The Group produced a competitive performance in the 2016 reporting period with all six of the board-approved financial targets being achieved despite increasing economic headwinds in our major trading regions.
Earnings before interest paid and tax (EBIT) increased by 20.7% to R4.2 billion while the return on assets was 26%.
The major factors influencing the Group's results for the period were the acquisition of Office in the UK and the introduction of new affordability assessment regulations by the National Credit Regulator in South Africa. These affordability regulations, which are estimated to have reduced credit sales in Truworths by at least R200 million in the period, are covered by the Chief Executive Officer in his report.
The Office acquisition will have a profound impact on the Group by diversifying the customer base and geographic store profile, growing footwear as a proportion of retail sales, shifting the credit:cash sales mix, diversifying revenue streams and generating hard currency earnings in offshore markets.
The Group acquired an effective 88.9% stake in the fashion footwear retailer via its UK resident and managed subsidiary for £256 million (on a 100% basis).
The business was purchased from investment funds managed by a private equity group and the management of Office. Key management has retained an 11.1% shareholding and the Group has the option to buy Office management's stake over a three to five-year period.
The acquisition and related costs were funded through approximately R3.5 billion in cash from South Africa, while £88 million in term loans and revolving credit facilities were raised in the UK to refinance Office's pre-acquisition debt. The impact of the purchase, funding and related costs on the Group's statements of comprehensive income and financial position is covered in the analysis which follows.
The acquisition was effective from 4 December 2015 and in terms of IFRS 3 profits are accounted from 23 November 2015. The financial results of Office are therefore included in the Group results for 31 weeks to 26 June 2016.
ANALYSIS OF FINANCIAL PERFORMANCE
The analysis of performance in this report aims to show how the Group's financial capital has been increased, decreased or transformed through the operating and investing activities in the 2016 reporting period, and how it is expected to contribute to value creation for shareholders in the short, medium and longer-term.
The following review of financial performance for the 52-week period ended 26 June 2016 should be read together with the Group's annual financial statements, published on the Group's website at www.truworths.co.za/investors.
Group financial and operating targets
Targets are published to provide guidance to shareholders on the Group's performance objectives for the forthcoming reporting period. Targets and performance are benchmarked against JSE-listed apparel retailers and best-in-class global listed fashion retailers. The targets are reviewed annually by the board based on actual performance and the outlook for the period ahead. The targets published for the 2016 reporting period were adjusted by the board following the acquisition of Office.
|Actual 2016||Target 2016 (adjusted post Office acquisition)||Target achieved||Local benchmark**||Global benchmark***|
|* Ratios are based on the results of the Group including 12 months of Office's profits, on a pro forma basis, excluding any exceptional non-recurring items as defined on page 65.|
|** The local benchmarks are based on the average ratios for comparable JSE-listed apparel retailers for the 2016 period.|
|*** The global benchmarks are based on the average ratios for global fashion retailers, H&M and Inditex, for the 2015 period.|
|Gross margin||(%)||52.9||52 – 55||✓||45.1||57.4|
|Operating margin||(%)||24.9||21 – 25||✓||18.0||16.3|
|Return on equity*||(%)||37||32 – 37||✓||35||32|
|Return on assets*||(%)||26||24 – 29||✓||31||26|
|Inventory turn*||(times)||3.8||3.0 – 4.0||✓||3.6||3.6|
|Asset turnover*||(times)||1.1||1.1 – 1.4||✓||1.7||1.7|
Statements of comprehensive income
Sale of merchandise
Group retail sales increased by 46.1% to R17.0 billion, with cash sales growth of 129.7% and credit sales growth of 11.0%.
These results include the non-comparable sales of the Office, Earthchild and Naartjie businesses, which were acquired with effect from 4 December 2015, 1 March 2015 and 1 April 2015 respectively (collectively ‘the acquisitions'). Truworths accounted for 78% of retail sales and Office 22%.
Credit sales accounted for 53% of retail sales (2015: 70%). It should be noted that the credit:cash metrics changed materially during the period as Office only generates cash sales.
Excluding the retail sales reported in both the current and prior periods by the acquired businesses, retail sales increased by 11.3% to R12.8 billion, with cash sales growth of 15.4% and credit sales growth of 9.7%.
Group sale of merchandise, which comprises Group retail sales, franchise sales and delivery fee income less accounting adjustments, grew 48% to R16.7 billion (2015: R11.3 billion).
Group trading space increased by 8.6% following the opening of a net 23 stores and the addition of 159 stores (including 44 concession stores) from the Office acquisition. At the end of the period the Group had 929 stores, including 44 concession stores (2015: 747 stores).
The Group's gross profit margin declined to 52.9% (2015: 55.2%) owing mainly to the acquisition of Office, which operates at a lower gross margin. Excluding the impact of Office, the Group's gross margin increased to 55.3%.
Trading expenses increased 51.6% to R6.2 billion (2015: R4.1 billion) and constituted 37.5% of sale of merchandise (2015: 36.5%). For further detail on trading expenses please refer to the Truworths and Office sections in this report.
|Divisional sales||26 June 2016 Rm||28 June 2015 Rm||% change on prior period|
|* Daniel Hechter, LTD and Earthaddict.|
|** LTD Kids, Earthchild and Naartjie.|
|*** Cellular, Truworths Jewellery and cosmetics.|
|Truworths ladieswear||4 794||4 387||9|
|Truworths menswear||2 713||2 386||14|
|Identity||2 186||1 951||12|
|Truworths Designer Emporium*||1 680||1 464||15|
|Truworths Kids Emporium**||816||457||79|
|Group retail sales||17 015||11 644||46|
|Delivery fee income||34||–||n/a|
|Sale of merchandise||16 654||11 290||48|
|YDE agency sales||292||297||(2)|
Interest received increased 21.2% to R1.3 billion (2015: R1.1 billion) due to the growth in the debtors book and increases in the South African repo rate during the period totalling 125 basis points.
Operating profit increased 20.7% to R4.2 billion while the operating margin decreased to 24.9% from 30.5% in 2015 owing to the reduction in the gross margin and the increase in trading expenses mainly as a result of the Office acquisition. Excluding Office the operating margin increased to 30.7%.
Headline earnings per share (HEPS) increased 12.4% to 667.6 cents (2015: 593.8 cents) with fully diluted HEPS increasing 12.5% to 665.9 cents (2015: 592.1 cents).
Adjusted fully diluted HEPS, being fully diluted HEPS adjusted to exclude the impact of the once-off Office transaction-related costs, increased 16.2% to 688.2 cents.
Statements of financial position
The Group's financial position remains strong, with the net asset value per share increasing by 13% to 2 031.8 cents (2015: 1 790.9 cents) since the prior period-end.
As a result of the acquisitions, goodwill and intangible assets increased to R5.4 billion. The purchase consideration for Office was allocated to the identifiable assets and liabilities of Office, based on the externally reviewed statement of financial position at the acquisition date. Additional identifiable assets (including trademarks) and liabilities were recognised on completion of the purchase price allocation, with a corresponding reduction in goodwill.
Inventories increased to R2.4 billion at the end of the period. Excluding the inventory of Office, but including the Earthchild and Naartjie inventories, gross inventory increased 13%. Excluding Office, inventory turn remained at 4.7 times.
During the period the Group raised interest-bearing borrowings of R4.4 billion (R4.2 billion in term loans and R227 million in revolving credit facilities) to fund its operating activities and incurred R208 million in finance costs. The term loans are either repayable annually after three, four and five years or quarterly over five years.
The Group (via its wholly-owned UK resident and managed subsidiary Truworths UK Holdco 1 Ltd) has granted put options to Office management, which holds an 11.1% non-controlling interest. These options give the holders the right to sell their shares in Truworths UK Holdco 2 Ltd in tranches at the end of the 2019, 2020 and 2021 reporting periods upon approval of the audited consolidated accounts of that company for the respective years. The Group has determined that these put options do not transfer a present ownership interest of those shares to the Group. Accordingly, the Group has not recognised a non-controlling interest in equity, but instead recognised a liability of R562 million in relation to these put options in non-current liabilities. In addition, the Group has call options over the shares held by management giving it the right to purchase those shares on the same terms applicable to the put options. These call options have been valued at R15 million and are included in derivative financial assets.
On a pro forma basis as set out later in this report (which includes the results of Office for the five months prior to acquisition, and excludes all exceptional items) the return on equity was 37% (2015: 35%), the return on assets was 26% (2015: 38%) and asset turnover was at 1.1 times (2015: 1.2 times). The reduction in return on assets is due to the fact that the Office business unit has a lower return on assets compared to the Truworths business unit, and the increase in assets due to the goodwill and trademarks raised from the Office acquisition.
The Group's capital management activities focused on the acquisition of Office, the continued investment in the organic growth of the business and on returning funds to shareholders through dividend payments.
During the period the Group raised interest-bearing borrowings of R4.4 billion to fund its operating activities while using the cash generated from operations to fund mainly the Office acquisition and transaction costs (R3.5 billion) and dividend payments (R1.4 billion).
At the end of the period the Group had cash and cash equivalents of R1.6 billion, an increase of 8.9% over the prior period.
The Group's net debt to equity ratio at the end of the period was 33% and its net debt was 0.6 times earnings before finance costs, tax, depreciation and amortisation (EBITDA). To provide for potential further acquisitions the Group's medium-term targeted net debt to equity ratio is 25%. The directors estimate that this ratio could be achieved by the end of the 2017 reporting period by offering scrip dividends, with a cash dividend alternative.
Capital expenditure amounted to R599 million (2015: R380 million), mainly invested in stores, head office, distribution capacity and information technology across Truworths (R562 million) and Office (R37 million). These amounts exclude the assets acquired by the Group through the acquisitions.
A total of R1.4 billion was returned to shareholders through cash dividend payments during the reporting period. No shares were repurchased during the period owing to the Office acquisition.
Pro forma 12-month Office results used in pro forma ratios presented
The following results for the 12 months ended 26 June 2016 were used when calculating certain of the disclosed ratios. These results were adjusted to include the results for the five-month period before the Group gained control of the Office business. The results have also been adjusted to exclude once-off exceptional items for Office. The once-off exceptional items include inventory markdown policy alignment, once-off deal-related fees, the profit on recognition of the call options, and finance-raising fees previously capitalised and written off on refinancing of debt.
|Sale of merchandise
|Cost of sales
|Profit after tax
|Group results as disclosed||16 654||7 837||4 154||2 817|
|Less: Office results for the seven months to June 2016||(3 765)||(2 071)||(193)||(119)|
|Plus: Office results for the 12 months to June 2016||6 052||3 363||260||75|
|(Less)/Plus: Once-off exceptional items||–||(72)||258||225|
|Less: Office results for the 12 months to June 2016, attributable to non-controlling interests||–||–||(58)||(33)|
|Group results used in the calculation of pro forma ratios||18 941||9 057||4 421||2 965|
The 12-month results were translated to South African Rand at an average exchange rate for the 12-month period of R:£ of R21.44 and for the seven-month period of R:£ of R22.15.
Operating profit and profit after tax attributable to equity holders of the company were calculated based on the assumption that 88.9% of the share capital of Office was held by Truworths for the full 12-month period.
The unaudited pro forma ratios presented are the responsibility of the directors. The pro forma information is presented for illustrative purposes only and, due to its nature, may not fairly present the Group's results of operations for the period. In quantifying the pro forma information, the Group has applied the accounting policies adopted by it in its audited annual financial statements, which have been prepared in accordance with IFRS.
Truworths and office business segments
Management monitors the operating results of the business segments separately for the purpose of making decisions about resources to be allocated and of assessing performance. Segmental performance is reported on an IFRS basis and evaluated based on revenue and profit before tax.
|Total third party revenue||14 561||3 773||(103)||18 231|
|Third party||14 458||3 773||–||18 231|
|Sale of merchandise||12 889||3 765||–||16 654|
|Retail sales||13 264||3 751||–||17 015|
|Franchise sales and delivery fee income||10||33||–||43|
|Depreciation and amortisation||259||86||–||345|
|Employment costs||1 426||490||–||1 916|
|Occupancy costs||1 265||557||–||1 822|
|Trade receivable costs||1 092||–||–||1 092|
|Other operating costs||794||374||(103)||1 065|
|Interest received||1 287||1||–||1 288|
|Operating profit||3 961||193||–||4 154|
|Profit for the period||2 698||119||–||2 817|
|Profit before tax||3 789||157||–||3 946|
|Tax expense||(1 091)||(38)||–||(1 129)|
|Credit:cash sales mix||(%)||69:31||0:100||–||53:47|
This analysis covers the performance of the Truworths business unit in South Africa and in the rest of Africa, including YDE but excluding Office. The performance however includes the R3.5 billion investment in Office by Truworths, the term loans of R2.6 billion to fund the operations of Truworths and the additional interest expense incurred by Truworths.
Statements of comprehensive income
Sale of merchandise
Sale of merchandise increased by 14.2% to R12.9 billion (2015: R11.3 billion). Retail sales in Truworths increased 13.9% to R13.3 billion while product inflation averaged 9.1% for the period. Excluding the retail sales of the two acquired businesses, Earthchild and Naartjie, retail sales increased 11.3% to R12.8 billion.
Comparable store retail sales increased by 7.3% (2015: 1.3%), while product inflation averaged 9.5% (2015: 5.6%). Excluding the retail sales of the two acquired businesses, credit sales accounted for 70% (2015: 71%) of retail sales. Trading space increased by 4.0% (3.8% excluding Earthchild and Naartjie).
Cash sales increased by 21% while credit sales growth of 11% was negatively impacted by the new affordability assessment regulations (refer to the Truworths: Managing the Risk of Credit report for further detail). It is estimated that the impact of the new affordability assessment regulations on retail sales has been at least R200 million, translating into an estimated HEPS impact of 17 cents.
Comparable store sales, product inflation and unit sales growth are detailed in the table below:
|Retail sales growth analysis||Retail sales
|Retail sales growth
|Like-for-like (LFL) store growth
|Unit growth: comparable stores
|Unit growth: non-comparable stores
|Jun 2016 (52 weeks)||13 264||14||7||9||(2)||7|
|Jun 2015 (52 weeks)||11 644||8||1||6||(5)||7|
|Jun 2014 (52 weeks)||10 762||7||1||9||(8)||6|
|Jun 2013 (52 weeks)||10 074||13||8||2||6||5|
|Jun 2012 (52 weeks)||8 921||10||6||8||(2)||4|
The South African operations accounted for 96.0% (2015: 96.2%) of the Truworths business unit's retail sales with the 47 stores in the rest of Africa contributing 4.0% (2015: 3.8%).
|Retail sales outside South Africa||Retail sales June 2016
|Retail sales June 2015
|Number of stores
|Number of stores
The gross margin improved by 10 basis points to 55.3%, benefiting from lower markdowns in the period.
|Analysis of trading expenses||2016
|2016 % of sale of merchandise||2015 % of sale of merchandise|
|* R794 million less R100 million of once-off transaction fees on-charged to Office.|
|Depreciation and amortisation||259||221||17||2.0||2.0|
|Employment costs||1 425||1 186||20||11.0||10.5|
|Occupancy costs||1 265||1 102||15||9.8||9.8|
|Trade receivable costs||1 092||960||14||8.5||8.5|
|Other operating costs||694*||647||7||5.4||5.7|
|Trading expenses||4 735||4 116||15||36.7||36.5|
- Depreciation and amortisation increased by 17% mainly due to store expansion as well as the additional assets purchased on the acquisition of Earthchild and Naartjie. Excluding non-comparable stores, depreciation increased 3%.
- Employment costs grew by 20% primarily as a result of the Earthchild and Naartjie acquisitions and the additional cost of providing benefits to certain flexi-staff following amendments to labour law. Excluding these items, incentive payments, share scheme costs and non-comparable store costs, employment costs increased by 11%, which includes growth in full-time equivalent employees of 4%.
- Occupancy costs increased by 15%, driven by trading space growth of 4%, average rental escalations of 7% and electricity cost increases of 20%. Comparable occupancy costs increased by 9%.
- Trade receivable costs increased by 14%. The doubtful debt allowance improved from 12.5% to 12.3% of gross trade receivables and the net bad debt as a percentage of gross trade receivables improved from 12.5% to 12.4%.
- Other operating costs increased by 7% and include foreign exchange gains of R34 million (2015: R5 million gain). Excluding the foreign exchange gains in both years, other operating costs increased by 12%.
Total interest received increased by 21% to R1 287 million. Trade receivable interest, excluding notional interest, increased by 25% to R1 111 million owing to the increases in the repo rate totalling 125 basis points, as well as an 11% increase in credit sales.
Trading and operating profit
Trading profit increased by 12% to R2.7 billion (2015: R2.4 billion) and the trading margin declined from 21.0% to 20.6%.
Operating profit (profit before finance costs and tax) increased by R518 million or 15% to R4.0 billion (2015: R3.4 million), with the operating margin 20 basis points higher at 30.7% as a result of the 21% increase in interest received.
This analysis covers the financial performance of the Office business unit for the 31 weeks to 26 June 2016.
Statements of comprehensive income
Sale of merchandise
Sales of merchandise of Office at £170 million for the 31 weeks since acquisition were level with the corresponding prior period. Unseasonal weather hampered sales of ladies own-brand shoes but were partly off-set by the strong performance in the largest category of branded sports shoes.
Online sales continued the strong growth trend and now account for 24% of sale of merchandise (2015: 21%).
The UK accounted for 92% of sale of merchandise, with Germany and the Republic of Ireland both contributing 4%.
Like-for-like retail sales, including stores and e-commerce, were 1.4% lower for the period. E-commerce increased by 21.7% and store like-for-like sales were 7.6% lower. Trading space increased by 2.4%.
Office's trading density improved from £17 754 to £18 316 per square metre.
|Sale of merchandise||Sale of merchandise
|Number of stores
|* Includes 44 concession stores.|
|Republic of Ireland||6||5|
The gross margin declined from 46.6% to 45.0% owing to the increased stock provisioning to align with Truworths' stock management philosophy.
The weak sales performance has necessitated higher promotional and markdown activity.
A process was also started to improve the stock turn by reducing stock levels through more aggressive markdowns.
Operating profit and margin
Operating profit included in the Group results for the 31 weeks was R193 million and would have been R298 million had all once-off exceptional items been excluded.
GROUP INFORMATION TECHNOLOGY
The Group continues to invest in best-of-breed information technology (IT) to support its retail trading operations and supply chain. Capital expenditure of R82 million (2015: R71 million) was invested in the upgrading and installation of new IT systems and infrastructure.
The Group has committed R80 million for Truworths and Office IT capital expenditure for the 2017 reporting period.
Major IT developments undertaken during the reporting period include the following:
- A new automated warehouse management system was implemented to improve stock management and measurement in the distribution centres.
- The call centre infrastructure was replaced with an outsourced, hosted solution which will provide access to new technology on an ongoing basis while containing costs.
- The e-commerce project to expand the Truworths omni-channel and online sales offering is on track for implementation in the second half of the 2017 reporting period.
Key projects for the new reporting period will include upgrading components of the retail merchandising systems to provide the capability to support e-commerce, multi-country expansion, customer loyalty and the integration of any further acquisitions; a new finance budget planning and forecasting system; the initial phase of a new collections system; and the implementation of an enterprise content management solution for head office and store documentation.
The largest infrastructure projects will be the installation of a new fibre-based wide area network to provide broadband real-time connectivity to top stores and the replacement of the head office PABX system with an outsourced, hosted solution.
The main focus of IT development during the reporting period was on enhancing Office's e-commerce and web capability. The footprint of stores able to fulfil online sales was expanded and the business piloted the broader use of web-assisted selling through in-store tablets. New virtualised technologies, server and storage were introduced and the e-commerce back-end systems were migrated onto this environment.
Web supply chain processes were improved to ensure Office can manage web demand peaks including Black Friday, the biggest shopping day on the retail calendar.
The integration and rationalisation of systems between Truworths and Office will be one of the Group's main IT focus areas in the short-term. Priority projects will address merchandise planning, business intelligence and labour scheduling as well as upgrading Office's financial and human resources systems.
As Office has operated a less advanced IT and systems infrastructure, modified Truworths systems and processes will be adopted where appropriate. As the Group will now be operating two IT teams across different locations, strong collaboration tools will be implemented to ensure that IT policies and processes are aligned.
EXCELLENCE IN INTEGRATED REPORTING
It is pleasing to report that the Group's 2015 Integrated Report was placed sixth in the EY Excellence in Integrated Reporting Awards which ranks the reports of the top 100 companies by market capitalisation on the JSE. This is the ninth consecutive year that the Group has been ranked in the top ten of the EY reporting awards.
These awards are independently judged by the University of Cape Town's College of Accounting and are widely regarded as the benchmark for integrated reporting in the country.
GROUP PLANS AND TARGETS FOR 2017
The financial and operating targets for the 2017 reporting period are as follows:
|Gross margin||(%)||51 – 55|
|Operating margin||(%)||21 – 25|
|Return on equity||(%)||30 – 35|
|Return on assets||(%)||22 – 27|
|Inventory turn||(times)||3.0 – 4.0|
|Asset turnover||(times)||0.9 – 1.3|
The Group is committed to investing in the longer-term growth of the business and capital expenditure of R547 million is planned for the 2017 period, including:
- R332 million for new stores and the expansion and refurbishment of existing stores;
- R97 million for distribution facilities;
- R80 million for information systems; and
- R35 million for land and buildings.
Trading space is planned to increase by approximately 3% (Truworths 3% and Office 6%).
Thank you to our shareholders for your continued confidence in the Group and we welcome those who invested for the first time during the year. My colleagues in the finance departments in Truworths and Office provide invaluable support and I thank them in particular for their hard work and commitment during the Office transaction and in the subsequent integration phase.
Chief Financial Officer