Truworths hopes cash injection will solve UK missteps

● Truworths International-owned Office will be on a new footing days after its parent company bagged a loan to help resuscitate the troubled UK-based shoe chain.

The apparel retailer said it would get £32.5m (about R603m) from Standard Bank, which it will use to settle its sterling-denominated debt of £43m. It would use £10.5m of cash reserves to settle the remainder of the debt.

Truworths, which owns the YDE and Ginger Mary brands, first made its foray into the northern hemisphere in December 2015 when it bought an 88.9% stake in the UK Office shoe chain for £256m.

It says it is seeing early indications that its Office business was reaching stability and that management was continuing with its turnaround and alignment initiatives despite tough economic conditions in the UK being exacerbated by the uncertainty of Brexit.

Alec Abraham, a senior equity analyst at Sasfin Wealth, says South African retailers have been desperate for international opportunities after subdued growth at home and competition from foreign retail giants, but Truworths should not have pursued this acquisition.

Their strategic faux pas was venturing into the UK without having determined what they wanted, Abraham said. “Rather than having determined what they wanted and going out and looking for it internationally, I think the approach was going to international corporate financiers and saying, ‘What have you got on offer?’ ”

Since the acquisition, Truworths’ share price has tumbled almost 30%. It was trading up 4.8% on the restructure news on Thursday. The retailer closed the year in 2015 as a R40bn company. It now has a market capitalisation of R24bn.

In the retailer’s latest financial results, for the year to end-June 2019, sales for Office had decreased in sterling terms by 0.9% to £279m, reflecting an unfavourable UK trading environment. In rand terms, retail sales were up 5.3% to R5.1bn.

The group reported that it had shut down 17 of its stores, 16 of which were positioned around some of its more trendy and youthful competitors such as Topshop and Topman.

Bjorn Samuels, an equity analyst at Argon Asset Management, said a positive for Office in the UK was that the “athleisure” and sneaker market remains buoyant.

“While this market has become more competitive, there are still enough positive fundamentals to support reasonable growth. Therefore, we believe the misfortunes of Office are not a result of a terrible acquisition but rather unfortunate timing,” he said.

The story of South African retailers making offshore investments that turn sour is not unique to Truworths. Like Woolworths with its David Jones misadventures, Truworths conceded that the Office deal was a poor investment. Just four years on, the company’s prospects were dashed when Office’s value faced a £97m write-down last month.

Truworths may have been “a little arrogant, thinking they can take a struggling business in an international market and turn it around. One, you’re not familiar with that market, and your South African experience is not necessarily exportable,” Samuels said.

While this market has become more competitive, there are still enough positive fundamentals [for] reasonable growth Bjorn Samuels

Equity analyst at Argon Asset Management