A peek into the fitting room

Great growth

At stake is a big market. Clothing ranks as SA's second-largest retail sector after food and liquor, according to Statistics SA, raking in almost R100bn or R19 out of every R100 spent by consumers in 2009. Clothing is also the fastest-growing retail sector, notching up an annual growth rate of 13.5% between 2005 and 2009, well ahead of the 11.5% pace across the other six retail sectors.

Power players

Power in clothing retail is concentrated in four listed players - Truworths, Foschini, Mr Price and Woolworths - and the unlisted Edgars. The sector's profitability shines. Even in 2009, a tough year by any standard after the global financial crisis, return on equity for the four listed clothing retailers averaged 36.6%, with a best 45.7% from Truworths and a worst 22.8% from Foschini.

The sector has already attracted a foreign entrant, Europe's largest clothing retailer, Inditex, which plans to open its first store under its Zara brand in early 2011. But lack of suitable sites is likely to limit its expansion, says Coronation Asset Management analyst Quinton Ivan Could the Spanish retailer, which has 4700 stores in 76 countries, be testing the water before it makes an acquisitive move? Time will tell.

There are others in the mix too. Privately owned German retailer C&A is one. C&A operates in 19 countries in Europe and reported sales of à6,3bn in the year to March 2010. "C&A is one of Europe's biggest store chains and can do it," says Nedcor Securities retail analyst Syd Vianello.

But it's unlikely that a US clothing retailer will enter SA, he says, because few ever venture outside their home market. Much the same applies to UK clothing retailers.

Beyond borders

For a foreign retailer looking for broader African exposure, all four SA listed clothing companies offer this. Woolworths has the broadest coverage with 34 franchised stores in 12 African countries. Its non SA operations generated revenue of R144m in 2009, with clothing and general merchandise contributing R109m and food the balance.

Woolworths would come with a price tag of about R12bn based on its current market cap, but for a foreign investor the SA retailer's clothing and food mix may be offputting. In 2009 clothing and household goods contributed R4bn in sales and food R5,9bn.

Better bet

For a purer play in SA's clothing sector, Mr Price would be a better bet. Clothing and sports goods sales of R6,7bn in the year to March 2010 accounted for over two-thirds of total sales of R9,5bn, the balance coming from general household goods. A clear focus on younger market segments - the fastest-growing in SA - is also unlikely to go unnoticed. Mr Price also comes with the attraction of a vigorous expansion strategy in Africa, where it has a presence in eight countries. In the past financial year 11 stores were added, taking the total to 24, all franchised.

On a 17 price:earnings multiple, Mr Price is the highest-rated of the big four listed clothing retailers but has the lowest market cap: R11bn.

For a buyer with deeper pockets Truworths sports a R24bn market cap and a p:e of 17. It would bring with it sales of over R6bn, 513 stores in SA and 19 franchised stores in five African countries.

With a R15,6bn market cap, Foschini would bring sales of R9bn as well as its financing unit RCS's revenue of R1bn. It has the biggest footprint in SA - 1539 stores across its brands. Exposure in Africa is limited to Botswana, Swaziland and Namibia and sales of about R300m. However, Foschini CEO Doug Murray is not expecting any interest. "We talk to many of the global retailers and Africa is simply not top of their agenda."

International issues

Aside from the fact that SA is in a different hemisphere, which introduces seasonal complexity into the fashion mix, Murray says international retailers have issues of their own. "Cost control and scaling down are their priorities. There is nothing on our radar that suggests there is likely to be action."

That said, a well-pitched bid for Foschini, Truworths or Woolworths would be unlikely to run into any big opposition, with none having a dominant control structure. The most significant investors are the Public Investment Corp, which holds 9.6% of Truworths and 11.7% of Woolworths, and US investment company Black Rock with a 3.7% stake in Foschini. Mr Price may pose a problem as holders of its unlisted B shares have just under 50% of voting rights.

Source: Financial Mail