TFG has been the hungriest retailer around in recent times. And thanks to some well-timed deals, it’s a strategy that may just be reaping rewards for CEO Anthony Thunstrom.
In the past three years, TFG has spent R2.7bn on three big deals: snapping up Jet from the carcass of Edgars, buying the Tapestry Group (which includes Coricraft, Volpes Linen and Dial-a-Bed) and, a few weeks ago, buying footwear firm Street Fever.
Last week the company announced 19.4% growth in revenue to R51bn from 4,697 stores across 22 countries, dominated by South Africa but including the US, Australia, UK and Sub-Saharan Africa.
Yet Thunstrom’s taste for dealmaking has raised red flags for analysts.
Shane Watkins, chief investment officer of All Weather Capital, says the weak economy, crippled by load-shedding, creates an especially risky environment.
“It’s not that [investors] feel TFG can’t do acquisitions, it’s just they can’t in this environment,” he says. “I would say Anthony is an excellent manager, and visionary in what he’s doing, but his strategy just doesn’t work in current conditions”.
Protea Capital Management CEO Jean Pierre Verster says that with all these acquisitions, “it’s hard to get a handle on how the business is doing”.
This creates greater execution risk, as there are often unpleasant surprises in deals — and Woolworths’ disastrous purchase of Australian chain David Jones isn’t the only one.
“Companies that are more acquisitive generally need to prove themselves, because of shareholders being aware that companies often overpay for acquisitions and that promised benefits more often than not do not materialise,” Verster says.
As valid as that criticism may be, it helps Thunstrom’s case that those recent deals — Jet, Tapestry and Street Fever — are all looking pretty smart right now.
Jet cost TFG just R385m, yet it made R5.6bn in revenue and R560m in pretax earnings last year at its 467 stores. TFG paid R2.2bn for Tapestry and clocked up R350m in pretax earnings from its 188 stores. And while TFG paid R150m for Street Fever, which has yet to contribute, Thunstrom believes it will help double its revenue from sports to R20bn a year.
Thunstrom says Jet’s performance, in particular, is a point of pride, as pundits weren’t convinced about its prospects after years of mediocrity under the Edgars umbrella.
“There was a lot of scepticism around anybody’s ability to rescue it from where it was, to integrate and reinvigorate it, and do this in the middle of the Covid pandemic. [But it’s] had a great run,” he tells the FM.
He argues these deals have been good for every one of the target companies, which have gained access to TFG’s infrastructure, such as its credit system and distribution centres.
“Almost everybody who’s joined us in a management capacity has stayed, and the businesses we have acquired have all benefited from being part of the TFG platform,” he says.
Despite how tough our market has been, there’s equally been an opportunity to grow, to take market share
— Anthony Thunstrom
But given the standout performance of recent purchases such as Jet — which may be TFG’s smartest deal ever — analysts have been worried that this may stoke an overconfidence that could lead to the group pursuing yet more deals at a particularly precarious time.
That’s why Thunstrom’s statement last week, that TFG is treating this year as one of “consolidation, getting maximum benefit out of assets we already have” and one in which it is “unlikely to be overly active in mergers & acquisitions”, was greeted with a huge sigh of relief.
SBG Securities, in a research note this week, says that while TFG’s results were below par, it did at least “provide comfort” that certain “pain points”, such as its “aggressive acquisitive appetite” will be addressed.
Instead, TFG is going to be concentrating on its online shopping app Bash, which was launched two months ago as a single portal for all its brands. Thunstrom says the customer traction is “well ahead of what we expected, so soon after launch”.
Anyway, Thunstrom says, there’s plenty of room for those brands within the existing TFG stable to grow — and he’s looking to open more than 1,000 new stores over the next few years.
In particular, TFG expects its value brands division (Jet, Exact, The Fix and RFO) to more than double revenue to R20bn in the next five years; its sportswear division (Totalsports and Rockwear) to grow to the same level; and home and furniture to double to R10bn.
Those are big expectations. And it’s not as if there’s any shortage of risks, exposed as they are to a power-sapped South African economy that will be lucky to get 0% growth this year.
Analysts from Citi said this week that the risks to TFG include “increased bad debts, given the poor state of the consumer” and the “sustained load-shedding impact on foot traffic in malls, additional costs [such as] diesel and inverters, and job losses in the country”.
Other analysts believe Thunstrom is playing his cards well.
Evan Walker, portfolio manager at 36One Asset Management, says TFG has been quite conservative when it comes to selling clothes on credit, so it isn’t risking higher sales volumes for bad debt.
“In these businesses, I expect the next 18-24 months to be tough, but they’re very well capitalised and their balance sheets are intact. That’s the bottom line,” he says.
Yet it’s obvious Thunstrom isn’t satisfied with just letting things tick over. As he tells the FM: “Despite how tough our market has been, there’s equally been an opportunity to grow, to take market share.”
Clearly, he’s not a man who likes standing still.
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