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Retail trading environment

Introduction

Trading conditions in the Group’s two major markets proved challenging in the past year and overall retail sales reflect the deteriorating state of the consumer economy in South Africa and the prevailing uncertainty and environment of low growth in the United Kingdom.

The South African environment has been marked by political uncertainty, muted economic growth, credit-rating downgrades and negative consumer sentiment, while the economic environment in the United Kingdom has been dominated by the impact of the decision to withdraw from the European Union.

Retail Trading in
SOUTH AFRICA

Consumer confidence recorded its 10th consecutive negative quarter, with sentiment measuring -9 in the second quarter of calendar 2017. Business confidence is at its lowest level since the financial crisis in 2009.

Currently over 6.2 million South Africans are jobless and the prospects for job creation are severely limited by the lack of economic growth in the country. The national unemployment rate was at a 13-year high of 27.7% in the first and second quarters of calendar 2017.

While the consumer credit market has stabilised, the National Credit Regulator’s affordability assessment regulations continue to have a marked impact on credit-based retailers.

Although Truworths has implemented action plans to mitigate the severity of the impact of the affordability assessment regulations, these have continued to restrict the opening of new customer accounts and limit account sales. The court proceedings initiated by Truworths and two other listed retailers was heard in August 2017 with judgment pending at the date of preparation of this report.

Interest rates remained stable throughout the 2017 financial period, but shortly after the period-end, were reduced by 25 basis points to 10.25%, which is positive for credit consumers.

Truworths directly or indirectly imports approximately 65% of its fashion merchandise and is therefore exposed to the volatility of the Rand/US dollar exchange rate. While the Rand appreciated against the US dollar during the 2017 financial period, product inflation in Truworths peaked at around 16% for the summer 2016 season owing to the sharp depreciation in the Rand in the previous financial period. There is a lag effect on inflation as orders for forthcoming seasons and forward exchange contract rates are secured well in advance. However, product inflation moderated in the second half of the reporting period to average 12% for the full 2017 financial period.

Retail Trading in the
REST OF AFRICA

Truworths has 47 stores in 8 countries in the rest of Africa. Trading conditions have been extremely challenging owing to the depreciating currencies and weakening consumer economies in most of the countries in which Truworths trades. In addition, commodity-based economies like Ghana and Zambia have been severely impacted by continued pressure on commodity prices. The environment in Ghana has resulted in trading no longer being viable and the process to close the four stores in the country has started. Despite the muted growth in retail sales in most territories, Truworths is committed to its strategy of cautious growth in Africa and will be expanding its store footprint in Kenya and Namibia while opening its first stores in Mozambique in the 2018 financial period.

Retail Trading in the
UNITED KINGDOM

The decision in June 2016 for the UK to end its membership of the European Union created widespread uncertainty and contributed to volatile trading conditions over the past year.

Consumer sentiment was negatively affected in the aftermath of Brexit, with UK consumer confidence in June 2017 measuring the lowest in the past year. However, business confidence has recovered from the low levels immediately after the Brexit referendum.

The depreciating value of the pound post-Brexit has been one of the main contributors to the increase in the UK inflation rate which reached 2.9% in May, the highest level since mid-2013.

The weaker pound has also reduced the Group’s foreign revenues and profits when translated into Rand.

The BDO High Street Sales Tracker, which measures like-for-like sales across over 80 UK retailers with a total of more than 10 000 stores, indicates that retail sales increased in only four of the past 12 months. Fashion retail sales, covering footwear, clothing and accessories, grew by 1.4% for June 2017 but have remained under pressure throughout the year and showed a decline in nine of the 12 months.

Nonetheless, online sales in the UK have continued the strong growth trend of recent years and increased at a rate of over 20% in six of the past 12 months.

Besides the overarching advantages of convenience and choice, online sales in the UK also benefit from periods of adverse weather and busy trading times such as Christmas, Black Friday and celebratory holidays when shoppers prefer to avoid crowded high streets and malls. In the year under review online sales have also been boosted by international customers taking advantage of the weaker pound post-Brexit. E-commerce sales in Office, accounted for 28% of the footwear retailer’s total sales in the period under review.

Retail Trading in the
REST OF EUROPE

Office has 15 stores across the rest of Europe: eight in Germany and seven in the Republic of Ireland. The German economy has remained buoyant, expanding for the past 12 consecutive quarters to June 2017. Consumer spending has been bolstered by unemployment being at a record low since 1980 with confidence levels at their highest since the global financial crisis in 2008/9. The Republic of Ireland has one of the fastest-growing economies in the Euro zone. Buoyant consumer spending has been supported by a nine-year low in the unemployment rate and confidence levels at a post-Brexit peak. However, the weakening of the pound against the euro has meant that the solid revenues generated by the Irish and German businesses have not translated into sterling bottom-line growth.