UK acquisition helps Truworths perform

Cape Town – Fashion retail group Truworths International [JSE:TRU] increased adjusted diluted headline earnings per share (Heps) by 16.2% to 688.2 cents in the year to June 2016 as the group benefited from the acquisition of UK fashion footwear chain Office Retail Group in December.

The group’s diluted Heps increased by 12.5% to 665.9 cents. Adjusted diluted Heps exclude once-off transaction costs relating to the Office acquisition.

A scrip dividend has been declared, with a cash dividend alternative of 182 cents per share bringing the total dividend for the year to 452 cents per share, representing an increase of 12% over the previous year.

Group retail sales have increased by 46% to R17bn, with Office contributing sales of R3.8bn.

CEO Michael Mark said the group posted a competitive performance in tough trading conditions in South Africa and in the UK, achieving all six of its financial and operating targets.

“The domestic trading environment was impacted by further pressure on consumer spending, the deteriorating credit market and declining consumer confidence, while retailers had to contend with the extreme volatility of the rand.”

Mark said the credit affordability assessment regulations introduced in SA by the National Credit Regulator in September 2015 have had a significant impact on the group’s credit sales.

“The onerous administrative burden for customers to produce proof of income has resulted in the new account acceptance rate falling from 30% to 24%, with a loss of approximately R250m in credit sales during the reporting period.”

Trading conditions

Trading conditions in the UK were challenging owing to unseasonable weather patterns, a general slowing in the economy and uncertainty ahead of the Brexit vote in June.

“The integration of Office is progressing well and we are aligning the business with Truworths’ retail philosophies, practices and systems. Our initial focus has been on optimising stock management in the merchandising division. The Office e-commerce business continues to gain momentum, increasing online sales by 21%,” said Mark.

The group’s trading space increased by 8.6% following the opening of a net 23 new stores and the addition of 159 Office stores (including 44 concession stores). At the end of June the group had 929 stores and concessions across South Africa (723), UK (147), rest of Africa (47), Germany (7) and the Republic of Ireland (5).

Truworths kids wear sales have increased by 79%, boosted by the acquisitions of Earthchild and Naartjie in the previous financial year. These brands, together with LTD Kids, have been included in the newly created specialist Truworths kids’ emporium. By year end 14 such emporiums had been opened and the group plans to open a further 150 over the next five years.

Group operating profit has increased by 21% to R4.2bn, while the operating margin declined to 24.9% from 30.5%, owing to a lower gross margin and higher trading expenses.

The group’s net asset value per share increased by 13% to 2 032 cents.

Cash generated from operations was used to fund the Office acquisition and transaction costs of R3.5bn, and dividend payments of R1.4bn. Interest-bearing borrowings of R4.4bn were raised to fund operating activities. At the end of the reporting period the group’s cash and cash equivalents totalled R1.6bn, 9% higher than the previous year.  

Credit environment

While the credit environment deteriorated in the second half of the reporting period, Mark said the Truworths debtors’ book metrics were improving.  

The doubtful debt allowance has been reduced from 12.5% to 12.3% of the debtors’ book and net bad debt improved from 12.5% to 12.4% of the debtors’ book as a result of improved collections. The group’s debtors’ book grew by 11.6% to R5.8bn.

Discussing the outlook for the 2017 financial year, Mark said the South African trading environment is expected to remain challenging “with slow economic growth and rising inflation putting further pressure on consumers”.

“The credit affordability assessment regulations remain a concern and will impact on our ability to open new accounts and grow credit sales in our South African businesses.”

Mark said the trading environment in the UK faces further uncertainty following the decision to withdraw from the European Union.

Capital expenditure of R547m is planned across Truworths and Office, with the majority to be invested in stores, distribution facilities and systems. 

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