The Foschini Group expected more repayments of company-issued credit by year-end, an early indicator that consumer spending is on the mend, the retailer said this week.

“We expect to see some signs through our collections later this year that the consumer is getting to a better place,” chief executive Doug Murray said, referring to the company’s local market.

Foschini gets more than half its revenue from customers that buy on credit, making it vulnerable to loan defaults as shoppers struggle with high inflation and unemployment. The retailer said last month that it wanted to boost its percentage of cash sales to 50 percent from 42 percent to support earnings.

South Africa was “in a bad credit cycle at the moment”, Murray said at the company’s headquarters in Cape Town.

Foschini is targeting customers who spend cash rather than make credit purchases to reduce the possibility of non-payment.

Inflation that has exceeded the central bank’s 6 percent limit has hurt retail sales, while growth in household spending fell to 1.8 percent in the first quarter from 2 percent in the previous three months.

“It’s still tough out there and we are keeping it very tight on credit for this year,” Murray said, referring to the number of credit applications the company rejected.

Foschini was factoring in a 50 basis point increase in the benchmark interest rate at the end of September and any improvement in collections or retail spending would be reflected in the financial year to March 2016, he said.

Maintaining balance

The retailer will maintain a balance between credit and cash sales to benefit from rising interest income and an increase in customers when the cycle turned, Murray said.

Foschini last month posted full-year profit that beat estimates as the proportion of cash sales increased.

The company’s sales advanced 10 percent to R14.2 billion last year, with the retail debtors’ book rising 11 percent to R5.8bn. Net bad debt as a percentage of closing debtors’ book increased to 12.4 percent from 10.5 percent at the previous year-end.

While Murray had looked at expansion opportunities in Brazil and Australia, there were no plans to grow the business outside Africa, he said.

High rent and salaries in Australia put pressure on input margins and increased the final cost of the product on shop shelves, he added. “There are a lot of retailers across there, so it’s a bit like dog eat dog.”

Double stores

Woolworths agreed in April to buy Australian retailer David Jones for R22.4bn, a move that would make it the southern hemisphere’s second-biggest department store operator by sales. Woolworths expects savings of at least R1.4bn a year by 2019, excluding interest and taxes.

Foschini, which owns Markhams stores for men and has 2 000 outlets in sub-Saharan Africa, is looking to double the number of stores in Africa outside of its home market to 300 by 2018.

Sales growth in its 120 stores in the region was 26 percent in the year to March.

The retailer’s shares have gained 20 percent this year, beating a 4 percent advance for the general retailers index.

They advanced 0.62 percent to close at R115.19 on the JSE yesterday, valuing the company at R25.57bn. – Bloomberg