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    Seed Weekly - The Foschini Group – Cash sales and African operations picking up

    The Foschini Group (TFG) is a well-known retailer in SA, with 17 brands in its stable spanning the clothing, jewellery, sporting apparel, cellular and homeware segments of the market. The Group caters primarily to the middle and upper income groups, and sales are nearly evenly split between cash and credit. The group operates 2,071 stores in SA and 134 in the rest of Africa, with the majority of stores located in Namibia, Botswana and Zambia.


    TFG was founded in 1924, and in 1941 became the first of SA’s fashion retail brands to list on the JSE. Various acquisitions followed, including American Swiss Watch Company, Markham and Sterns in the earlier years, and Sportscene and Totalsports more recently. Brands such as DonnaClaire, Matrix, DueSouth and Luella were launched at regular intervals through the years to serve different consumer groups.

    As a result, TFG has built up an impressive collection of brands that are well diversified across product types and target markets:

    Latest Financial Results

    The Group has recently released its financial results for the half-year ended 30 September 2014. Despite a tough trading environment, including low real GDP growth, inflation at the upper edge of the target band and rand weakness affecting imports, the Group has performed admirably.

    Retail turnover is up 9.7% to R 7.3bn compared to the previous period, while continuing HEPS is up 8.0% and the interim dividend has increased by 8%.

    As can be seen in the table below, clothing turnover contributed 67% to total turnover but grew at a relatively modest 8.5%. Cellphones have overtaken Jewellery to become the second-highest contributor at 10%, with good growth of 21% over the previous reporting period.

    Over the past two and a half years of trading, growth in cash sales have picked up significantly, while growth in credit sales have slowed down owing to the constrained credit cycle. Cash sales now represent 44.2% of total sales - compared to 40.3% in Sept ’13 – after strong growth of 20.3%.

    TFG’s African operations have performed well, with 26% total turnover growth and 16% same store turnover growth providing a boost to the consolidated results outlined above. Fourteen new stores were opened during the year, and all regions are profitable except Nigeria’s two stores. Further expansion is planned in Ghana, Kenya, Mozambique and Angola, with management aiming to have between 280 and 300 stores established by 2018.

    TFG sold its stake in the credit provider RCS Group to BNP Paribas during the reporting period, realising R 1.4bn in proceeds and a profit on disposal of R 273m. The funds were used to reduce borrowings in the short term, while management evaluates other opportunities to employ the cash.

    Outlook and Fundamentals

    Management sees the growth in cash sales as a major benefit, as the local credit environment is likely to remain challenging for the rest of 2015. The recent drop in the fuel price will provide welcome relief to consumers, with revenue increasing accordingly. Growth in retail space for the full year is estimated at around 7%, with 100 new stores planned for the second half of the financial year. A key focus area is e-commerce – TFG plans to launch @Home and TFG Mobile sites during the year and will eventually phase in all of its brands.
    TFG currently trades at a PE of 19, which is slightly more expensive than the JSE’s 17, while the dividend yield is a healthy 3.4% compared to the JSE’s 2.9%.

    The Foschini Group has been included as a value holding in the Seed Equity Fund in the past, but is currently included at a 2.8% weighting due to strong recent price momentum.

    Kind Regards

    Cor van Deventer

    021 914 4966

    Permalink2015-01-28, 12:35:18, by Mike Email , Leave a comment

    Seed Weekly - Swiss Franc Volatility – A Precursor for 2015?

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    Seed Weekly - Swiss Franc Volatility – A Precursor for 2015?

    Volatility is the up and down movement of the price of an asset, usually a stock price, but it also extends to changes in the exchange rate of one currency against another.

    Typically the volatility of developed-world currencies has been reasonably low. However, this is not necessarily the case for emerging markets, with South African investors and businessmen having first-hand experience of just how volatile the Rand’s rate of exchange with global currencies can be. For example, in 2001 the rand opened at around R7.65/USD, but depreciated sharply to end that year at over R12/USD.

    Other currencies that have experienced high levels of volatility include:
    • In December 1994 increased US interest rates help spark the Mexican Peso to a loss of over 50% against the USD.
    • The Thailand central bank devalued its currency and this saw the Thai Baht fell 48% against the USD in 1997.
    • Argentina tried to maintain a one to one peg of its peso to the USD, but was forced to default on US denominated debt and in June 2002 the peso fell 74% against the USD.
    • In December 2014 the Russian Ruble fell 34% against the USD as the Russian economy plunged towards recession on the back of the massive decline in oil prices and hence lower exports.

    Last week one of the world’s strongest currencies, the Swiss franc had a taste of the type of volatility normally found only in emerging market currencies – but to the upside. In one day the Swiss franc appreciated by 17% against the euro – one of the biggest movements ever in the currency markets.

    The Swiss central bank (the Swiss National Bank or SNB), in an attempt to curtail currency strength, had over the last 3 years tried to maintain the franc pegged to the euro at 1.2 Swiss francs. Because 70% of the Swiss economy is export driven and roughly half of this is to the Eurozone, a strong franc negatively impacts this exporting economy. At the same time the Swiss economy has been in deflation since 2012.

    The SNB kept the Swiss franc from firming against the euro by using an unlimited quantity of Swiss francs to buy euros from the banking system. In order to buy euros it had to print Swiss francs and the SNB expanded its balance sheet from around CHF 75bn to CHF 380bn at the end of November2014 as it bought up euros.

    As the chart below reflects, it had been successful in that the exchange rate was maintained at close to 1.2 CHF to the euro, but it has come at a huge cost in terms of the rapid snap back of the currency that was being artificially restrained.

    With the European Central Bank about to announce a major stimulus package in the form of euro printing this week, the SNB acted to stop supporting the peg. This immediately saw the Swiss currency appreciate from 1.2 to close to parity to the euro. Because of the negative impact on the Swiss economy, the Swiss market immediately fell 10%. Even negative yields on 10 year government bonds have not been low enough to dissuade money flows to the Swiss franc.

    The extent of a move such as this is a timely reminder that where there is low volatility, even over a 3 year period, one cannot necessarily bank on this continuing especially where there is an “artificial” buyer (or seller) of last resort in the form of a central bank. The rapid appreciation of this currency is a timely reminder that investors will need to be vigilant in the year ahead and not take any price quoted yesterday as a reasonable anchor for future prices.


    Ian de Lange

    021 914 4966

    Permalink2015-01-20, 12:05:47, by Mike Email , Leave a comment