FASHION VICTIM
Is Trutworths out of touch ?
IN the early 1980s, two of South Africa’s retail giants, Woolworths and Truworths, joined forces to form the Wooltru Group.
Since the two retailers unbundled in the early 2000s, they have gone from strength to strength, building their local operations.
In the case of Woolworths, and recently Truworths International, the groups have expanded offshore.
Truworths’ focus on local operations five years ago earned it the accolade of being the premier fashion retailer on the JSE. But as Truworths International celebrates 100 years in retail, the stock has declined, losing over 17% in the past year. Analysts now ask whether it will be the next cautionary tale in the retail sphere.
Victor Dima, a director at Arqaam Capital, rates the stock as an underperformer.
“It’s hard to talk about sustainable improvement in Truworths operations.
“One of the biggest challenges for Truworths is the fact that they bank on credit,” he said.
“If you look at the South African part of the business, 70% of sales are driven by credit. A lot of its success will be in the improvement of credit sales. It is relying on the idea that credit growth will accelerate.
“They have to adjust to the new reality, which means that there is stronger competition from international players, there are more pricing points, and the growth in sales will also be driven by cash, because credit will remain constrained,” said Dima.
“They should probably be answering the question whether they think that they would be able to maintain the kinds of margins they have seen in the past, and whether this is a realistic and an achievable target,” he said.
According to Bloomberg data, 15 out of 18 industry analysts hold a sell option for the stock.
Truworths CEO Michael Mark, who has been at the helm since 1991, has been partly blamed for the company’s inability to adapt to the current environment.
With about 60% of Truworths International’s customers under the age of 35, analysts have suggested that the retailer needs a new, younger CEO to maintain a competitive edge against fast fashion retailers such as H&M, Zara and Cotton On.
H&M and Cotton On’s fast turnaround times mean they can easily offer consumers the latest fashions worn by celebrities, whereas Truworths has struggled to stock its stores with fashion that appeals to people under 35.
“They need to keep pace with what they see from global retailers and to convince consumers that their value proposition is as good as that of the internationals,” said Dima.
Mark countered that “everyone is entitled to their own perspective, but I have a view that we tend not to run our business based on the perceptions of analysts, who often have very short-term perspectives.
“I can’t tell you how many retailers in the past, including ourselves, are very hot with analysts when you have good numbers, but when times are tough, they have all sorts of reasons to take the view that you are on the way down.”
Mark added: “Our board has expressed its preference to make an internal appointment, and we are well advanced in identifying internal candidates as well as recruiting at senior level into the group. It would be great by then to have a successor in place who is, say, 45 years old and ready to take over from me.
“When that day comes, I will enthusiastically step aside,” he said.
“Some analysts do not fully support our strategy and business model, which aims at the better-end mainstream fashion market.
“They think we should drop our prices and change our brands, but we obviously debate all those things internally and it’s certainly not just me and the board, but we think it’s the right strategy for shareholders and that’s our belief.”
Truworths has 781 stores in South Africa and the rest of Africa.
Its brands include Uzzi, Identity, Truworths, LTD, Ginger Mary and the recently acquired children’s brands Earthchild and Naartjie.
Just a few years ago, the company decided it needed a new CEO.
In 2015, Jean-Christophe Garbino was appointed the CEO-designate. However, he resigned after spending less than a year with the retailer, which industry insiders attributed to Mark not wanting to relinquish power.
This was the year that the retailer bought its first offshore business, Office, a shoe retailer in the UK. It is an acquisition that has helped to boost the business.
For the 26 weeks ended December 2016, group retail sales were up 21%. But if Office is excluded, sales remain unchanged.
The group’s children’s brands made the biggest gain in the period, at 13%, while Identity declined 5%, Truworths menswear was up by a marginal 2% and the sales at YDE fell by 5%.
Dima said the successes of
They have to adjust to the new reality that growth is driven by cash sales In the next 10 years Truworths International will be much larger in Africa
most local retailers depended on their international presence.
“If you look at successful companies, the one thing to mention is that being international helps.
“Take Cotton On, for example: they’ve grown out of Australia and have been able to capture new market share. I think that exposure to international competition helps companies to improve their offering,” said Dima.
Yet Mark said: “It’s not like we are shy of acquisitions, we just make sure that they fit with our strategy and our plans, exactly in the way we want them to.”
On how the Truworths of the future will look, Mark said: “I do think over the next 10 years Truworths International will become much larger in Africa.
“Despite the difficulties we are all having in Africa, I do think that eventually, when the time is right and the opportunity presents itself, we will acquire more businesses that are bolt-on or match our own.”