Fashion retailer The Foschini Group (TFG) is asking shareholders to raise R3.95 billion as a precautionary measure against a possible Covid-19-induced downturn.
TFG CEO Anthony Thunström said the intention is to insulate the company’s balance sheet against any shocks.
“We don’t have a crystal ball. We don’t know how long this crisis is going to last, how deep the economic impact is going to be. The only thing we are certain about is that the next 12 and 24 months are likely to be tougher than the last 12. So, our priority is to be looking after our balance sheet,” Thunström said.
Preparing for Covid-19 shock
Independent retail analyst Syd Vianello said the group provided a wide range of reasons during its presentation, some of which are straightforward.
“They want to have flexibility to expand existing operations and gain market share; they need capital to develop their digital strategy further. They also say they may be on the lookout for acquisitions to expand their business.
“They state clearly that they expect their debtor’s book to deteriorate in the months ahead. This will impact cash flow significantly,” said Vianello.
“The loss of one month’s sales (April 2020) alone could wipe out a third of a year’s profits and if sales do not recover sufficiently to enable all the winter stock to be sold before the end of the season, then very heavy discounting can be expected as the stock is moved before the summer season.”
Senior equity analyst at Sasfin Wealth, Alec Abraham shares the sentiment that TFG is raising capital due to Covid-19 uncertainty, therefore it needs to ensure there are enough funds in its balance sheet to pay for things such as stock and employee salaries.
“In that context trying to determine how much will be needed for stock and paying employees, is a complicated decision to be making right now. I think that they want to have a bit of gearing and pay off a bit of gearing and have some leeway in the balance sheet and be able to withstand how the Covid-19 situation is going to bring,” Abraham says.
“The reality is, there are so many businesses going out of business… This period at the same time is going to open up a lot of opportunities without putting out a lot of strain on the requirements that they may have to meet, so it is precautionary but also opportunistic at the same time,” Abraham says.
TFG released its annual results to March 31 2020 on Thursday.
“Interestingly, the balance sheet at end-March is quite strong. Debt is higher, but so are the cash balances and net debt is fairly consistent,” Vianello said.
Unsurprisingly, no dividend was declared. “In light of the current subdued economic environment and the heightened levels of uncertainty posed by Covid-19, the Supervisory Board has decided that it would be prudent not to declare a dividend at this year-end,” TFG stated.
Vianello said the decision not to pay a dividend will save nearly R1 billion, “which alone will strengthen the balance sheet.
“Foschini went into the Covid-19 [induced] lockdown with quite a reasonable balance sheet and financial position, 58% gearing. Offsetting this is the large interest-bearing debtor’s book.”
April and May were tough on trading and losses have been incurred.
“Cash flow will also have been affected due to slow collections from debtors, exacerbated by trading losses. Gearing will have risen substantially. The rights issue will cover these negatives and provide the firepower to act quickly should competitors get into trouble and liquidate,” Vianello said.
He reckons there will be a few privately-owned retailers and particularly those funded with private equity capital, who will be badly affected by Covid-19 and could come up for sale at attractive prices.
“As a multi-brand retailer. Foschini is possibly better placed from a management perspective to take on other brands and, having the cash available, they can act quickly and acquire something at a good price,” Vianello said.
He says there will be an impact on EPS going forward but this ultimately depends on the pricing of a rights issue. Dilution will be about 25% at least, which means there will be share price pressure until the rights issue is completed.
He believes Edgars’ closure could be beneficial for Foschini across quite a number of its brands, although in the short term there will be heavy discounting as Edgars sells out its remaining stock and this will necessitate competitors such as Foschini to adopt similar strategies to get rid of winter stock.
Mr Price intends raising capital for the same reasons as TFG.