Credit cloud over Truworths
Retailer weathers Covid storm but credit sales cause concern
● Truworths CEO Michael Mark says the biggest challenge facing the clothing retailer in SA is the health of the economy because of the impact on the group’s debtors book and consumer spending.
The group ended its financial year to June in a positive cash position and able to pay a dividend — albeit a smaller one — but Mark says it “didn’t get through unscathed”, having been hard hit by the Covid-19 pandemic and its fallout.
“We got badly hurt like everyone else but our business model is still intact and our balance sheet is still very strong.”
“Without a doubt” the biggest challenge facing the group is an economy that has been badly damaged by the pandemic and lockdown, Mark says.
Truworths’ “challenging trading conditions” in SA and the UK resulted in headline EPS falling 28.2% to 410.4c.
However, the group says it has “remained strongly cash generative and increased cash from operations” by 7% to R4.5bn. It will also pay a final dividend of 31c a share, bringing its total payout to shareholders to 280c, compared with 384c in the previous financial year.
In anticipation of the difficult times to come, the group increased bad debt provision from 19% to 30% of its R5.5bn debtors book. The split between credit and cash sales for Truworths in SA is 70/30. Its UK shoe chain Office is a 100% cash sales business.
Discussing the higher debt provision, Mark says Truworths — owner of such brands as Identity, Uzzi, Daniel Hechter, Earthchild and Naartjie — had sought to ease the financial pressure on credit customers by allowing them an extra month to pay.
Investment analyst Chris Gilmour says the credit sales component of Truworths’ business in SA is still high, so it will have to start increasing the percentage of cash sales.
“What’s going to happen now is that with more and more people being laid off, with an extra 3-million unemployed, the ability to repay credit is going to be more and more compromised whereas cash sales are more straightforward,” says Gilmour.
There will also be renewed pressure on consumers in the UK, he says. The British government has since March paid wage subsidies to people whose companies have placed them on leave of absence due to the pandemic, but this is temporary.
“That is going to have to end [next month]. When that ends you are going to see a lot of people losing their jobs. Unemployment is going to levels they haven’t seen since the 1970s. So again, it is going to be incredibly tough. There are so many high-street stores in Britain that are closing down.
“But online, both in SA and the UK, is growing tremendously. If you can cut costs, and online by its very definition is a cheaper proposition than bricks and mortar, that certainly helps,” says Gilmour.
Shane Watkins, chief investment officer at All Weather Capital, says Truworths reported “actually pretty good numbers considering the circumstances”.
“The core South African business profits were only down 28% in the second half, excluding the additional debtors provisions, which, now at 30% of the book, you would hope won’t need to be increased again,” says Watkins.
He says the group’s net cash position means it will be able to buy back shares if its share price remains depressed.
Watkins says the problem at Office seems to be 30 “onerous leases which will expire over the next three or four years and then Office will do quite well”.
“It feels like at R30 that all the bad news and more is baked into the share price and the returns in Truworths seem skewed to the upside from here,” he says.
Mark says the group is in a strong position in SA from a real estate perspective, which should stand it in good stead in the coming years.
The fact that Truworths in SA has relatively short leases of five years means that once a year 20% of the group’s leases come up for renewal, which gives it options to resize and renegotiate, he says.
“We are an anchor tenant and we are also able to consolidate space. We have six or seven brands in a mall often and if we have too much space we can move one store into another store’s envelope or we can reorganise our real estate in each mall.”
Office, on the other hand, typically has long leases of between eight and 12 years on some properties.
Mark says this means it could take up to four years to reduce the size of the Office business to its optimal level. The group, which bought Office for R5.5bn 4½ years ago, has already impaired its investment by nearly R5bn as the fallout from Brexit wreaked havoc in the UK retail sector.
He says that with hindsight the timing of Truworths’ purchase of Office was “awful”, but at the time there had not been even a whisper of Brexit.
But there are green shoots showing. Not only has Office performed well in terms of
It feels like at R30 that all the bad news and more is baked into the share price Shane Watkins
Chief investment officer, All Weather Capital
online sales during the lockdown, but a review of the business has shown how valuable the brand could be, Mark says.
“It made us realise how appealing Office’s unique positioning is in the marketplace. It is positioned as a fashion sneaker brand but it is uniquely orientated to the female market in the UK. That positioning is also quite aspirational. Everyone is aspiring to get involved in that market.
“The UK [during lockdown] interestingly enough surprised us. Remember that in SA clothing stores were closed for about five weeks. In the UK they were closed for about 3½ or four months and yet they did better than expected because the e-commerce was very successful.”
Mark says Truworths plans to reduce the 129 Office stores in the UK, Ireland and Germany to 101 by June next year. He says his ideal store count would be about 55 but the process was tied to the long leases coming to an end, which could take up to four more years.
Mark, who has been at the helm for about 30 years, has been asked by the board to stay on as group CEO for another two years as part of its succession planning. After that, he will remain as a consultant to Truworths for another year.