The Finance Ghost: The market lowdown on Cashbuild and Famous Brands

27 Oct 2024

Building materials retailer Cashbuild is a useful barometer of consumer sentiment, while Famous Brands must focus on its core business if it wants to stop rivals eating its lunch.

Cashbuild on the rise

I’ve written on this topic a few times before, as I think that Cashbuild is one of the most obvious places to spot any improvement in consumer sentiment.

Cashbuild’s products represent a classic discretionary purchase, something that only happens when consumers (1) have money and (2) feel confident enough to spend it. Actually, there’s a third element – they have to be willing to spend it on home improvements unrelated to protection against rolling blackouts, as Cashbuild wants to sell you tiles rather than solar panels.

With interest rates starting to head in the right direction, consumers seem to be feeling more confident that they won’t be working purely for the benefit of their bankers in future.

Other reasons to believe in the Cashbuild story right now are that sentiment has improved after the elections, and of course we’ve had 200 days of no rolling blackouts, which has been the right kind of electric shock for South Africans.

Against this backdrop, I’ve been carefully following the Cashbuild quarterly sales updates. They showed negative growth for a long time before finally bottoming this year. In the latest quarter, revenue is up 5%. Now, that might not sound like much, but it’s a start. There was 4% growth in existing stores and 1% in new stores.

Sales volumes were 3% positive, so this growth isn’t being driven solely by inflation. In fact, a moderation in inflation is another reason to believe that things can get better from here.

Year to date, Cashbuild is up 6.6% and competitor Italtile is up 17.6%. The major gap in performance opened up in June this year and I still think there’s a decent chance it could close.

Famous Brands needs to focus now

At some point in the business life cycle, a fast-growing disruptor in a market goes from the hunter to the hunted. The business eventually matures in its core market and has to turn its attention to new kids on the block trying to eat its lunch.

If you’re lucky as an investor, the company will resist the temptation to try to conquer new lands instead of focusing on its core market. If you’re unlucky, you’ll see major offshore deals that distract management from protecting market share.

Today, Famous Brands is still licking its wounds from years of poor capital allocation decisions in international markets. Not only did it lose a lot of money, but it allowed South African competitors to spring up.

For a great example of a focused strategy that is working well, look no further than archrival Spur. It has rebranded its core restaurant offering and made some smart local acquisitions.

By striking at a time when Famous Brands has been weakened, Spur has been able to notch up impressive gains. Over five years, Spur’s share price is up 30% and Famous Brands is down 20%.

Interestingly, though, the Spur valuation got to a point where the year-to-date move is only 8% for Spur versus 13.4% for Famous Brands, with the latter benefiting from improved sentiment combined with a weaker valuation coming into the GNU period.

Will Famous Brands be able to improve things to justify the share price move this year? Well, for the six months to August, revenue growth was 2% and Heps increased by 9.5%, so decent overall growth is being driven by inward focus and efficiencies rather than top-line growth. The company is reducing debt and seeing more success in the leading brands business than signature brands, further evidence that focusing on the core business is the right way to do things in restaurant groups. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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Cashbuild on the rise

Famous Brands needs to focus now