Truworths fell more than 6 percent on the JSE after it told investors that it had approached lenders to embark on steps to restructure the R801 million debt of its UK-based Office shoe brand, whose operational performance has continued to deteriorate.
The UK’s Sky News broke the story that Truworths had asked advisers to draw up a company voluntary arrangement (CVA) that could see the closure of some of its roughly 100 UK stores.
The stock closed 5.03 percent lower at R68.85 with a day low of R67.82 as the company confirmed media reports that it had engaged Alvarez & Marsal and Deloitte to advise them on debt restructuring options for Office.
Truworths, whose brand names include Daniel Hechter, Ginger Mary, Glamour, and LTD, said £45m (R803.6m) of debt was due to be repaid with a significant portion of the debt to be settled through a lump sum payment at maturity in December 2020.
“In light of the depressed retail trading environment currently being experienced in the UK, Office has entered into discussions with the relevant lenders regarding potential debt restructuring options,” the company said. “The fragile retail economy in the UK is expected to remain under extreme pressure amid rising concerns over the faltering negotiations ahead of the end-March Brexit deadline.”
Office accounts for 27percent of Truworths revenue and 10 percent to profit, whereas the South African division contributed 73 percent to revenue and almost 90percent to profit.
Damon Buss, an equity analyst at Electus Fund Managers, said Office had been a poor performer since it was acquired by Truworths in December 2015.
“The footwear market is very competitive, especially in the UK. Footwear is not Truworths’ core skill set and, unfortunately, the timing was very poor as the rand/British pound exchange rate was greater than R20 to the pound,” said Buss.
“If Truworths goes down this route, it will have impaired a significant portion of the £135m goodwill which is ascribed to Office on its balance sheet. However, it will enable it to exit loss-making stores much faster than the current option of seeing out the leases, Buss said.
Truworths acquired 88.9percent of Office for R5.5 billion in December 2015, joining local retailers, including Woolworths and Famous Brands, which expanded their footprints abroad.
Office has been a weak performer over the past 18 months, exacerbated by department stores in the UK rationalising space and Brexit uncertainty.
“This has resulted in new management with footwear experience being appointed by Truworths during the first half of 2019,” said Buss.
Kokkie Kooyman, a director and portfolio manager at Denker Capital, said South African companies have had a tendency to go offshore when South Africa faced economic headwinds and then it hit them when the economies they tried to diversify into went into a recession.
“The UK is going through a hard time and it will be interesting to see whether the company will be able to sell its book to lenders and whether they simply sell the bad book or do an ongoing joint venture,” said Kooyman.
The Brexit uncertainty and weak consumer sentiment have weighed heavily on households in a faltering UK economy.
The UK retail environment has been harsh with retail footfall decreasing by 2.6 percent, and growth in sales was mainly driven by online, which now accounted for roughly 20 percent of all sales.
About 1123 stores had disappeared from Britain’s top 500 high streets in the first six months of 2018, according to the accountancy firm PricewaterhouseCoopers.
The report said about 14 shops were closing every day in the UK high streets. Office closed seven stores and opened a store in the half-year to December.