Apparel and home retailer TFG says it shuttered around 100 loss-making stores in the past year and will close “just over 100” more in the year ahead as it looks to boost margins in the medium term.
CEO Anthony Thunström says the group generally has a weighting towards a two-and-a-half-year end to its leases as its leases tend to be five years in duration.
This means it can only address a certain number at any point in time; however, it continues to deal with these issues.
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In its full-year results presentation to 31 March, Thunström admitted that it currently has “about 300 stores” that are marginal.
“Even the ones that are loss making are generally minimally loss making, and a lot of [those] have kind of fallen into that bucket over the last six months as things have got tighter.”
He did add that they “wouldn’t have necessarily been marginal or loss making 12 months ago” and that the group will shut the stores “as quickly as we can, given the lease profile”.
Perspective
CFO Ralph Buddle highlights that there are “no real fixed costs to a store, [and] the marginal stores in themselves cover their variable costs, but that’s not good enough”.
“They don’t generate the returns and therefore they lower the average cost of returns, the average returns over the whole shape of the chain. So by being much more focused on eliminating the marginal stores, we increase the average, but we have to then take out overhead at the centre to cater for that smaller, smaller base.”
He says the group trimmed its capex in the second half, with around R200 million of the R500 million planned not executed.
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“We won’t shy away from developments that we believe are still right, but we are tightening our hurdle rates and payback criteria … Stores are a high fixed cost asset in a structurally declining channel.
“Our job is to ensure that the fleet remains profitable by managing it with total discipline and closing without sentiment. Every store in every brand must earn its place.”
Along with this, it has implemented “significant short-term cost savings and avoidance, including … aggressive head office and store reductions in Australia and London”.
Buddle is adamant that the capital expenditure for 2027 will be lower than the amount for 2026.
Strategic reset
Thunström sketches a path forward for the group where it is ‘resetting’ “to enhance both profitability and capital returns”.
“We are planning on the basis that consumer conditions will remain under pressure for some time across each of our territories and may potentially deteriorate further until a durable solution is found to the Iran war, inflation cools and consumer sentiment improves.
“How we are going to run our business is directly aligned with this cautious outlook,” he adds.
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“Turnover growth may well be muted, but we will manage inventory and gross margins very carefully and in line with this reality.
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“We are going to continue to manage costs very tightly as we extend the cost saving initiatives of last year. Capital is being held tightly with investments proceeding only where the business case is significantly de-risked and yet still compelling.
“Strategically, we are looking at ways to aggressively reduce structural operating expenses to de-risk operational leverage.
“While this approach will apply across the entire business, we also have very specific initiatives and levers applicable to each territory,” he adds.
“We are also reviewing marginal brands and rationalising our brand structures. Our Africa business has assembled an incredible portfolio of 28 loved brands over many years, which have helped us to more than double the Africa business over the past 10 years.
“However, as I have already pointed out, growth comes at a cost, and the portfolio breadth has increased complexity and diluted returns in a tough market. There is a need for us to simplify our structures and structurally reduce our cost of doing business.”
Reading between the lines, it is clear that some of its almost absurd number of brands will be rationalised over the next 24 months.
In jewellery, for example, it has three whole brands – American Swiss, Sterns and Galaxy & Co – all doing roughly similar jobs.
It will continue to prioritise Bash, its online and omnichannel platform. “To put this into perspective, the additional R1.1 billion of sales generated by Bash this year would have needed the equivalent of opening more than 100 new stores,” says Thunström.
“Achieving the same outcome through physical expansion alone would have required approximately R500 million in store Capex and inventory investment.”
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