Truworths results reflect pressure on consumer spending | Fin24
 
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Truworths results reflect pressure on consumer spending

Aug 17 2017 18:03

Cape Town – Fashion retail group Truworths International, which owns the Truworths clothing chain in South Africa and the Office footwear chain in the UK, encountered tough economic conditions in the local and UK markets in the 53-week financial year to July 2 2017.
 
The group’s operating profit increased by 1% to R4.2bn and diluted headline earnings per share, which were 0.8% lower at 661 cents, were virtually unchanged. A final cash dividend of 182c per share has been declared, maintaining the annual dividend at 452c per share.
 
Cash generated from operations increased by 8% to R3.0bn and the group’s cash balance was 29% higher at R2.1bn at the end of the financial year. Cash was used to fund dividend payments of R1.5bn, capital expenditure of R467m, share buy-backs of R101m and loan repayments of R324m.     
 
The group’s financial position remains strong, with the net asset value per share up 8% to 2 201c.

Domestic performance
 
CEO Michael Mark said the domestic performance was impacted by pressure on consumer spending in the current recessionary environment, while the affordability assessment regulations continued to restrict new account growth and limit account sales in Truworths.

Uncertainty in the UK in the aftermath of the Brexit vote contributed to volatile trading conditions for Office over the past year, he said.
 
“The retail trading environment locally was also impacted by aggressive and unsustainable pricing, which has created stress in the market and led to increased markdown and promotional activity, closure of retailers and down-scaling of others,” said Mark.
 
Group retail sales increased by 9% to R18.5bn, with Truworths contributing sales of R13.4bn and Office R5.1bn (£294m). Good progress has been made with the ongoing integration of Office into the group since its acquisition in December 2015, with the footwear chain reporting lower stock levels and an improved inventory turn following the alignment with Truworths’ retail processes and systems.
 
Online sales in Office continued to gain momentum and increased by 25%, accounting for 28% of the chain’s total retail sales.
 
Truworths will be launching its new e-commerce site in the first half of the 2018 financial year. Through the online store customers will ultimately have access to the full range of Truworths, Identity, kidswear and Office London merchandise.

Retail footprint
 
The group’s retail footprint increased to 937 stores following the opening of a net 8 new stores during the year. This comprises 734 outlets in South Africa, 141 in the UK (including 38 concession stores), 47 in the rest of Africa, 8 in Germany and 7 in the Republic of Ireland. Overall trading space grew by 1.5%.
 
Trading space is expected to grow by approximately 5% in 2018 (Truworths 5% and Office 2%), buoyed by the launch of the Office London footwear chain in SA, with the first 10 stores being opened this month.
 
The group’s debtors’ book was unchanged at R5.8bn. The doubtful debt allowance has increased to 12.7% from 12.3% at June 2016, while the new account acceptance rate has increased to 26%.
 
The Truworths active account base declined by 4% to 2.5 million accounts as a result of the onerous administrative burden introduced by the affordability assessment regulations which require customers to produce documentation to verify their income.
 
“Account granting strategies have been implemented to mitigate the impact of the regulations and have largely arrested the decline in the number of active accounts in the past few months. We expect our active account base to stabilise in the 2018 financial year”, Mark said.

Outlook
 
On the outlook for the South African business in the 2018 financial year, Mark said political uncertainty and the increased pressure on consumers’ disposable income will ensure that trading conditions remain challenging.
 
“Despite these headwinds we expect the Group’s performance to reflect signs of improvement in the 2018 financial year. Factors driving the prospects are the low to negative outlook for product inflation, stability in the debtors’ book, exciting new ranges, higher trading space growth, ongoing cost containment and the benefit of the relatively low base set in the 2017 financial year.”
 
Mark said the trading environment in the UK is expected to remain uncertain, with low economic growth prospects. “However we expect to realise ongoing benefits from the integration of the Office business owing to more effective systems and processes.”

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