The Investor - Moneyweb's monthly investment magazine Issue 6 | Page 23

Fashioning an opportunity the operating margin (excluding Phase Eight) dipping to 17.7% (FY14: 17.9%). Including Phase Eight it was lower at 17.5% but we expect this to increase to about 18% in the medium term as synergies become entrenched. Headline earnings from continuing operations (excluding once-off acquisition costs) rose 9.7% to 897.9c/share. Management declared a scrip dividend (with a cash alternative) of 588c/share which is an increase of 9.7%. The scrip dividend is a move by management to reduce the high net debt-to-equity ratio of 77% down to 40% in the medium term. The Foschini Group makes the best of a bad market. Foschini has responded well to the credit market storm that inflicted pain on most credit retailers in the past two years. It disposed of RCS – its consumer finance division providing credit cards, personal loans and insurance products to the mass middle market – and replaced it with an offshore upmarket cash apparel retailer, Phase Eight. Central Bank’s quantitative easing programme. Sales turnover grew 13.6% (10.8% excluding Phase Eight) to R16.1bn from continuing operations, where product inflation averaged 7%. Cash sales accelerated 19.6% and credit sales, which improved in the second half of the year, managed meagre 4.3% growth. Operating profit climbed 10.7% to R2.8bn with The consumer market is still cloudy though there are signs of recovery. Transunion national credit numbers reflect the most marked improvement in more than two years but a parallel survey shows consumer confidence is at its lowest point in more than a decade. Foschini’s debtors’ costs as a percentage of debtors deteriorated marginally in FY15 to 13.5% from 12.4% the previous year, but is still far better than FY13’s 28.5%, which was in the thick of the credit crunch. However it is still higher than the 9%-10% range prior to the credit crunch. It is impressive that debtors’ turnover has gradually improved over the past five years, although the growing cash sales component may be partly responsible for Foschini now generates 46.9% of sales in cash, up from 42.2%. Interestingly, its gross profit margin including Phase Eight shot up to 47.3% (FY:46.5%) compared with 46.7% excluding it. It is plausible to expect this margin improvement to trickle down to the bottom line once Phase Eight has properly bedded down. In addition, Phase Eight provides a natural rand hedge, geographical diversification and also offers a leveraged platform on which the group can introduce its Foschini product range in Europe and Asia. The annualised revenue contribution from Phase Eight is 12%, but this is set to increase in light of the rand’s continued weakness and as Europe starts to benefit from the European ISSUE 6 – SEPTEMBER 2015 23