Foschini Sees Higher Repayments Amid South Africa Rebound

The Foschini Group Ltd., a clothing retailer with more than 2,000 stores in sub-Saharan Africa, expects more repayments of company-issued credit by year-end, an early indicator that consumer spending is on the mend.

“We expect to see some signs through our collections later this year that the consumer is getting to a better place,” Chief Executive Officer Doug Murray said in a June 17 interview, referring to the company’s home market of South Africa.

Foschini gets more than half its revenue from customers that buy on credit, making it vulnerable to loan defaults as shoppers struggle with high inflation and unemployment. The retailer said last month it wants to boost its percentage of cash sales to 50 percent from 42 percent to support earnings.

South Africa is “in a bad credit cycle at the moment,” Murray said at the company’s headquarters in Cape Town.

Foschini is targeting customers who spend cash rather than make credit purchases in order to reduce the possibility of non-payment. Inflation that has exceeded the central bank’s 6 percent limit has hurt retail sales, while growth in household expenditure slipped to 1.8 percent in the first quarter from 2 percent in the previous three months.

“It’s still tough out there and we are keeping it very tight on credit for this year,” Murray said, referring to the number of credit applications the company rejects. Foschini is factoring in a 50 basis-point increase in the South African benchmark interest rate at the end of September and any improvement in collections or retail spending will be reflected in the financial year through March 2016, he said.

Maintaining Balance

The retailer will maintain a balance between credit and cash sales in order to benefit from rising interest income and an increase in customers when the cycle turns, Murray said. Foschini last month posted full-year profit that beat estimates as the proportion of cash sales increased.

The company’s sales advanced 10 percent to 14.2 billion rand ($1.3 billion) last year, with the retail debtors’ book rising 11 percent to 5.8 billion rand. Net bad debt as a percentage of closing debtors’ book increased to 12.4 percent from 10.5 percent at the previous year-end.

While Murray has looked at expansion opportunities in Brazil and Australia, there are no plans to grow the business outside Africa, he said.

High rent and salaries in Australia puts pressure on input margins and increases the final cost of the product on shop shelves, he said. “There are a lot of retailers across there, so it’s a bit like dog eat dog.”

Double Stores

Woolworths Holdings Ltd. of South Africa agreed in April to buy Australian retailer David Jones Ltd. for 22.4 billion rand, a move that would make it the southern hemisphere’s second-biggest department-store operator by sales. Woolworths sees savings of at least 1.4 billion rand a year by 2019, excluding interest and taxes.

Foschini is looking to more than double the number of stores in Africa outside of its home market to about 300 by 2018. Sales growth in its 120 stores in the region was 26 percent in the year through March.

The shares have gained 20 percent this year, beating a 4 percent advance for the FTSE/JSE Africa General Retailers Index. They were little changed at 114.52 rand at 10:13 a.m. in Johannesburg, valuing the company at 25.4 billion rand.

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