Newsletter No 7/1 March 2024

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Fashion retailers boost local production amid port delays

By Nqobile Dludla

TFG, which owns Foschini clothing, has fared better than competitors after expanding its local factories and bought new ones over the past seven years. Picture: 123RF.COM

Transnet warns backlogs could persist for as long as 18 months as it awaits equipment for upgrades and maintenance

Fashion retailers are ramping up local production and using other ports and air freight to mitigate congestion at traditional ports that has caused long delays in stock deliveries, according to company executives.

State-owned port and rail operator Transnet said in November backlogs at the port of Durban and congestion at Richards Bay were due to factors including underinvestment in equipment and maintenance, and warned that procuring some of the new equipment could take as long as 12 to 18 months.

Though fashion retailers have been moving production closer to home, they continue to rely heavily on imports, especially from Asia, for some products.

TFG, the owner of Foschini clothing brand, has fared better than competitors after it expanded its local factories and bought new ones over the past seven years. As a result, TFG had enough stock for the December festive season, it said.

The company said it didn’t expect major disruptions to ranges for the autumn and winter months, and it was taking the necessary action, such as ordering earlier and amending destination ports.

The autumn season starts in March.

Woolworths and Truworths are also increasing local production of clothing, using local suppliers and placing orders earlier, company executives said.

Woolworths is placing smaller orders more frequently to avoid having big shipments stuck at the harbour, CEO Roy Bagattini said. The company is also directing ships to ports with fewer backlogs, such as Walvis Bay in Namibia, and then trucking the products to Cape Town, he added.

 “Sometimes we look to air freight depending on the product and category. We fly stuff in. Obviously it is costly and not sustainable,” he said, adding Woolworths wouldn’t rely on this heavily to avoid higher expenses.

For the autumn and winter seasons, Woolworths is in a much better shape in terms of stock but not at 100% levels yet, Bagattini said. Truworths has cautioned there may be some stock shortages in autumn.

Truworths said its mitigation strategy included sourcing from different countries.

It’s not only fashion retailers grappling with the problem. Food services group Bidcorp said last week it was holding buffer stocks to mitigate the impact.  

Luxury design’s next frontier

By Sandiso Ngubane

Kenneth Ize couture. Image: Supplied 

African designers are expanding the parameters of exclusivity

Writing for The Business of Fashion in 2015, editor and media entrepreneur Helen Jennings noted that, in the fashion category in particular, Africa “can’t yet compete with mature markets in terms of manufacturing and scale, [but] it can shine by elevating its vast artisanal heritage to develop a fresh approach to handmade craftsmanship for discerning customers worldwide”. It’s a plausible argument.

Sustainability is constantly touted as the next big thing in luxury as it becomes a ubiquitous topic across industries. Traditionally, luxury has centred on exclusivity through limited quantities, high-quality materials, and exquisite craftsmanship. Now, as it becomes more confident creatively, the continent is well positioned to refine this concept further as designers and producers of luxury goods across the continent operate from a position of scarcity that entrenches innovation.

In many instances, this means not only tapping into heritage, reviving artisanal traditions, and uplifting local communities by creating work for crafters but also consolidating all of this to redefine the very meaning of luxury.

Growing Market

The African middle class continues to grow in spite of the instability — and, in some cases, stagnation — across the economic landscape. Nigeria and South Africa, in particular, are the driving forces behind Africa’s emergence as an attractive destination for luxury brands at a time when the appetite for luxury goods — designer apparel, accessories, cars, cosmetics, fragrances, and more — remains strong globally.

The former is renowned for its robust champagne-drinking culture and ever-growing imports, while the latter has become a luxury-goods shopping destination for consumers from all over the continent.

Xesha Dzu’neka watch.  Image: Supplied

According to professional services firm Deloitte, the continent, Asia Pacific, Latin America, and the Middle East will account for 25% of the global luxury market by 2025. Sub-Saharan Africa is second only to Asia Pacific in terms of the level of growth in consumer markets. Says Rodger George, Africa leader for consumer business at Deloitte: “Africa definitely provides a longer-term growth opportunity for luxury brands. The shifting appetites and behaviour of consumers in this segment will require luxury-goods retailers to develop a sophisticated but uniquely African approach to reach and satisfy the growing demand for luxury goods in this segment.”

Global brands are certainly taking note as they increase their footprint in the market, but local producers are not resting on their laurels either.

Better Times 

Artisanal watchmakers have been cropping up all over the continent, hoping to penetrate a market that has largely been dominated by traditional foreign luxury-timepiece brands. Among them is South Africa’s Xesha Creaxions, with pieces ranging from about R2 000 to R80 000. The brand prides itself on heritage and authenticity. Its Busa watch, for example, with its recognisable Bapedi and Swati symbols, tells a story of migration and shared cultures.

Cape Town-based Bettél draws inspiration from the local environment in making its handmade timepieces, with watch cases cut from discarded indigenous kiaat wood, for example.

Established in 2018 in Accra, Ghana’s Caveman is widely regarded as that country’s first watchmaker. Its products come adorned with symbols such as cave paintings instead of numbers on some timepieces and incorporate patterns from West African print fabrics on the straps of others.

Other examples are Nigeria’s Asorock Watches and Kenya’s Sued brand which, like LN Watches from KwaDukuza, KwaZulu-Natal, incorporates local beading.

Fashionably Different 

In an interview with Luxury Society, renowned British fashion journalist Suzy Menkes once said: “There are two reasons why Africa and luxury should appear in the same sentence. The first is a new vision of what luxury means in the 21st century. Consumers, particularly in the Western hemisphere, are beginning to prize objects touched by human hands — and the handwork in Africa is exceptional.”

African fashion designers who hope to export their wares are aware of this. Among others, Nigeria’s Kenneth Ize and Lagos Space Programme and Côte d’Ivoire’s Kente Gentlemen are creating luxury fashion that taps into traditional crafts such as indigo dyeing and old-world hand-weaving techniques to produce contemporary fashion that elevates these crafts and offers consumers the kind of authenticity and traceability many global brands can’t claim.

Similarly, Ilé Ilà, the lifestyle furniture line by architect Tosin Oshinowo, expresses and celebrates Yoruba traditions by using local hardwood and traditional aso-oke fabric made by local artisans.

These are just a few examples of Africa’s luxury industry as it begins to emerge from the shadow of its international and better-resourced counterparts in the West — and this is in addition to consumer goods that go beyond the well-established five-star offerings in the hospitality industry, as well as the spirits, wine, and méthode cap classique from South Africa in particular.

As the industry slowly diversifies, the growth of the local luxury market, under-pinned by a growing middle class and an ever-increasing number of high-net-worth individuals, can only bode well for categories that don’t yet have the capacity to produce at scale and compete at a global level. By continuing to innovate and keeping sustainability at the core of operations, Africa’s luxury industry benefits by standing out and setting trends that can emerge only from this culturally rich landscape.  

Woolworths shares hammered after disappointing interim results

By Katharine Child

Picture: Supplied

Woolworths shares fell the most since November 2021 after the retailer reported that none of its divisions had increased sales volumes in the half-year to December 24 and its clothing business continued to underperform, though its food business produced a “resilient” result.

Its best-performing food division saw like-for-like sales growth of 7.2%, slightly higher than Shoprite’s growth of 6.3% for a similar period.

“Our biggest business remains our strongest business,” CFO Zaid Manjra said of the group’s food sales, adding that the performance was “industry leading”. 

Sales growth was, however, still lower than in-store food price growth of 9.1%, indicating the company is selling slightly lower volumes than before — a phenomenon all listed food retailers have noted in recent results. Overall food sales, including stores at petrol stations, grew 8.4%.

The market took a dim view of the results, with its shares falling as much as 7.34% before ending the session 5.34% lower at R63.42.

IG analyst Shaun Murison said the food business was resilient. “The business has managed to grow sales and maintain a gross profit margin of 24.6%, despite challenges such as load-shedding and avian flu,” he said.

Consumers are beginning to view Woolworths’ food prices more positively, according to the “price perception” data it generates, CEO Roy Bagattini said. Woolworths has spent R750m on reducing prices over three years.

The group is focusing on offering value for money; consumers may pay more for a banana, but feel it was worth the extra cost if the produce stayed fresh for longer, he said.

“Over the last couple of years we’ve been investing in a number of key categories to bring prices to a point where they are more acceptable,” Bagattini said. “They won’t be cheaper, but more accessible.”

The retailer reported a 14.2% drop in pretax profit to R2.5bn, while adjusted headline earnings from continuing operations fell 5.6% to 209.7c. An interim dividend of 148c per share, down 6.6% year on year, was declared.

However, its local clothing and homeware business still isn’t performing as well as expected. 

Since 2021, Woolworths has been striving to improve its fashion division by focusing on key lines such as denim and children’s wear, reducing its extensive range of formal workwear, and selling fewer items on promotion. Bagattini conceded in 2020 the clothes were viewed as “expensive and boring”. 

Its SA fashion division maintained gross margins of 48% in line with the strategy to sell more items at full price. However, volumes fell by almost 10%, with sales up 2.2%.

Sasfin analyst Alec Abraham said he was a “little disappointed in the SA clothing result, because of the eight percentage point lag to the sector growth”. The clothing sector grew 10.1% from June to December, according to Stats SA, he said.

Sales continued to fall into 2024, its post-period data shows.

Bagattini said one issue that Woolworths was focusing on is poor availability in stores, with either too few of the popular sizes or certain items selling out, he said. This was in part because of legacy IT systems and a strategy of delivering all stock to stores upfront, with no reserve stock to send to outlets that sell out a certain product. 

It is also trialling daily deliveries to clothing stores in KwaZulu-Natal using food trucks so as to have fewer missed sales.

In Australia, the Country Road clothing business reported a drop of about 46% in profit after it sold 5% fewer goods but had high fixed costs.

Consumer confidence Down Under was at its lowest since the 1970s, Manjra said. 

Bagattini defended Country Road’s contribution to the business saying it had added about R600m in profit to the group, was self-funding and provided higher-end apparel for the upper-end clothing business in SA.

Woolworths is investing R10bn over three years to grow and this is one reason debt increased from R671m to R4.1bn year on year.

Bagattini was comfortable with the amount, saying investing in the business produced excellent returns. “We have one of the healthiest balance sheets in the sector, by a long way.”

Pick n Pay – update, trading statement, cautionary

The Company and its subsidiaries (“the Group”) increased total sales by +5.3% for the 47 weeks ended 21 January 2024 (“the period”) with like-for-like sales growth of +2.9%.

The Group’s key growth drivers comprising Boxer, Pick n Pay Clothing and Online continued to deliver strong results, with Boxer and Pick n Pay Clothing each improving on the growth delivered in the first half of the year.

Balance sheet update and discussions with lenders
The disappointing trade performance from Pick n Pay supermarkets, increased inventory levels and strategic investment into the Group’s growth engines have led to a marked increase in the Group’s level of net debt from R3.8 billion on 27 August 2023 to R7.2 billion as at 21 January 2024. The Group’s net debt position improved in February 2024, largely as a result of the receipt of R0.5 billion of cash proceeds from the sale of property, as disclosed to shareholders in October 2023. Pick n Pay has actively engaged with the key lenders under its long-term syndicated and bilateral loan facilities to ensure continued compliance with the Group’s long-term debt covenants under these facilities.

Following this engagement, long-term lenders have agreed to waive all covenants on the syndicated loan and bilateral loan facilities as at 25 February 2024 while amending them for 31 August 2024. These waivers have provided the Group with sufficient time and flexibility to strategically assess the Group’s gearing position and progress the optimal course of action to correct the capital structure. The board of directors of Pick n Pay (“the Board”) extends its sincere thanks to its lenders for their continued support.

Further Trading Statement
Shareholders were referred to the announcement released on the JSE Stock Exchange News Service (“SENS”) on 18 October 2023, wherein the Group advised shareholders that it was likely that its H2 FY24 earnings (26 weeks to 25 February 2024) would be below the earnings reported in H2 FY23 (26 weeks to 26 February 2023). In terms of section 3.4(b) of the JSE Listings Requirements, the Group guided that it expected its earnings, headline earnings and pro forma headline earnings for the financial year ending 25 February 2024 (“FY24”) to decrease by more than 20% when compared to the EPS, HEPS and pro forma HEPS reported for FY23.

Shareholders are advised that the Group will compile and finalise its financial results for FY24 over the coming weeks, the publication of which is scheduled for late May 2024. The Group expects to publish a loss at the earnings, headline earnings, and pro forma headline earnings levels for FY24. The loss is entirely attributable to the performance of the Pick n Pay supermarkets business, which was primarily due to a weaker than expected trade performance, the duplication of supply chain costs related to the move from Longmeadow to the Eastport distribution centre, once-off restructuring costs and the net incremental costs of loadshedding. The Group’s Boxer and Pick n Pay Clothing businesses remain highly profitable. Management does not yet have the required degree of certainty to provide details of the anticipated ranges for earnings, headline earnings, and pro forma headline earnings levels for FY24. Management will provide a further update to this trading statement once the Group has the required degree of certainty to do so.

Strategic response and cautionary announcement
In October 2023, the Company appointed Sean Summers as its new CEO to urgently address the under- performance of the Pick n Pay supermarkets business, and to assess ways in which the Group could unlock value for shareholders from Pick n Pay’s broader business.

While the Board recognised that the Pick n Pay supermarkets turnaround would be a multi-year strategy, significant progress has nevertheless been made in the appointment of a new leadership team and the implementation of a strengthened and simplified operational structure which aims to drive rapid decision making, improved in-store execution and excellent customer service.

Alongside the immediate action taken at an operational level, the Board prioritised the development of a sustainable capital structure for the Group, which would reduce debt levels, provide sufficient support for investment in the turnaround of Pick n Pay and unlock shareholder value.

In this context, the Board appointed financial advisors who have been working alongside the Board and management team to evaluate the Group’s strategic alternatives to achieve these objectives and unlock the value inherent in the Group.

To this end, the Board has approved a plan to prepare for a two-step recapitalisation plan which, subject to final approval by the Board as well as the requisite shareholder and other regulatory approvals being obtained, will comprise a rights offer to existing shareholders of the Company of up to R4.0 billion to provide near-term liquidity, followed by an offering and listing of the Group’s Boxer business on the Main Board of the Johannesburg Stock Exchange (“IPO”). The rights offer is currently expected to take place in the middle of 2024, followed by the IPO towards the end of 2024. At this time, the Group intends to retain a majority stake in Boxer after the IPO.

In taking this decision, the Board believes that the two-step recapitalisation plan is the best course of action to not only stabilise the Group’s balance sheet, strengthen Group liquidity and provide adequate capital funding for long-term sustainable growth, but importantly to unlock shareholder value. The controlling shareholder of the Group has indicated its in-principle support for the proposed two-step recapitalisation plan.

As the terms and conditions of the recapitalisation plan are still being developed with Pick n Pay’s financial advisors and are subject to ongoing Board engagement and approvals, shareholders are advised to exercise caution when dealing in the Company’s securities until these details are finalised and a further announcement is made.

FY24 financial results announcement and strategic update

Shareholders were advised that the Group expects to release its financial results for the 52 weeks ended 25 February 2024 on SENS in late May 2024, followed by an in-person and online results presentation. The presentation will include a formal update on Group strategy and the Group’s plans to raise capital. Further details will be provided in due course.

The Average Person Only Wears 20% of Their Clothes 80% of the Time

The modern shopping model – which relies on rapid production and cheap deals – encourages excessive consumption as people are inherently attracted to low-priced goods. For individual buyers, it is also easier and more economic to snatch up cheap clothes that have short lifespans compared to splurging on high-quality, long-lasting pieces that will very shortly fall out of popularity. Yet, despite owning large quantities of fashion items, studies show that most people wear the same things over and over, while in most cases at least 50% of their wardrobe is left untouched. 

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