The Foschini Group also sees credit sales pain

Fashion retailer The Foschini Group (TFG) has joined its peer Truworths International by posting downbeat credit sales as the National Credit Regulator (NCR) seeks to rein in reckless lending to increasingly indebted South African consumers.

The retailer’s group turnover for the half-year grew by 16.9% at a time when consumers wrestle rising living costs and interest rates – resulting in their spending to be in the doldrums.

TFG – the owner of 22 brands including Foschini, Exact, Markham, Duesouth and Donna Claire – saw its credit turnover grow by 1.4% citing the NCR’s new regulations.

Under the regulations – introduced in March 2015 – additional steps are required for retailers offering store accounts (credit) which include applicants presenting three months’ bank statements and payslips in stores; additional checks with credit bureaus and assessing consumers’ existing financial means to prove if they are worthy of larger amounts of credit.

The NCR deems the regulations as necessary while retailers call them cumbersome.

Fashion retailers TFG, Truworths and Mr Price have been implementing the regulations since late last year.

TFG estimates that the NCR’s regulations negatively impact its credit turnover by R310 million and that its retail debtor’s book of R6.7 billion showed no growth.

In a trading update last week, Truworths saw its credit sales decrease by 1% for the first 18 weeks to October 30 as a result of the NCR’s affordability regulations. Credit sales comprised 70% of Truworths’ total sales excluding its UK fashion footwear chain Office Retail Group.

TFG’s financial director Anthony Thunström says since September 2015, new store accounts have on average declined by 30%. The decline in consumers applying for credit has had a positive spin-off for lay-by sales.

“Lay-by sales are up by 50% but it’s only 4% of our turnover. The growth in lay-by sales shows that there is a huge demand for the merchandise that we are selling and equally how difficult it is to get credit,” Thunström tells Moneyweb.

Ten years ago, TFG’s credit sales represented 75% of total sales as it sold merchandise on credit mainly at Foschini, but the retailer has since focused on boosting cash sales.

“We have managed to reduce cash and credit sales to a 50%-50% split for south Africa. And for the whole group, we are 60% cash and the balance is credit.

“The problem with credit is that it goes through cycles. If the cycle is good, you make money,” says Thunström.

TFG’s group cash turnover during the period under review grew by 29.5% including its UK fashion businesses Phase Eight and Whistles, and 19% excluding these businesses.

So unhappy are clothing retailers with the affordability assessments that TFG, Truworths and Mr Price have initiated legal action against the NCR and the Department of Trade and Industry. The retailers are arguing that their process of vetting consumers for credit is effective and the required documentation for credit applications is burdensome.

To limit further pressure on its credit turnover Thunström says TFG will promote cash sales through in-store promotions using its rewards programme and educating consumers about the requirements for credit applications.

Another big change together with the NCR’s affordability assessments is the limit on interest rates that retailers can charge, which was effective from May 2016.

The change, under the amended National Credit Act, adjusted the formula for calculating the maximum interest rate chargeable on credit facilities, which totalled 25.4% (the current repo rate (7%) times 2.2 plus 10%).  The maximum interest rate that can now be charged drops to 21.9% (repo rate times 1.7 plus 10%) under the amendments.

TFG’s headline earnings per share grew by 5.7% to 496.8 cents and achieved a gross margin of 49.6% compared with last year’s 49.1%.

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