Truworths share jumps after decision to increase dividend

SHARES in Truworths, which yesterday reported flat half-year earnings as it struggled to grow sales, rose 7.3% to R87.42 as the market welcomed the cash-flush retailer’s large dividend hike.

Retailers targeting the lower middle-income segment are bearing the brunt of weak consumer demand. While there is some respite thanks to the fall in the oil price, consumers’ ability to spend is tempered by indebtedness and unemployment.

Profit at Truworths, which owns brands including Identity and YDE, was R1.39bn in the 26 weeks ended December 28, from R1.4bn previously, while retail sales rose 5.2% to R6.2bn.

The interim dividend rose 9% to 236c, resulting from a reduction in the dividend cover to 1.4 times from 2013’s 1.6 times.

This came as a relief to investors as Truworths’ share has lagged growth seen by peers. In the last year, its share has gained 29.15%, The Foschini Group (TFG) a whopping 90.20%, Mr Price 87.10% and Woolworths 55.35%. Cash and cash equivalents at Truworths fell 5% to R2.4bn at the period end.

The group’s saving grace had been the “big” increase in the interest earned on their debtors’ book, according to portfolio manager at 36ONE Asset Management Evan Walker.

“Their book grew by 9% versus 5%…. There’s been a lengthening in the book, which means that customers are paying slower, which in turn means that they’re paying more interest on their purchases and obviously that is aiding Truworths quite significantly,” Mr Walker said.

“It can’t go on forever before you’re hitting up more bad debts, and to me this just continues to slow the sales cycle.

“They’ve done a very good job on the cost side but you can’t take costs out of the business forever either… I think they’re still up against a very tough next 12 months… they’re going to struggle,” he said. Credit sales contributed 71% to group retail sales for the period.

While rivals such as TFG and Woolworths have hastened to add value offerings to retain customers given the tough environment, Truworths has held its price-points, which are deemed to be too high for distressed shoppers

“Truworths have been very reliant on credit to drive their sales growth … they’ve missed the transition to cash where TFG have moved fast and are doing a good job,” Mr Walker said.

Looking ahead, Truworths said it expected to benefit from the buyouts of the Earthchild and Naartjie brands. Retail sales for the first seven weeks of the second half of the 2015 financial year rose 10%. The period, however, is not a good performance gauge as retailers tend to discount and hold promotions after December into January.

Truworths have been very reliant on credit to drive their sales growth… they have missed the transition to cash where TFG have moved quickly and are doing a good job