Truworths may grow in the UK

If Truworths makes an acquisition, it is likely to be in the UK where it owns the shoe chain Office, which provides a third of its profits and has turned a corner after challenging times a few years ago.

Truworths CEO Michael Mark was responding to a question about possible merger & acquisition (M&A) opportunities during an investor presentation on Friday, though his answer did not suggest anything was imminent.

Mark said the group had previously looked at opportunities in Australia, but decided it preferred working in the northern hemisphere.

“We like the fact that we are [already] working in the UK. We seem to be finding our feet there. We can control it and get our hands around it and we are there frequently. We have got a fantastic team of management and staff capability there, a warehouse, infrastructure, ecommerce, [and] intellectual capital.”

Office, which sells top shoe brands including Birkenstock, Timberland, Nike and New Balance, provided £37.4m (R902m) in profit before tax for the group, compared with R1.7m from Truworths Africa in the six months to end-December.

“We are focused [regarding] M&A objectives, even though we get offered many, quite broad opportunities frequently in countries all over the world.”

He said a purchase, if Truworths made one, wouldn’t necessarily be in the shoe business, but could be a fashion business that sells to the same sort of customers who shop at Office, which, numbering millions.

Office grew sales 15.6% to £162m with its gross profit margin strengthening by 80 basis points to 47.4%. The group sells almost half its footwear online.

The chain, which Truworths bought in 2015 for about £260m, initially struggled with unprofitable stores and wrote down almost R5bn in impairments by 2020, meaning it overpaid for it. After Truworths quit the unprofitable shops in Germany, this is now its fastest-growing asset and a means to earn foreign currency with the rand weakening.

IMPROVING HEALTH

Office is a cash business, but in SA 70% of clothing and shoes at Truworths are sold on account. In the six months to endDecember, bad debt and writeoffs rose 54% to R731m at Truworths, but the group expects this to improve in 2024 as credit bureau TransUnion data shows credit health is improving.

In the prior period it had a high percentage of sales on account, leading to higher writeoffs, financed by provisions as required by accounting standards. Truworths says it uses credit as an enabler to drive sales in its aspirational or higher-end brands.

Truworths sold lower volumes in SA in the half-year compared with the previous half as consumers struggled. Sales revenue was flat at R8.4bn despite prices rising 8.4% on average.

It is selling about 8.4% lower volumes than the year before but its profit margin remains high at 53.6%. Like-for-like store revenue decreased 3.3%.

Issues at SA ports have led to delays with stock arriving about two to three weeks late, leading to lower sales over the peak festive season. The company believes it will be less affected by delays and lags in March.

Mark said the group was “cautiously optimistic” about the next 12 months as it has almost 3-million active credit customers in SA.

“Besides the active accounts, the growth in accounts is very good and the credit environment is looking better. We’re doing some internal initiatives on our merchandise that are exciting. These are the reasons we feel cautiously optimistic for the next 12 months.”

The group’s headline earnings per share were 3.6% higher at R5.13 and the interim dividend was raised 3.8% to R3.32 per share.

Cash generated from operations increased R1bn to R2.7bn, which funded dividend payments of R935m and capital investment of R426m.

Truworths’ share price closed 7.93% higher at R77.57 on Friday.

WE LIKE THE FACT THAT WE ARE [ALREADY] WORKING IN THE UK. WE SEEM TO BE FINDING OUR FEET THERE

Michael Mark Truworths CEO