Chief Executive Officer's Report
2017 is a momentous year for the Group. Not only does it mark the founding of Truworths 100 years ago but, even more significantly, it is also the start of our next 100 years of leading fashion.
We are immensely proud of reaching our first century of operation when looking back on the achievements which have brought us to where we are today. Truworths International is one of the largest apparel retailers in Africa, has a growing presence in the United Kingdom, generates retail sales of over R18 billion and has financial and operating metrics among the highest of its fashion retail peers worldwide.
However, as a high fashion retailer our focus is always on the future, looking to the seasons ahead to ensure we continue to exceed the expectations of our customers for quality internationally styled fashion.
As Truworths embarks on its next 100 years we remain committed to our business philosophy which has seen us thrive in good times and prove resilient in tough times.
This business philosophy drives the Truworths business model and ensures that we remain aligned with our strategic direction. While we change tactics to adapt to market conditions, competitive forces, environmental challenges and opportunities, our business philosophy remains intact and has not changed since being introduced more than two decades ago.
More recently a business philosophy has been developed for Office, confirming the brand’s core purpose of being the world authority on fashion footwear.
Our business philosophies have never been more relevant than in the current constrained retail environment.
Over the past year Truworths was impacted by pressure on consumer spending in the depressed economic climate in South Africa, while uncertainty in the United Kingdom in the aftermath of the Brexit vote contributed to volatile trading conditions for Office.
The retail trading environment locally has created stress in the market and led to increased markdown and promotional activity, as well as the closure of retailers and the down-scaling of others.
The affordability assessment regulations in SA continued to restrict new account growth and limit account sales. The onerous administrative burden requiring customers to produce documentation to verify their income contributed to the Truworths active account base declining by 4% to 2.5 million. Account granting strategies have been implemented in an attempt to mitigate the impact of the regulations and have largely arrested the decline in the number of active accounts in the second half of the financial period. The court proceedings initiated by Truworths and two other listed retailers against the National Credit Regulator and the Minister of Trade and Industry was heard in August 2017, with judgment pending.
Despite these adverse trading conditions the Group achieved all the board-approved financial targets set at the start of the year. Group retail sales for the 53 weeks increased by 9% to R18.5 billion, with Truworths contributing sales of R13.4 billion and Office R5.1 billion (£294 million). On a fully comparable basis retail sales for the period were unchanged.
The Group’s retail footprint increased to 937 stores following the opening of a net eight new stores during the year. The store footprint comprises 734 stores in South Africa, 141 in the United Kingdom, 47 in the rest of Africa, eight in Germany and seven in the Republic of Ireland (including 38 concession outlets). Overall, trading space grew by 1.5%.
The Group’s gross margin reduced by 30 basis points to 52.6%, with the results of the lower-margin Office business included for the full period compared to only 31 weeks in the prior period. Truworths’ gross margin remained stable at 55.2% (2016: 55.3%), with the Office margin strengthening to 46.0% (2016: 45.6%, excluding exceptional items).
While the South African credit market continues to stabilise, large credit retailers have experienced a reduction in the number of active accounts. It is most encouraging that Truworths increased its market share of, and showed year-on-year growth in, the number of new accounts opened in the second half of the reporting period.
The Group’s debtors book was unchanged at R5.8 billion. Overdue values as a percentage of the total debtors book and the percentage of active account holders able to purchase at the period-end were unchanged at 14% and 82% respectively, while the new account acceptance rate has increased from 24% to 26%. The doubtful debt allowance increased to 12.7%, up from 12.3% at June 2016.
Operating profit increased by 1% to R4.2 billion while the operating margin decreased to 23.3% from 24.9% owing to higher trading expenses and Office being included for the full 53 weeks.
A detailed analysis of the financial performance is included in the Chief Financial Officer’s report.
Sharpen the saw
We continually re-energise and reinvigorate the business to maintain our market leadership. In response to the tough market conditions we are currently experiencing the Group has embarked on a programme to ‘sharpen the saw’.
Customer loyalty programmes were launched for Truworths (TruRoyalty) and Identity (iDream) in the second half of the period, aimed at increasing the customer’s basket size and frequency of shopping. The programmes have attracted over 2 million non-account customers in addition to the 2.5 million active account customers who are automatically members of the programmes.
Office has been re-energised under its strong leadership team and is poised for growth. The world-class Office e-commerce platform and online offering is being further enhanced, while a totally modernised store design is being implemented for new stores.
Systems are being upgraded to remain at the forefront of technology, while new supply chain systems and refined processes are benefiting margin management, inventory control and ensuring faster lead times.
Shortly after the end of the reporting period the Group acquired Loads of Living1, an upmarket South African linen and homeware chain, and also launched Office London footwear stores in South Africa. The new e-commerce platform for Truworths and Office London is scheduled for launch in the first half of the new financial period (refer to short-term growth strategies below).
Short-term growth strategies
Integration of Office
Good progress has been made with the ongoing integration of Office into the Group, with the business reporting lower stock levels and an improved inventory turn following alignment with Truworths’ retail processes and systems. Office has generated cash from operating activities of approximately £50 million (approximately R850 million) since acquisition and it is estimated that the Group’s share of the equity value of R3.4 billion will be paid back over a period of five to six years.
The Group will continue to pursue its strategy of complementing organic growth with the acquisition of fashion businesses that meet the board’s investment criteria, with the primary focus on the United Kingdom and Europe. The acquisition of the Loads of Living chain of 14 stores in South Africa will accelerate the Group’s entry into the fashion homeware market. Management plans to upgrade the store design, review the product range and expand the store base to ensure that the Group becomes a meaningful player in this market within the next five years.
Launch of Office London
Based on the success of Office in the United Kingdom the Group has introduced Office London into the South African market, with 10 stores being opened during August 2017. The in-store offering of branded and in-house designed footwear will be complemented by an online offering.
Expand kidswear presence
The Kids Emporium concept is unique in South African retail and houses the LTD Kids, Earthchild and Naartjie brands. A further 18 Kids Emporiums were opened in the 2017 financial period, increasing the footprint to 32. Customer response to the kidswear offering creates the opportunity for sustained store expansion for several years.
E-commerce and online shopping
Truworths will be launching its new e-commerce site in the first half of the 2018 financial year. Through the online store customers will ultimately have access to the full range of Truworths, Identity, kidswear and Office London merchandise, with several payment options and delivery choices to ensure a convenient customer experience. The recently launched TruRoyalty and iDream customer loyalty programmes will be aligned with the new online offering.
Expanding retail presence and e-commerce
Office plans to expand its store footprint in the UK by opening 10 to 15 stores in the next two years, and about 5 stores in Europe over the next three years. The current e-commerce offering will be enhanced to offer customers an omni-channel shopping experience while a loyalty-based marketing programme is being developed to drive new and repeat purchases.
Trading conditions in our two major markets of South Africa and the United Kingdom will remain constrained in the year ahead, although there are encouraging signs in the outlook for world economic growth over the next 12 to 18 months.
Political uncertainty and the increased pressure on consumers’ disposable income will ensure that the South African trading environment remains challenging.
Despite these headwinds we expect Truworths’ performance to begin to show early signs of improvement in the 2018 financial period. Factors currently driving the prospects on the upside are the low to negative outlook for product inflation, stability in the debtors book, ongoing cost containment and the relatively lower base set in the 2017 financial period.
The continued impact of the affordability regulations remains a concern as they unreasonably restrict Truworths’ ability to open new accounts and to grow account sales. We do, however, expect the Truworths’ active account base to slowly increase in the 2018 financial period.
The trading environment for Office in the UK is expected to remain uncertain, with low economic growth prospects. We do, however, expect to realise ongoing benefits from the integration of Office, which will continue in the 2018 financial period.
We remain committed to investing for long-term growth and capital expenditure of R636 million (Truworths R493 million and Office R143 million) has been committed for the year ahead. Trading space is expected to grow by approximately 4% (Truworths 4% and Office 2%).
Thank you to our Chairman, Hilton Saven, and my fellow directors for their insight and counsel, and for sharing their collective wisdom.
The executive teams in Truworths and Office have again demonstrated outstanding leadership in particularly difficult trading conditions and I commend them on a job well done. I also extend my appreciation to our employees in Truworths and Office for their commitment and teamwork.
Thank you to our customers for making us their first choice for quality fashion apparel and footwear. We look forward to your continued support as we embark on our next hundred years of business.
Chief Executive Officer