JOHANNESBURG - Truworths International reported lower earnings for the year to June 2019 as Truworths posted a steady performance in the weak domestic retail market while the profitability of the Office chain was severely impacted by the depressed United Kingdom (UK) trading conditions.
Group retail sales increased by 3.7 percent to R18.6 billion, with account sales contributing 51 percent of the Group’s total sales. Truworths Africa, which comprises mainly the Truworths business in South Africa, reported stronger second half results and increased sales for the year by 3.1 percent to R13.5 billion. Sales for Office declined by 0.9 percent to £279 million, but grew in Rand terms.
Truworths Africa’s gross margin was stable at 55.5 percent while the Office gross margin declined from 44.4 percent to 42.3 percent, resulting in the group’s gross margin decreasing to 51.6 percent.
The tough trading environment in the UK has resulted in a non-cash impairment charge of £97 million being raised against the Office intangible assets.
The Group’s operating profit, excluding the Office impairment in the current period, as well as the impact of foreign exchange gains and losses in the current and prior periods, decreased by 10.3 percent to R3.5 billion with the operating margin declining from 22.3 percent to 19.4 percent.
Group diluted headline earnings per share declined by 8.5 percent to 560.7 cents, with earnings in Truworths Africa down 2.5 percent and Office 60.0% lower. The annual dividend was reduced by 9 percent to 384 cents per share, based on a maintained dividend cover of 1.5 times.
The Group generated cash from operations of R2.7 billion which funded dividend payments of R1.8 billion, capital expenditure of R465 million, share buy-backs of R266 million and loan repayments of R422 million. Group net debt decreased from R968 million to R663 million, with the net debt to equity ratio at the end of the year at 7.2 percent, down from 9.3 percent a year ago.
Chief executive officer Michael Mark said trading conditions locally have been impacted by low economic growth, high unemployment and higher average fuel and utility prices which have contributed to low consumer confidence and constrained spending.
In the UK, uncertainty over Brexit and muted consumer confidence, together with the pressure on store-based retailing as consumer spending shifts to online shopping, continue to negatively impact the economy and the retail sector in particular.
“Early in July we advised our shareholders that Office has engaged advisers and entered into discussions with lenders regarding potential debt restructuring options. These negotiations are progressing constructively and we believe they will be concluded satisfactorily,” said Mark.
During the year the group closed a net 24 stores across all brands, bringing the retail footprint to 945 stores. Truworths Africa opened 23 stores and closed 30, while Office closed 17 stores, including 16 concession stores across House of Fraser and Topshop/Topman.
Online sales have increased to 9.6 percent of the Group’s retail sales. The Truworths e-commerce platform launched in 2018 was profitable in its first year and is already generating the turnover equivalent to a medium to large-sized Truworths store. Online and digital sales in Office grew by 10% and account for 34% of that chain’s retail sales.
Truworths has an expanding presence in the kidswear market through its multiple exclusive kidswear brands. The Truworths kids emporium, which houses the LTD Kids, Earthchild and Naartjie brands, was the strongest performing division and increased sales by 19 percent.
The quality of the Truworths Africa debtors book remains healthy despite increasing consumer stress. Active accounts across the Truworths, Identity and YDE debtors book increased by 2.6 percent to 2.7 million and the total value of the book grew to R5.9 billion. The doubtful debt allowance has increased marginally from 19.0 percent to 19.2 percent since the start of the year when the new accounting standard IFRS 9 was adopted.
Discussing the outlook for the South African business, Mark said consumer spending is expected to remain under pressure in the short-term owing to the effects of the prolonged economic downturn and renewed demands on disposable income.
“However, Truworths’ stronger retail sales growth in the second half of the financial year is promising. We expect sales momentum to be driven by our expanding e-commerce offering, the recently introduced layby payment option and customer response to our new store concepts, including ID Kids and Context.
Mark said trading conditions and consumer confidence in the UK remain under intense pressure ahead of the end-October Brexit deadline, and it is expected that the retail sector will remain constrained in the medium term.
“Over the past few months the Office management team has implemented several turnaround initiatives relating to merchandise buying and planning, cost control, capital expenditure and brands and marketing. Inventory management remains a significant focus to arrest the decline in the gross profit margin and release working capital,” he added.
Trading space in Truworths is planned to increase by 0.7 percent in the 2020 financial year, with Office trading space expected to decrease by 0.2 percent.
Mark said management in Office “is critically evaluating the real estate portfolio with a view to closing loss-making stores as leases come to an end”.