TFG's retail array puts it ahead of peers

TFG, with its diversified consumer portfolio, trumped its local peers to be the only listed apparel retailer to record gains in a difficult year.

Shares of TFG, which owns 22 brands including Foschini and Totalsports, have gained about 27% since the beginning of last year, compared to peers Mr Price, Truworths and Woolworths, which were down 17.8%, 14.23% and 27.9% respectively.

Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said this week that unlike its competitors, TFG had executed a better strategy.

"If you look at the numbers, they have improved the quality of earnings by increasing the component of business coming from cash sales. It's now a much better-quality business because the contribution from cash sales has gone up," said Takaendesa.

According to the group's annual report, TFG's cash sales for the 2016 financial year grew 18.4%, and represented 48.3% of turnover and 57.2% of total group sales.

The group's broader range of merchandise categories - compared to its retail peers - has cushioned it against economic headwinds that have depressed the retail sector. Its brands include male apparel retailers Markham, Due South and G-Star Raw, jewellery brands Sterns and American Swiss and furniture store @home.

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TFG's offshore investments, Phase Eight and Whistles, have also bucked the UK trend of falling sales, reporting better numbers than their UK peers. The footprint of UK acquisitions contributed 13.7% of total turnover, according to TFG's annual report.

Alec Abraham, an equity analyst at Sasfin Securities, said: "From a market rating point of view, TFG tended to lag other retailers. There is a little bit of a catch-up coming in here because they have had some reasonable numbers ... the performance appears to be good so far from what they bought in the UK."

Last year, South African retail struggled with weak economic growth while rising interest rates and inflation reduced consumer spending.

Retailers also said unseasonably warm weather in the second half of the financial year hit sales across the southern hemisphere.

As a result, TFG competitor Woolworths this week reported its first decline in half-year earnings in nine years. In a trading update, Woolworths said that earnings, excluding one-time items for the six months to December 25, were expected to decline by 2.5% to 7.5%, while clothing and general merchandise sales from comparable stores rose 1.2% and food sales rose 5.6% over the period.

Abraham said a number of factors had hurt Woolworths' performance. "There's been the haircut in Country Road, there's been the view that David Jones is going to disappoint, and there's been the fact that their rating is significantly higher than their peers - all of those contributed to its performance last year and early this year."

Despite the disappointing numbers, Abraham said Woolworths might perform better than its peers.    

Woolworths, which owns retailers David Jones and the Country Road Group in Australia, said reported sales in that country were 0.9% lower than the prior year in Australian dollar terms.

According to data compiled by Bloomberg, this year TFG is estimated to have adjusted earnings-per-share growth of 7.5%, while Woolworths will sit on 4.3% growth and Truworths and Mr Price will decline by 7.8% and 6.5% respectively.

TFG is also the only retailer that does not have a sell recommendation from industry analysts. Abraham said this might be because its rating was still lower than its peers, making it appear of better value to investors.

However, Takaendesa said TFG's performance this year would depend on "what happens to the domestic environment. If interest rates and the rand remain steady then [TFG] should be supported throughout the year, provided that they continue to execute well."

In a trading update on Thursday, Truworths said it expected diluted headline earnings per share for the 26 weeks to December 25 to decrease between 380.6 cents and 397.9 cents per share, up to 6% lower than in the same period in 2015.

TFG's share gained 3.79% to R160.38 by the close on Friday.

tshandup@sundaytimes.co.za