Subject to regulatory and other conditions being met a successful takeover of David Jones Limited (ASX: DJS) by the South African retailer Woolworths appears a certainty. In a statement Woolworths CEO Ian Moir said: "The combination will create a leading southern hemisphere retailer with meaningful scale, able to leverage common fashion seasonality with enhanced sourcing capability".
And he is right – northern hemisphere retailers are finding it difficult to properly service southern hemisphere customers; and the strategic logic behind this takeover bid is very apparent. Interestingly, Ian Moir was previously the CEO of Country Road now 88% owned by Woolworths. Woolworths is Africa's largest department store retailer and operates 400 stores (including smaller related outlets) throughout South Africa, the Middle East and other African countries. Woolworths earns a return on equity of 50.7% and revenues / profits rose 20% in the latest year – partly due to Africa's rising middle class.
This whole business begs the question – why does the world have so many Woolworths?
In the early 20th century things were a bit simpler and the US retailer F W Woolworth just didn't bother to register trademarks or business names. The Australian Woolworths originally called itself Walworths before realising the name Woolworths was up for grabs and the South African Woolworths simply took the title without permission. None of them have ever been related.
A successful South African takeover of David Jones places Myer Holdings Ltd (ASX: MYR) in an uncomfortable position. Myer has underinvested in itself over the past few years (private equity mostly took costs out of the business); has too much floor space; will be squeezed at both ends by David Jones and Kmart; lacks capital and is already quite highly geared. Although Myer's current dividend may look attractive the need for more capital could take precedence.
Alternative prospects for fashion retail investors include OrotonGroup Limited (ASX: ORL) and Premier Investments Limited (ASX: PMV). In recent weeks a couple of Oroton directors have topped up their holdings with significant on market purchases. Oroton has broadened the product range; the overseas stores are gaining traction; and the joint venture (Brooks Brothers) plus the GAP licence agreement hold solid medium-term potential. Oroton has no debt and sufficient cash on hand to further invest in the business. Selling on undemanding medium-term metrics, I think Oroton ($4.07) is an undervalued opportunity.
Premier Investments has a diverse portfolio of brands amongst which Smiggle and Peter Alexander offer superior growth prospects. This company is extremely well capitalised and remains on the lookout for opportunities. With astute and patient management Premier Investments is fairly dismissive of the 'threat' posed by the plethora of fast fashion offshore retailers and the latest results evidence this isn't just a complacent assertion. At $9.81 Premier Investments is fairly valued on prospects.
Foolish takeaway
Are Australian investors continually jumping at shadows? Despite a still high Aussie dollar foreign takeovers of local companies appear to be increasing – resulting in future profits going to largely offshore shareholders. And yet we have a massive amount of capital tied up in supposedly long-term superannuation funds and non productive investment housing. Not to mention ridiculous tax driven schemes.
In the meantime enterprising foreign investors see real opportunities in some of our industries whilst we as investors too often just take the opportunity to turn a fast buck. Makes you wonder.
