Credit problems curb prospects for Truworths
OF ALL SA’s clothing retailers, Truworths was the most vulnerable in terms of present economic and competitive conditions, an analyst said yesterday.
The fashion player, which reports first-half earnings tomorrow, has been feeling pressure as debt from store cards, microloans and unsecured credit reduces people’s spending power, particularly of those in the lower-middleincome segment.
Despite cheaper fuel prices, there is little relief on the horizon from rising living costs, a dearth of jobs and stunted income growth.
And the deluge of foreign brands entering SA has heightened competition.
“They (Truworths) are stuck between a rock and a hard place,” Alec Abraham, a senior retail analyst at Sasfin Securities, said. “I’m not expecting much (tomorrow). Their bad debt write-offs are around 13%, which is a huge problem — the environment (affects) them more than Woolies, The Foschini Group or Mr Price because out of all the retailers they have the highest credit exposure. This then weighs on revenue.”
About 71% of Truworths total sales are credit sales.
Truworths’ longstanding CEO, Michael Mark, is set to end his 23year tenure at the company this month, when Jean-Christophe Garbino takes the helm. Mr Garbino is at present head of cheap and chic French retailer Kiabi.
“The double whammy is their (Truworths’) very high rejection rate — they’re turning away about 68% of applications,” Mr Abraham said. “So they’re taking a bigger write-off on a bigger quantum of book, and that puts pressure on profitability as well. They do a brilliant job on keeping costs in check but the bad debt write-off is such a big part of their business.
“Woolworths’ debtors book is 17% on credit and they’re taking a write-off of 5%. Mr Price’s is about 18% credit and they’re writing off 6%,” Mr Abraham said.
The group’s rivals can counteract adverse market conditions to an extent through tiered pricing. Historically, Truworths has had a narrow pricing model, without much manoeuvrability.
“If you’re willing to pay R500 for a pair of jeans, you now have more options — you can go to Zara, Topshop or Cotton On and even Woolies … however, if you’re only willing to spend R130, then your option is Mr Price and Woolies,” Mr Abraham said.
“Arguably, from that point of view, they haven’t lost any customers to the other guys because that’s a totally different price level … in the case of Truworths they don’t have a low-, mid- or highpriced jean, they have a very narrow profile, and it hurts them.”
Although the group is often praised for its operating efficiency and top operating metrics, strategically it has not done enough to address the loss of market share to foreign retailers.
SA has attracted global brands including River Island and Forever 21, many of which see SA as a new income stream in a relatively untapped market‚ and a stepping stone to other sub-Saharan mar- kets. Local retailers have responded. Both The Foschini Group and Woolworths have made international buyouts to gain scale and so increase responsiveness in the supply chain so they can put the latest catwalk-inspired trends in store.
Mr Abraham said Truworths’ recent purchases of children’s clothing brands Naartjie and Earthchild “just doesn’t address the issue of international entrants”.
(Truworths) are stuck between a rock and a hard place. Their bad debt write-offs are around 13%, which is a huge problem — the environment (affects) them more than Woolies