TFG embarrasses Woolworths in Australia

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TFG embarrasses Woolworths in Australia
Credit: © Reuters.

The Foschini Group (JO: TFGJ ) (TFG) rallied 4.2% on Friday based on its trading update for the third quarter of the 2021 financial year.

This covers the three-month and nine-month periods ended 31 December 2021.

With operations in Africa, Australia and the UK, there's a lot to digest here. If you are an investor or potential investor in the group, it's important to understand how the group is performing across regions, channels (online vs. in-store), categories (e.g. clothing vs. cellphones) and the split of cash vs. credit sales.

For the latest quarter, Group retail turnover growth of 17.3% is a strong result. There's encouraging momentum, with 19.3% growth achieved over the Black Friday period and 19.8% over the festive period. Cash sales grew 16.8% and contributed 79.4% to group turnover. Credit sales grew 19.2%. Online turnover grew 10.3%.

For the nine-month period, Group retail turnover grew 37.3%. Cash turnover increased 40% and contributed 89.2% of the group total. Online sales grew 17.8% and contributed 9.9% to the group total.

Strangely, Jet is only mentioned once in the update. In the closing paragraphs, TFG notes that Jet drove a record kidswear and school clothing turnover result for TFG Africa. That's such an "obvious" point to disclose, as Jet was never short of turnover and the group effectively bought those sales by acquiring the group. The biggest story is whether Jet's profitability is improving.

With no details on that, I am immediately skeptical.

TFG Africa

TFG Africa's sales grew 17.3% this quarter. Cash sales were up 16.6% and contributed nearly 71% of TFG Africa's turnover. This means that credit sales growth at 19.2% was well ahead of cash growth, as South Africans reverted to old habits of buying on credit.

The story is different over the nine-month period, with cash retail turnover growth at 41.6% being much higher than credit sales growth of 27.8%. The group has been applying stringent acceptance criteria as a caution against overall economic conditions. It seems the taps were opened somewhat over Black Friday and the Christmas period, helping to drive sales.

We can see this coming through in like-for-like turnover growth which showed proper momentum, up 5.5% in November and 11.2% in December. This means that in relative terms, festive trading was even stronger this year than Black Friday.

The blemishes in the result were the cosmetics and cellphone categories, which lost out due to international supply chain disruptions. Conversely, the localised clothing supply chain provided a useful buffer against this issue.

One of my great hopes is that a post-Covid world will see increased use of local manufacturing to hedge against supply chain risks. Clothing contributes around 76% to TFG Africa's sales, so we can easily imagine the benefit to South Africa of local sourcing.

Even cosmetics and cellphones as the slowest-growing categories posted decent results over the nine months, up 9.2% and 12.2% respectively.

Online turnover grew 23.6% vs. the comparable quarter in the prior year. The sales contribution (i.e. percentage of total sales) was 3.2% in this quarter vs. 3.6% in the comparable quarter (which was far more impacted by Covid).

As a quick reminder, the group is investing in its online channels and acquired Quench in December, a last mile delivery provider.

Finally, an update on the civil unrest and subsequent recovery. 198 stores were looted and damaged and 166 of these stores reopened by the end of December. Another 6 stores will reopen by March and the remainder will only open in the new financial year due to extensive structural damage.

TFG Australia

The Australian business has been on the receiving end of that government's hard stance on lockdowns. With a vaccination rate in Australia of nearly 90%, the retailers will be hoping that the worst is well and truly behind them.

After the terrible update by Woolworths (ASX: WOW ), the market was watching TFG's result to compare the performance to David Jones and Country Road. Although the Woolies update covers a different period (the 26 weeks to 26 December 2021), there is enough overlap to be helpful. David Jones saw turnover drop 9% and Country Road dropped 3.2%. In the final six weeks of that trading period (Black Friday and the festive season), David Jones grew 3.2% and no disclosure was given for Country Road.

The TFG update is highly embarrassing for Woolworths, with sales growth of 16.9% in local currency and online growth of 43.1%. For the nine-month period, total turnover is up 28.7% and online turnover contributed 9.9% to the total.In my view, Woolworths has no leg to stand on now when it comes to its Australian business. It remains a massive problem for shareholders.

TFG London

Unlike in Australia where things got better towards the end of the year, the UK saw increased measures by the government in December as a response to Omicron.

Turnover for the nine-month period was up 48.2%, with a 25.5% increase in the third quarter as evidence of both slowing momentum but a strong recovery overall.

Fascinatingly, the slowdown in Q3 was driven by the online business, which only grew 5.5% on the company's own sites and declined by 4.3% on third party sites.

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