Segmental
performance review

Salient features

PERFORMANCE OVERVIEW

Retail

  • The Group had pleasing growth in retail turnover relative to a very tough market. Second half turnover growth of 7,6% was particularly gratifying, following turnover growth of 5,0% in the first half.
  • Turnover growth in the various merchandise categories was as follow:
    • Clothing had especially strong turnover growth for the year coming off a high base of 8,6% in the previous year.
    • Jewellery, the most discretionary category in our merchandise offering which is particularly sensitive to market conditions and consumer confidence levels, continued to gain market share in a tough environment.
    • Cellphone turnover growth at -0,2% comes off a high base in the previous year of 15,3%. Turnover growth for the year was impacted by product price deflation and stock availability.
    • Homeware and furniture and cosmetics were both impacted by significant discounting in the market during the year. Homeware and furniture strategically reduced promotional activity compared to the previous year and focused on the repositioning of the brand as well as margin efficiencies, which positions them well for the year ahead.
  • Inventory levels for the year were planned taking into consideration the expected tough trading environment as a result of the current market conditions. This proved to be the appropriate approach given the lack of consumer confidence that was evident in South Africa for much of the year.
  • Gross margin improved to 47,8% from 46,4%, a very good performance in a deflationary product inflation environment, characterised by significant discounting in the market. The Group’s supply chain strategy in respect of sourcing and quick response clearly contributed to this improved result.

Credit and value-added services

  • Stronger credit turnover growth of 5,3% was achieved for the year (2017: 2,3%). Improvement was expected given that the impact of the Affordability Regulations was in the prior year base. We are however pleased to note the recent court ruling which set aside these regulations.
  • Net bad debt contracted by 6,5% (2017: 5,4%) due to a further slowdown in the growth of write-offs combined with a strong recoveries yield. Write-off, provisioning and re-age policies remain consistent with prior years.
  • Two new insurance products and an additional data product were launched in the value-added service portfolio during the year.
  • The publishing business unit strategically focused on product mix during the year, leading to higher conversion rates and profitability.
  • In the second half of the financial year, an additional sales channel was launched for four of the Group’s current magazines. These magazines, Soccer, MAN, FitLife and Balanced Life, are now available through a national retail network of supermarkets and bookstores.

What differentiates us

Retail

  • The Group’s speciality store format enables us to deliver a better and more focused customer experience.
  • Our customers have the choice to shop across a portfolio of 20 established brands in TFG Africa via their preferred channel of choice (store or online) with multiple payment options such as one TFG account card, credit or debit cards, eGift cards or SnapScan.
  • The Group’s focus on supply chain optimisation, quick response and product sourcing enables us to deliver quality merchandise to our customers at the right price and the right time.

Credit and value-added services

  • TFG credit is managed such that credit-related costs are kept as low as possible, in order to make credit as affordable as possible for consumers and to enable merchandise sales. The National Credit Act allows a number of fees to be charged, such as initiation fees or monthly service fees, but TFG only implements a nominal monthly service fee and no initiation or upfront fee. We also offer a six-month interest-free product which attracts no interest, providing the customer keeps the account in good order.
  • Various value-added services are offered to customers at competitive pricing.

FUTURE FOCUS AREAS

Retail

  • Focus on supply chain optimisation, sourcing and quick response initiatives will continue.
  • We will continue to monitor and seek ways to improve our customer’s experience through the use of a number of customer feedback channels, including “Net Promoter Score” and “Voice of Customer”.
  • Continued emphasis will be placed on capital allocation and working capital optimisation as well as on cost control and elimination of waste.
  • The Group’s investment in technology will create the platform to position the Group well for the digitalisation of future retail.

Credit and value-added services

  • We will continue to look for ways to improve our customer experience, and in particular the ease and convenience of opening an account.
  • New marketing channels for credit will be tried and tested during the course of the financial year in order to ensure that we remain relevant to both potential and existing customers.
  • Maintaining the quality of our debtors’ book while enabling responsible credit growth will always be a key focus area for the Credit division. We continue to invest in our data analytics capability both in terms of people and technology required to deliver against this objective.
  • Significant resources are being allocated to the implementation of the new accounting standard, IFRS 9, which replaces IAS 39 and is required to be implemented for all financial years which starts on or after 1 January 2018. The principal difference between the accounting standards is that IFRS 9 is based on an “expected loss” principle versus IAS 39, which was premised on an “incurred loss” principle. This has the net result of credit providers expecting to increase their provisioning levels. TFG remains conservative in its approach to provisioning and we expect a significant initial adjustment given the forward-looking view implied by IFRS 9. Annual impacts on earnings, given the introduction of IFRS 9, are not expected to be material going forward (in the absence of any meaningful change in the economic outlook).
  • Continued consideration will be given to new processes, product innovation and new technology platforms to complement the current value-added service offerings.

Salient features

PERFORMANCE OVERVIEW

  • EBITDA growth for the year was adversely impacted by cost pressures driven by government minimum wage inflation, an acceleration of channel shift to online, exchange rate movements as a result of Brexit, as well as proactively re-shaping the store estate.
  • Online turnover growth continues to outstrip that of stores and now represents 33% of total TFG London sales.
  • In line with the Group’s focus on ROCE, there has been a continued focus on the performance within the TFG London store portfolio, resulting in reduced lease lengths on renewal and selected store closures where continued channel shift renders these unprofitable.
  • The implementation of the post-acquisition plan for Whistles, acquired in March 2016, continues to deliver sales and profit growth.
  • The acquisition of Hobbs was successfully concluded with an effective date of 25 November 2017 and current performance is in line with expectations.
  • The remaining 15% stake in TFG London, previously held by United Kingdom management, was acquired by the Group during the year and concluded in December 2017.

What differentiates us

  • TFG London has built a portfolio of premium brands, with significant brand loyalty and recognition due to their longstanding British heritage.
  • True omnichannel retailer, with a broad portfolio of physical stores and concessions matched by a rapidly growing online presence, both in the United Kingdom and internationally.
  • Shared learnings, resources, management and strong capital base within TFG London.

FUTURE FOCUS AREAS

Short term:

  • Further development of a scalable and sustainable shared support services platform within TFG London in order to streamline processes, facilitate knowledge sharing and provide a stable platform on which to build.

Medium term:

  • Continued extraction of revenue and operational synergies across Whistles and Hobbs, building on the strong operational and omnichannel model of the core Phase Eight brand.
  • Continue to seek value-accretive or complementary brands where strategic benefits can be achieved.
  • Broad-based international growth with an equal emphasis on developing our online and offline channels.
  • Continue to seek opportunities, and minimise risk from the channel shift online through:
    • Expansion of online routes to market (own and third-party sites).
    • Close management of our store portfolio with a focus on leasehold flexibility.

PERFORMANCE OVERVIEW

  • Seamless integration with TFG post the acquisition of RAG by the Group in July 2017.
  • Over the eight months since acquisition RAG’s total number of stores, excluding G-Star, grew by a net 31 to 431.
  • Record profits driven by top line turnover growth in excess of 14% on the prior corresponding period as well as strong like-for-like turnover growth. The gross profit percentage was higher than plan and prior year through maintaining input margins and controlling markdowns. Cost of doing business as a % was better than plan and slightly lower than prior year. Overall this resulted in an EBIT that significantly outperformed plan and prior year.
  • Strong performance despite pressure on consumer spend and increased competitive behaviour with international retailers continuing their expansions in the Australian market.
  • With two brands already in New Zealand, RAG has now successfully launched a third brand in New Zealand, with Johnny Bigg opening two new stores there pre-Christmas 2017.
  • All the brands within the RAG portfolio performed ahead of management’s expectation with EBIT growth ahead of last year and plan.
  • RAG outperformed both its peer group and the general retail market in Australia.

What differentiates us

  • All the brands within the RAG portfolio are speciality retailers offering superior customer service in a great store environment.
  • Each brand within the RAG portfolio is extremely customer-focused with its own unique identity and target market.
  • Our brands are positioned to serve the value and mid market segments.

Future focus areas

  • Maximise our existing brands store portfolio across Australia and New Zealand.
  • Testing of a TFG Africa brand in Australia.
  • Continued investment in the online channels.