Johannesburg - Bad debts at retailer Truworths have jumped by 66%, but interest gained on outstanding accounts has resulted in the operating margin being maintained at 33%, says chief financial officer Wayne van der Merwe.
Net bad debt as a percentage of the company's debtors' book of R1.9bn grew to 11.3%, or R226m, for the year to end-June.
Truworths - whose brands include Daniel Hechter, value chain Identity and menswear brand Uzzi - embarked on an aggressive drive to open new accounts in the run-up to the introduction of the National Credit Act in mid-2007. "We knew the consequence would be that we'd have an increase in bad debts, but many of the new accounts are interest-bearing. The effect is that we have maintained our operating margin at 33%," said van der Merwe.
Growth in Truworths' active account base slowed to 6%, with 1.8 million accounts being active. This growth rate compares with the four-year compound growth average of 20%.
Truworths said the rejection rate on new account applications was 60%: "Two or three years ago, this was just under 50%," said van der Merwe.
Truworths reported a 16% increase in sales to R5.7bn for the 53-week year to end-June. Product inflation was 6%, the company said.
Operating profit was up 16% to R1.9bn, with the operating margin remaining steady at 33%. The retailer has bucked the down trend displayed by the retail sector as a whole: StatisticsSA said that retail sales fell year-on-year for the fourth consecutive month in June, down 2.6% in real terms.
The company declared a final dividend of 72c/share, taking the full-year dividend figure to 144c, a 20% rise on financial 2007's payout to shareholders. This places the company on a dividend yield of 4.8%.
Van der Merwe said Truworths spent much effort ensuring it produced fashions that were sought after by its customers - defined as a youthful South African looking for fashion of an international standard. "We don't always get it right, and we have to be dynamic and flexible enough to change when possible." To ensure flexibility, the company sources most of its apparel locally, said van der Merwe. Truworths does not disclose the percentage split between local and imported goods.
Truworths has bought back 68.1 million shares and cancelled 43.4 million; directors see this as an efficient way of using the company's surplus cash. The remaining 24.3 million shares, which comprise 5.4% of shares in issue, are held as treasury shares. The company is able to hold up to 10% of its shares this way, with van der Merwe saying Truworths will continue to use buybacks as a way to employ excess cash.
Expansion
Truworths' trading space grew by 9% over the financial year. It expects to grow "by similar levels" in financial 2009, said van der Merwe. Growth is being driven by the emporium concept, which houses several brands in one store, in new malls.
Value fashion chain Identity is seen as another growth area, with between 10 to 15 stores planned for the 2009 financial year, following from the 13 opened in 2008.
Truworths sees the operating environment "remaining tough" for financial 2009, but is positive that it can achieve "satisfactory earnings growth", said van der Merwe. For the first seven weeks of financial 2009, sales were 14% higher than for the same period in 2008, with 6% product inflation.
- Fin24.com
* The writer holds shares in Truworths.