Previously, Chris Gilmour has delved into the non-discretionary retailers on the JSE as well as the discretionary retailers in a series of articles. The first one focused on Woolworths and the second on Truworths. This week in part 3, Chris wraps up his summary on the discretionary retailers.
Mr Price
Mr Price is the new kid on the block, relatively speaking, among the major clothing retailing chains in South Africa and is arguably the best. It certainly has the best long-term track record of any local clothing retailer in terms of compound annual growth in earnings and dividends.
Its genesis was John Orrs department store, which Mr Price founders Laurie Chiappini and Stewart Cohen acquired in 1987. In those days, the two main trading entities were Milady’s and The Hub, both department stores.
Initially, it was listed on the JSE as Specialty Stores and it had reasonable performance. It wasn’t until the hugely capable and charismatic Alastair McArthur was appointed CEO in 1997 and the name was changed to Mr Price in 2001 that the earnings really took off. McArthur was a retailing genius and current CEO Mark Blair understudied him closely when he was CFO of the group. To this day, no satisfactory explanation has been given publicly for McArthur’s departure. He left abruptly in 2010 and was replaced by Stuart Bird, who himself retired in 2019. Mark Blair replaced Bird as CEO.
Watching recent Mr Price presentations, it is clear that Blair is a man on a mission. He has staked his future career on the group becoming the most valuable retailer in Africa, based on market capitalisation on the JSE. Although difficult, this vision is achievable in the longer term, but much of the growth required to get there will have to come from acquisitions.
Most of Mr Price’s growth up until now has been organic, a feature that most analysts love. However, Mr Price took the strategic decision in the depths of the recent coronavirus pandemic to expand into the weakness caused by the virus. The group bought Power Fashion, a low-end fashion business not too dissimilar to Mr Price apparel and then it also bought Yuppiechef, an upmarket kitchenware retailer. Both have turned out to be earnings accretive in a remarkably short time period. The latest acquisition is Studio 88, the largest independent “athleisure” retailer in southern Africa, with over 700 outlets selling well-known branded sports-oriented clothing and footwear.
The Foschini Group
Back in the day, TFG (or Foschini as it was then known) was the benchmark by which all clothing retailers were measured. It had the best metrics of any clothing retailer but it didn’t divulge much in its annual financial statements.
It was controlled by a holding company called Lewis Foschini Investment Corporation (Lefic) which in turn was controlled by Stanley Lewis, father of the current chairman Michael Lewis. The Lewis family maintained control of Foschini until the late 1980s, when they moved to London and sold most of their holdings in Foschini.
By the early 1990s, Foschini had lost its edge and began experiencing some earnings hiccups. Truworths took over the mantle of best clothing retailer and it wasn’t until the arrival of Doug Murray as CEO in 2007 that TFG/Foschini got back on track again. It can make a strong argument as SA’s best clothing retailer, with Mr Price as the other reasonable contender.
What really differentiates TFG from the rest is its commitment to quick response manufacturing. Long before the coronavirus pandemic, TFG had begun establishing Prestige Clothing in order to be able to offer quick response products without the unnecessary delay associated with sourcing from China or elsewhere in far east Asia. This strategy has paid off handsomely for TFG in the past few years as supply chain disruptions have become the norm.
Another big differentiator has been TFG’s ability to succeed in foreign markets, notably in Australia. Over the years, Australia has become a graveyard for most South African retailers (think Pick n Pay / Franklins, Truworths / Sportsgirl and then of course the massive disaster of Woolworths / David Jones & Country Road). TFG’s acquisition of RAG a few years ago has proved to be earnings accretive and is a useful rand hedge. TFG London has gone through a torrid time during the pandemic but now appears to be coming right with a vengeance.
And TFG’s positioning in the market has also changed considerably over the years. Until fairly recently, it was predominantly a credit retailer. Now it’s mainly cash.
Right at the start of the pandemic, TFG bought Jet from Edcon’s liquidators for next to nothing including the stock. That has proven to be an inspired move. By expanding into the downturn, TFG and Mr Price have distinguished themselves as two discretionary retailers that will survive a prolonged period of low to negative economic growth in South Africa.
Pepkor
The current Pepkor shouldn’t be confused with the highly focused clothing group that was delisted from the JSE in late 2003 at a price of R12 per share, with 37% of it eagerly gobbled up by Brait. The unlisted entity went from strength to strength and was eventually sold to the ill-fated Steinhoff group in 2015. Steinhoff reworked its African interests and a couple of other operations into Steinhoff Africa Retail Ltd (STAR) not long before its own near-demise in late 2017.
In an attempt to distance itself from the taint of Steinhoff, STAR was renamed Pepkor in 2019 and relisted in largely its current form. Pepkor is now a very large retail conglomerate consisting of clothing & general merchandise, furniture, appliances & electronics, building materials and fintech. Clothing & general merchandising is still by far the largest component of the group, contributing 64% of revenue and 84% of operating profit. Brands in this segment include Pep, Ackermans, Tekkie Town, Dunns and Refinery. Furniture & appliances is essentially the old JD Group with the addition of Abacus Insurance. Building materials includes Tiletoria and fintech includes Capfin.
The group thus doesn’t as yet have a proper five-year track record and so comparisons with more established listed retailers are not so relevant. And although there are no more financial settlements outstanding due to its former association with Steinhoff, one is still left with the uneasy feeling that this whole exercise was cobbled together with the express purpose of removing it from the attention of Steinhoff-watchers. One must remember that Steinhoff still owns more than 50% of the issued equity in Pepkor.
But it’s predominantly a cash business and as such, should be relatively straightforward to manage in the current risk-averse environment. That doesn’t mean that it has limited ambitions. It recently acquired 87% of Brazilian retailer Grupo Avenida. This is a brave move, notwithstanding the observation that Pepkor has reserved 13% of the equity in the business for local management.
Brazil’s apparel sector, like its grocery sector, is highly fragmented and Brazilians tend to prefer buying local products, rather than those with a foreign label. They also like buying clothes on credit, so Pepkor and its associates will need to adapt to this. Although Pepkor would not divulge the exact amount of the transaction back in February this year when it was announced, it is widely believed to be around R3.5 billion or just under 5% of Pepkor’s market capitalisation.
Cashbuild
Cashbuild was founded by the late Albert Koopman in the late 1980s. Koopman and Cashbuild were way before their time, especially with regards to his vision for participative management in the business. He challenged the status quo and questioned why workers couldn’t also be entrepreneurs. As a result, Cashbuild had one of the lowest rates of industrial action anywhere in South Africa during the apartheid era. There was no room for prima donnas; whoever got to the office or branch first in the morning got the best parking, regardless of colour, creed or background. And his philosophies still resonate in the business, even though he physically left it many decades ago.
Cashbuild is the largest retailer of building materials and associated products, selling directly to cash-paying customers through its 319 stores in South Africa, Namibia, Lesotho, Botswana, Swaziland, Malawi and Zambia. It employs 6 238 people. Cashbuild shares have been listed on the JSE since 1986 and its main competitors are Builders (part of Massmart) and Buildit in the Spar group.
Despite having been around for 35 years, it is still relatively small, with a market capitalisation of only R6.3 billion and revenue of R12.6 billion. But it has been a relatively solid performer since listing with only very few surprises over the years. Its 5-year CAGR in HEPS is one of the best in the entire retail sector at 8.7%.
Lewis Group
Lewis is a real little gem. It is the only listed furniture retailer left on the JSE and still operates out of a very humble head office in Salt River in Cape Town. Unbundled from Great Universal Stores plc in 2004, It has survived while its two former much larger peers have either disappeared, as in the case of Ellerines or been swallowed up as with JD Group, which is now part of retail conglomerate Pepkor.
Conventional wisdom suggest that Lewis should be on a downwards trajectory by now in the face of a deteriorating local economy, higher interest rates and soaring unemployment, as well as the fact that the so-called “homebody economy” caused by more people working from home during the coronavirus pandemic is now evaporating. But if anything, it is flourishing. Lewis has management that get just about everything right and the Lewis customers are exceptionally loyal.
Lewis used to be predominantly a credit-oriented retailer but these days it is around 50:50 cash vs. credit. The valuation of Lewis is truly fascinating. It is currently sitting on a PE ratio of 5.8x and yet its 5-year CAGR in HEPS of 16.2% is the best of all the listed retailers by far. It is significantly higher than the 12% CAGR in HEPS of 12% at Clicks which is currently on a 32x PE ratio.
marc@platinumsa.co.za pepkor