TFG’s annual results starkly expose the limits of diversification. All three of the retailer’s major geographies underperformed, undermining a strategy built on owning multiple brands across various continents to offset risk and reduce reliance on any single market.
Management defends the diversified model, but the market is sceptical. Over a year, the TFG share price is down almost 60%.
TFG owns more than 30 brands including Foschini, Markham, Sportscene and @home — and, through its international acquisitions, owns Phase Eight, Hobbs, White Stuff and various Australian labels.
TFG is cutting costs and pulling back on capital spending to protect cash, and management is signalling a strategic pivot towards a leaner, more digitally focused model. About 100 South African stores are expected to close this year.
In the past financial year group revenue rose 7.2% to R67.1bn and retail turnover grew 7.1% to R62.4bn. But strip out the recently acquired White Stuff and underlying group sales growth was 2.8%.
Profit is less flattering. Operating profit before brand impairments fell 22.1%, headline earnings per share plummeted 33.5% to 675.4c and the final dividend was slashed 39.1% to 140c a share. Net debt climbed from R6.8bn to R8bn.
TFG’s multibrand, multigeography model has long had sceptics arguing that it creates structural cost duplication and management complexity.
CEO Anthony Thunström does not dispute the trade-off, but argues that the alternative is worse. “If we’d had the one brand, we would have been ex-growth decades ago in what is a relatively small South African economy. It’s hard to find a South African fashion retailer who hasn’t looked for growth through some form of diversification.”
Meanwhile, apparel retailers in South Africa are struggling as fashion becomes more globalised and demand becomes more immediate and trend-driven.
Over the past decade, TFG’s South African turnover has compounded at just under 10% a year against an economy growing at about 1%. The diversification, he argues, is what made that possible. The challenge now is that the model’s diversification benefit — the idea that when some parts struggle, others compensate — failed to materialise this year.
The international drag was the dominant and most costly story. TFG London reported sales growth of 29.4% in sterling, but almost all of it came from White Stuff. Underlying sales were essentially flat, strangled by the protracted structural decline of UK department stores. When TFG bought Phase Eight in 2014, about 70% of the brand’s revenue flowed through department stores. That channel has been contracting ever since and now accounts for just 35% of Phase Eight’s sales.
Australia was almost as tough. Sales fell 1.5% and like-for-like sales declined 3.4%, the result of soft consumer confidence and heavy promotional activity across the sector.
The group recognised noncash impairment charges against Phase Eight in the UK and the Tarocash and yd. brands in Australia, totalling R1.1bn for the year. Thunström notes that these are partly a reflection of acquisition pricing that was, at the time, relative to the current economic and consumer outlook. These have deteriorated significantly.
He is also clear that this is not, in his view, a reason to necessarily reconsider TFG’s international presence. Would it consider selling an asset? “Perhaps, but first prize is to fix or rightsize an underperforming brand. And if you are going to sell something, ideally you don’t want to do that at the bottom of the cycle. You want to do that when you’re more on the front foot.”
Over the past decade, TFG’s international businesses have outperformed South Africa in five of those years, and South Africa has outperformed internationally in the other five.
“You’ve had huge swings and roundabouts between the portfolios,” Thunström says.
On capital returns, the Australian operation has already returned about two-thirds of its original acquisition price to South Africa through dividends. It holds property assets that, combined with those returns, bring the total close to the original purchase price. “And we’ve still got a valuable asset on top of that,” he says.
Back in South Africa, the picture was more nuanced. TFG Africa, which accounts for about two-thirds of group revenue and four-fifths of operating profit, outperformed the broader retail market for nine of 12 months — a creditable performance in a difficult consumer environment.
But the three months it didn’t — June, September and December — were the months that mattered most. These are TFG’s peak trading periods, and near-zero growth in each translated into excess inventory, which the group chose to clear in-season rather than carry forward. That decision protected the balance sheet but compressed margins in the process.
Digital platform Bash crossed R3.5bn in revenue during the year and has been growing above 40% annually
The US-Israel attacks on Iran pushed fuel costs higher, knocking discretionary consumer spending.
Thunström identifies fuel prices as the single most important lead indicator for South African discretionary spending — more so, he argues, than interest rates, though those remain elevated too.
TFG Africa’s performance was uneven. Beauty surged 21.6%. Homeware grew 8.7%. Women’s wear rose 8.9% with Foschini, Jet and The Fix all contributing. Jet emerged as the standout performer in the mid- to value segment, with a meaningful rebound evident even after the year ended.
The sports division was hit hard (particularly in internationally branded footwear), caught as it was between softening consumer demand and inventory ordered when confidence was higher. Menswear had a rough time, with competition tougher than ever.
The genuine growth engine in the results is Bash, TFG’s digital platform. Bash crossed R3.5bn in revenue during the year, a figure equivalent to more than 300 physical stores, and has been growing above 40% annually since inception.
Online penetration across TFG Africa reached 10% by year-end, up from 2%-3% five years ago, and the platform’s gross profit margin now equals the store channel.
Thunström believes 10% represents an inflection point.
“When you hit 10% and you see online still growing in strong double digits, things really start to change after that.” He expects Bash to contribute 15% of local turnover over the next few years.
TFG’s digital sales grew by R1.1bn last year with almost no additional capital investment, since the platform was already built. Generating the same revenue growth through physical stores would have required about 100 new openings at a cost of about R500m.
This is reshaping TFG’s approach to growth and is all about making the business more “capital light” and efficient. The group still plans to open physical stores, where they are commercially justified.
But the old model, in which meaningful turnover growth required significant store rollouts, is “effectively over”, says Thunström.
About 100 South African stores will close this year. The group has identified about 300 underperforming locations, though closures will only follow attempts to improve performance first.
John Biccard, one of South Africa’s most respected value investors and a long-serving portfolio manager at Ninety One, offers a telling perspective on TFG. He doesn’t own it — despite holding meaningful positions in Truworths and Pick n Pay, two stocks that have been out of favour for years.
Biccard concedes TFG looks cheap on the surface, having shed around 60% from its highs. But the debt burden accumulated through five years of acquisitions leaves him wary, as does the business’s geographic sprawl and complexity. TFG has grown from roughly 10 South African brands to more than 30 spread mostly across the UK and Australia — a level of geographic and operational fragmentation he considers a serious red flag.
Even though TFG looks cheap on the surface, Biccard feels there are other less risky retailers trading at similarly attractive valuations, making it easy to avoid the stock given its elevated risk profile.
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