Performance review

Retail operations

The performance of TFG this year must be seen against the backdrop of the operating environment and actions taken in respect of strategy execution.

Operating environment

While some context is given to the operating environment in the operating context section, it is again noted that the review of operations should be seen against that backdrop. While the traditional TFG business was previously primarily based in South Africa with a growing African footprint, the geographical reach of the business now extends to many territories outside of the African continent (in developed and emerging market economies).

Strategy execution

As mentioned in the strategy section, one of TFG’s four key strategies is growth and strides were made this year through:

  • a combination of new store openings of existing brands (in existing territories and in new territories where we have not had a presence previously);
  • the launch of a new in-house developed brand in South Africa in the form of SODA Bloc, which caters for the tween market;
  • the acquisition of franchise rights for South Africa for the two international brands Colette (ladies accessories brand) and Next (international childrenswear brand); and
  • the acquisition of a further international brand Whistles at the end of our 2016 financial year.

In relation to Phase Eight, it is again noted that any comparison of retail operations between 2015 and 2016 should take cognisance of the fact that 2015 includes two months of trading, whereas 2016 includes a full 12 months of trading for Phase Eight.

Furthermore, the acquisition of Phase Eight resulted in the following fundamental changes to the combined business:

  • A business that was previously primarily based in South Africa (with a growing African footprint) now reaches across many international territories through the Phase Eight brand (and in future, Whistles).
  • As Phase Eight (and in future, Whistles) are cash-based businesses, the overall contribution of cash vs credit turnover of the new combined business will shift over time. It remains TFG’s strategy to achieve an equitable cash vs credit split to provide a more defensive position through the credit cycle.
  • The Phase Eight brand gave TFG greater representation in the upper market segment.
  • As the reporting currency of the Phase Eight (and in future, Whistles) business is GBP, the business acts as a natural Rand hedge to the South African-based operations.
  • Phase Eight’s unique operating model provides significant, low-risk expansion opportunities, which are not capital intensive in nature.

In light of this backdrop, the commentary on the performance of our retail operations for 2016 is as follows:

  • As has been indicated in other sections of this report, the group reported good turnover growth of 31,2% this year. Excluding the impact of Phase Eight, the group achieved pleasing turnover growth of 11,6%, with comparable sales growth of 5,7%.
  • Cash sales growth was strong at 18,4% (excluding Phase Eight) while credit turnover growth at 5,9% was in line with our expectation in the current economic climate.
  • Cash sales now make up 57,2% of total group sales.

Merchandise categories

Our turnover growth in the various merchandise categories is as follows:

% turnover 
  growth 
(excluding 
Phase Eight)
% same 
store 
  turnover 
growth 
(excluding 
Phase Eight)
% turnover 
growth 
(including 
Phase Eight)
Clothing 13,0 6,9 41,8
Jewellery 7,0 3,4 7,0
Cellphones 7,4 3,5 7,4
Homeware and furniture 11,7 3,1 11,7
Cosmetics 9,2 6,6 9,2

We are pleased with the performance of clothing’s full year growth of 13,0% (including Phase Eight: 41,8%), up from 10,2% in 2015. Jewellery performed well, growing by 7% in a very competitive market, up from 5,7% in the prior year.

Cellphones achieved full year growth of 7,4% against 19,2% in the prior year, but had a much improved performance in the second half of 12,6% after reporting a growth of only 1,6% for the first half. The performance in the first half was affected by the MTN strike, which impacted on our stock deliveries, as well as by a system implementation towards the end of the 2015 financial year, which impacted trading during April and May 2015.

Homeware and furniture reflect growth of 11,7% and this is a good result coming off several years of very strong growth. Homeware’s performance during the year was negatively impacted by significant discounting in the market place. While we responded with some promotional activity, we do not intend to change our discounting strategy and will continue to ensure that our product offering meets our customers’ needs.

Cosmetics grew by 9,2%, which is at similar levels to the prior year.

LSM appeal

The addition of Phase Eight (and in future, Whistles) resulted in the overall business now having a greater exposure to the upper market segment and less exposure to the mid market segment, which contributed 36,7% of overall group turnover in 2016. This again positions the business well through the various retail cycles.

Geographical footprint

As expected, the inclusion of Phase Eight trading for a full 12 months resulted in the international contribution increasing to 17,1%. As noted elsewhere in this report, the group believes that geographical diversification provides risk mitigation as the combined business is no longer subject primarily to South African dominated market conditions and further offers protection from exchange rate volatility. This will increase further in the 2017 financial year with the inclusion of Whistles. The contribution from the rest of the African countries at 5,0% remains consistent with the prior year.

E-commerce

This year, our Sports division launched their online selling platform with good results. Our omnichannel roll-out will continue in the 2017 financial year with the online launch of Foschini cosmetics, @home furniture, Markham and Fabiani.

Gross margin

Our gross margin across the combined business improved primarily as Phase Eight operates at a slightly higher margin than our traditional business. As in the past, gross margin is carefully managed, with much effort being invested to ensure that the effect of any exchange rate volatility is minimised. It is noted that our effort to ensure that products are locally manufactured as far as possible assists in managing the impact of foreign exchange and the focus on supplier negotiation and measurement.

* International turnover for 2015 represents two months since the acquisition of Phase Eight (February – March 2015).