From pizzas to diamonds, Taste has an outlet

TASTE Holdings has often been asked how a jewellery unit fits into a food group's strategy.

But Carlos Gonzaga's high-flying company cemented this path by buying a second jewellery company, Arthur Kaplan.

This week, Taste revealed that it had bought the luxury watch and jewellery retailer - the largest retailer of Swiss luxury watches in South Africa, with brands including Breitling, Tag Heuer, Rolex and Omega - for R85-million in cash.

It's a risky gamble for a company that, despite a 70% rise in its share price over the past three years, lost a fifth of its value in the past year.

There is a difference between the two jewellery brands too: while Taste's existing jewellery company, NWJ, targets middle-income consumers (25 brands being sold in 77 stores), Arthur Kaplan caters for wealthier, more aspirational customers.

Vunani Securities analyst Anthony Clark said the deal was a good strategic one for Taste, especially since there was scope to add higher volumes and better margins to Arthur Kaplan from higher jewellery sales.

But Clark said that for some years large institutional investors had grappled with "what is Taste" - a retailer or a fast-food business?

The shift might be even more profound: for years, Taste has been a pure franchise operation, with its main brands being Scooters, Maxi's, the Fish and Chip Co and NWJ.

Clark said Arthur Kaplan propelled Taste firmly into the retail space, a move underscored by the roll-out of the Domino's pizza brand, which would make the company far more of a traditional owner-manager than simply a franchise business.

It's no coincidence either, as Gonzaga's group has been buying back more franchised NWJ stores in the past two years.

For Taste investors, it appears there is scope to improve Arthur Kaplan's margin.

In the year to June, Arthur Kaplan Jewellers reported R224.3-million in sales and adjusted profit after tax of R12.4-million.

The deal will boost Taste's earnings immediately, which will help lower its price-to-earnings ratio below its current ratio of 21-times earnings, and make it a more compelling proposition. However, shares in Taste's closest rival, Famous Brands, are even more expensive, trading on a ratio of 24.

Gonzaga said the jewellery range fitted neatly into Taste's current manufacturing capability, and there was potential to expand the Arthur Kaplan jewellery range.

Arthur Kaplan owns 11 stores across South Africa. But Gonzaga has his eye set on selling Swiss watches across sub- Saharan Africa. "This market is currently underserved by dedicated retail offerings, and the African focus and opportunity is aligned with that of the broader Taste group," he said.

Arthur Kaplan has been largely owned by the Divaris family for some time, and Taste is buying some of the shares from Dean Divaris's family trust. Divaris will stay on as managing director.