value investors are less enthusiastic. Echoing the view of other value managers, Investec Value Fund manager John Biccard puts it simply: "With earnings already at record levels, their [Foschini's and Truworths'] valuations are just too high."

Source: Financial Mail