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Chief Financial Officer's Report

During the 2017 reporting period the Group encountered tough economic conditions in the South African and United Kingdom markets with Truworths’ account sales continuing to be impacted by the affordability assessment regulations. While Group retail sales were slower than expected and effectively remained unchanged on the prior period (on a 52-week basis and in constant currency), the Group demonstrated good management of costs, margins, inventory and debtors. The business remained strongly cash generative with a healthy cash balance and robust balance sheet at the end of the period.

David Pfaff

Chief Financial Officer

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In this environment it is pleasing that the Group achieved all seven of its published financial and operating targets set for the 2017 period.

The Group’s operating profit increased by 1% to R4.2 billion and diluted headline earnings per share (HEPS) were 1% lower at 661 cents.

Cash generated from operations increased by 8% to R3.0 billion and the Group’s cash balance was 29% higher at R2.1 billion at the end of the financial period.

Importantly, the directors have shown their confidence in the Group’s prospects in this challenging trading environment and maintained the annual dividend at 452 cents per share, with a dividend cover of 1.5 times.


The Group’s ability to create value for shareholders is impacted by several factors in the operating environment. These factors or risks are monitored on a continuous basis to ensure the Group is able to identify and implement appropriate mitigating strategies as part of its financial risk management policies and overall risk governance strategy.

Impact Low economic growth, political instability and the sovereign credit-rating downgrades in South Africa, and Brexit in the United Kingdom, collectively contribute to declining consumer disposable income and negative consumer sentiment, which in turn have a direct impact on the Group’s ability to grow sales revenue. Exchange rate volatility has a direct impact on the cost of imported goods, specifically in Truworths where approximately 65% of all merchandise is imported and US dollar denominated, which in turn constrains sales growth in an economy dominated by uncertainty and growing pressure on consumers’ disposable income.

The weaker pound has increased the cost of euro-denominated imports and other inputs incurred by Office, and reduced the Group’s foreign revenues and profits when translated into Rand.

The introduction of additional credit affordability assessment regulations in September 2015 has inhibited our ability to grow the number of active accounts, resulting in pressure on account sales.
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  • Diversifying the brand offering through the launch of Office London in South Africa and acquisition of Loads of Living.
  • Expand kidswear offering.
  • Complement organic growth with acquisition of fashion businesses, with a focus on the United Kingdom and Europe.
  • Launched TruRoyalty and iDream loyalty programmes in Truworths.
  • Enhanced Office’s online offering and preparing to launch enhanced e-commerce platform and websites in Truworths across all brands.
  • Focus on cost containment through tight financial control to mitigate the bottom-line impact of subdued top-line growth.
  • All import orders are covered using forward exchange contracts in terms of the Group’s currency risk management policy.
  • The gross profit margin is protected through forward cover, by planning in value rather than units to contain markdowns and through quick reaction to sales performance.
  • Together with two other major listed retailers, Truworths instituted legal action against the National Credit Regulator and the Minister of Trade and Industry in 2016 to have the affordability regulations reviewed. The matter was heard in
    August 2017, with judgment pending.
  • Introduced several strategic initiatives to reduce the gap between number of account applications and number of new accounts opened.
  • Focus on improving sales from existing customers through account limit management and customer reactivation.
  • Grow cash sales base by introducing brands that are aimed at attracting more affluent cash customers.

Analysis of Financial Performance

The following analysis of performance aims to demonstrate how the Group’s financial capital has been increased, decreased or transformed through the Group’s operating and investing activities in the 2017 reporting period, and how the effective management of this capital is expected to contribute to value creation for shareholders in the short, medium and long-term.

In line with the general practice in the South African retail industry, the Group manages its operations in accordance with a retail calendar, which treats each financial year as an exact 52-week period. This treatment effectively results in the 'loss' of a day (or two days in a leap year) each calendar year. These days are brought to account every four to seven years by including a 53rd week in the financial reporting calendar, as is the case for the 2017 financial period.

All results are reported for the 53-week period and, where relevant, performance for the 52 weeks has been included to allow for meaningful comparison with the prior financial period and to ensure transparent reporting to shareholders. For more detail refer to note 12 in the 2017 Preliminary Report on the Audited Group Annual Results available at

It is also important to note that the prior period results include the non-comparable 31 weeks’ results of the Group’s UK business, Office, which was acquired in December 2015.

The following review of financial performance for the 53-week period ended 2 July 2017 should be read together with the Group’s Audited Annual Financial Statements, published on the Group’s website at


Group financial and operating targets

Targets are published to provide guidance to shareholders on the Group’s financial performance objectives for the forthcoming financial 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.

Gross margin (%) 52.6 51 – 55 44.3 56.1
Operating margin (%) 23.3 21 – 25 16.6 14.9
Return on equity (%) 31 30 – 35 30 29
Return on assets (%) 26 22 – 27 26 22
Inventory turn (times) 4.5 3.0 – 4.0 3.8 3.3
Asset turnover (times) 1.1 0.9 – 1.3 1.6 1.6
Net debt to equity (%) 18 25
* The local benchmarks are based on the average ratios for comparable JSE-listed apparel retailers for the 2017 period.
** The global benchmarks are based on the average ratios for global fashion retailers, H&M and Inditex, for the 2016 period.
Statements of comprehensive income
Sale of merchandise

Group retail sales increased by 9% (6% on a pro forma 52-week basis) to R18.5 billion, with cash sales growth of 16% and account sales growth of 2%.

Account sales comprised 50% (2016: 53%) of retail sales for the period.

Group sale of merchandise, which comprises Group retail sales, together with wholesale and franchise sales and delivery fee income, less accounting adjustments, grew 8% (6% on a pro forma 52-week basis) to R18.1 billion (2016: R16.7 billion).

Group trading space increased by 1.5% following the opening of a net eight stores. At the end of the period the Group had 937 stores (including 38 concession outlets) (2016: 929 including 44 concession outlets).

Divisional sales 2017
53 weeks
Pro forma
52 weeks
52 weeks
Change on
period 53 on 52
Change on
period 52 on 52
Office@ 5 081 4 984 3 751 35 33
Truworths Ladieswear Emporium 4 672 4 556 4 794 (3) (5)
Truworths Menswear Emporium 2 813 2 736 2 713 4 1
Identity 2 129 2 075 2 186 (3) (5)
Truworths Designer Emporium 1 696 1 657 1 680 1 (1)
Truworths Kids Emporium# 896 878 816 10 8
Other^ 1 185 1 159 1 075 10 8
Group retail sales 18 472 18 045 17 015 9 6
Delivery fee income 53 52 34 56 53
Wholesale sales 50 50 n/a n/a
Franchise sales 8 8 9 (11) (11)
Accounting adjustments (518) (518) (404) 28 28
Sale of merchandise 18 065 17 637 16 654 8 6
YDE agency sales 278 274 292 (5) (6)
@ Office sales for the prior period represents the 31 weeks since acquisition and were translated at a significantly higher average exchange rate (R/£ 22.15) compared to the current period’s 53-week sales (R/£ 17.27).
Daniel Hechter, LTD and Earthaddict.
# LTD Kids, Earthchild and Naartjie.
^ Cellular, Truworths Jewellery and Cosmetics divisions.
Gross margin

The Group’s gross margin was 52.6% (2016: 52.9%). The lower gross margin of Office, which is now consolidated for the full period, compared to only 31 weeks in the prior period, has impacted the Group’s gross margin.

Trading expenses

Trading expenses increased 14% to R7.1 billion (2016: R6.2 billion) and constituted 39.2% (2016: 37.5%) of sale of merchandise.
The increase is principally due to the financial results of Office only being included for 31 weeks in the prior period. For further detail on trading expenses refer to the Truworths and Office sections in this report.

Interest received

Interest received increased 15% to R1.5 billion (2016: R1.3 billion), resulting mainly from increases totalling 125 basis points in the South African repo rate since the commencement of the prior period.

Operating profit

Operating profit increased 1% to R4.2 billion while the operating margin decreased to 23.3% from 24.9% owing to the increase in trading expenses.

Finance costs

Interest-bearing borrowings were raised in Truworths five months into the prior period to fund operating expenditure, and therefore Group finance costs have increased to R295 million (2016: R208 million).


HEPS and diluted HEPS declined marginally by 1% to 662.0 cents and 660.9 cents respectively. Relative to the prior period’s adjusted diluted HEPS1 of 688.2 cents, diluted HEPS decreased 4%. Excluding the 53rd week’s performance from the period, the pro forma diluted HEPS for the 52-week period decreased by 6% to 626.0 cents.

Statements of financial position

The Group’s financial position remains strong, with net asset value per share increasing by 8% to 2 200.7 cents (2016: 2 031.8 cents).

Goodwill and intangible assets decreased 14% and 16% respectively, mainly due to the weakening of the pound sterling.

Inventories decreased by 20% to R1.9 billion at the end of the period. Gross inventory decreased 18% and inventory turn improved to 4.5 times (2016: 3.3 times). The inventory of Office reduced from £57 million at the prior period-end to £47 million due to the strategic focus on optimising the Office stock holding. The Office inventory turn improved to 3.4 times in pound sterling (2016: 2.7 times, compared to 2.5 times in 2015 prior to being acquired by the Group). Excluding the inventory of Office, gross inventory decreased 5% and inventory turn increased to 5.2 times (2016: 4.7 times).

Interest-bearing borrowings at the period-end decreased to R3.8 billion from R4.4 billion at the prior period-end as a consequence of scheduled loan repayments, the settlement of the Office short-term funding, as well as a more favourable pound sterling translation rate.

Included in non-current liabilities is a liability of R400 million (2016: R562 million) in relation to put options granted to the non-controlling management shareholders in Office, while derivative financial assets of R11 million (2016: R15 million) represent the call options of the Group over the shares in question.

Trade and other payables decreased 25% to R1.6 billion (2016: R2.2 billion) because creditor payments for June 2017 were made before the period-end compared to June 2016 when such payments were made after the period-end.

Capital management

The Group’s capital management activities focused on the continued investment in the organic growth of the business and on returning funds to shareholders through dividend payments and share buy-backs.

During the period the Group generated R3.0 billion in cash from operations and this funded mainly cash dividend payments of R1.5 billion, capital expenditure of R467 million, share buy-backs of R101 million and loan repayments of R324 million. At the end of the period the Group had cash and cash equivalents of R2.1 billion, an increase of 29% on the prior period-end.

The Group’s net debt to equity ratio at the end of the period was 18% (2016: 33%) and 0.4 times EBITDA (2016: 0.6 times).

The net debt to equity ratio at the period-end is comfortably below the Group’s medium-term targeted net debt to equity ratio of 25%.

1. Diluted HEPS adjusted to exclude the impact of the once-off Office transaction-related costs in the prior period.

Truworths and Office business segments

Management monitors the operating results of the Truworths and Office 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 with reference to revenue and profit after tax.

2017 Truworths
Total third party revenue 14 699 5 163 (4) 19 858
   Third party 14 695 5 163 19 858
   Inter-segment 4 (4)
Sale of merchandise 12 907 5 158 18 065
   Retail sales 13 391 5 081 18 472
   Accounting adjustments (497) (21) (518)
   Wholesale and franchise sales and delivery fee income 13 98 111
Depreciation and amortisation 277 112 389
Employment costs 1 438 656 2 094
Occupancy costs 1 361 794 2 155
Trade receivable costs 1 207 2 1 209
Other operating costs 875 368 (4) 1 239
Interest received 1 477 1 1 478
Operating profit 3 763 447 4 210
Finance costs 253 42 295
Profit for the period 2 514 352 2 866
   Profit before tax 3 510 405 3 915
   Tax expense (996) (53) (1 049)
Gross margin (%) 55.2 46.0 52.6
Trading margin (%) 17.5 8.6 15.0
Operating margin (%) 29.2 8.7 23.3
Inventory turn (times) 5.2 3.5 4.5
Account:cash sales mix (%) 70:30 0:100 50:50


This analysis covers the performance of the Truworths business segment, which operates in South Africa and in the rest of Africa, and includes YDE.

Statements of comprehensive income
Sale of merchandise

Sale of merchandise remained unchanged at R12.9 billion, and decreased by 2% to R12.6 billion for the comparable 52-week period on a pro forma basis.

Retail sales in Truworths increased 1% to R13.4 billion (but declined by 2% to R13.1 billion for the comparable 52-week period) with cash sales contracting by 2% and account sales growing by 2%. Account sales comprised 70% (2016: 69%) of retail sales. Product inflation averaged 12% for the period.

The South African operations accounted for 96% (2016: 96%) of the Truworths segment’s retail sales with the 47 stores in the rest of Africa contributing the balance.

Retail space increased by 1.6% as a net 11 new stores were opened.

The trading density remains among the highest in the local retail sector at R37 261 per m² p.a. (2016: R37 350 per m² p.a.).

Gross margin

The gross margin remained stable at 55.2% (2016: 55.3%).

Trading expenses

Excluding the foreign exchange movements in both years, trading expenses increased 6% and reflect the positive impact of management’s cost-saving initiatives.

Analysis of trading expenses 2017
Depreciation and amortisation 277 259 7
Employment costs 1 438 1 426 1
Occupancy costs 1 361 1 265 8
Trade receivable costs 1 207 1 092 11
Other operating costs 875 694# 26*
Total trading expenses 5 158 4 736 9**
# R794 million less R100 million of once-off transaction fees on-charged to Office.
* 7% excluding the impact of foreign exchange gains and losses in both periods.
** 6% excluding the impact of foreign exchange gains and losses in both periods.
  • Depreciation and amortisation increased by 7% mainly as a result of capital expenditure of R407 million. Excluding non-comparable stores, depreciation increased 5%.
  • Employment costs grew by 1%. Excluding non-comparable stores and other non-comparable costs (incentives and share scheme expenses), employment costs increased 5%.
  • Occupancy costs increased by 8% driven by trading space growth of 1.6%, average rental escalations of 7% and utility cost increases of 10%. Comparable occupancy costs increased by 5%.
  • Trade receivable costs increased by 11% and the doubtful debt allowance increased from 12.3% to 12.7% of gross trade receivables. Net bad debt as a percentage of gross trade receivables increased from 12.4% to 15.0% as a result of no growth in the book and increased bad debts resulting from high account sales growth in the prior period. Trade receivable income of R1 426 million exceeded the trade receivable costs of R1 385 million by R41 million.
  • Other operating costs increased by 26%, but excluding the foreign exchange movements in both years (2017: losses of R93 million; 2016: gains of R34 million), other operating costs increased by 7%.
Interest received

Total interest received increased by 15% to R1 477 million. Trade receivable interest, excluding notional interest, increased by 13% to R1 260 million owing to increases totalling 125 basis points in the South African repo rate since the commencement of the prior period.

Finance costs

Trading operations have been partly financed through interest-bearing borrowings since December 2015. Finance costs increased to R253 million (2016: R171 million) due to the interest incurred on these borrowings for the full 12 months in the current period.

Trading and operating profit

Trading profit decreased by 15% to R2.3 billion (2016: R2.7 billion) and the trading margin declined from 20.6% to 17.5%.

Operating profit (profit before finance costs and tax) decreased by 5% to R3.8 billion (2016: R4.0 billion), with the operating margin reducing from 30.7% to 29.2%.


This analysis covers the financial performance of the Office business segment, which operates in the United Kingdom, Germany and Republic of Ireland.

Statements of comprehensive income
Sale of merchandise

Sale of merchandise increased by 6% to £299 million (R5.2 billion) and by 4% on a pro forma 52-week basis relative to the comparable prior period.

Retail sales grew by 5% to £294 million (R5.1 billion) (increase of 3% for the comparable 52-week period) relative to the comparable prior period’s retail sales of £281 million (R6.0 billion). Of these retail sales, £169 million (R3.8 billion) was included in the Group’s results for the prior period with effect from the December 2015 acquisition date. Trading space decreased by 0.4%.

E-commerce sales showed continued strong growth and now account for 28% of total retail sales.

The United Kingdom accounted for 92% of retail sales, Germany 5% and the Republic of Ireland 3%.

Retail sales 2017
53 weeks
52 weeks
Number of
52 weeks
Number of
United Kingdom 271 266 141 261 147
Germany 14 14 8 11 7
Republic of Ireland 9 9 7 9 5
Total 294 289 156* 281 159*
*   Includes 38 concession stores (2016: 44).
Gross margin

The gross margin strengthened to 46.0% (2016: 45.6% excluding exceptional items).

Trading expenses
Analysis of trading expenses 2017
53 weeks
52 weeks
Depreciation and amortisation 6.5 5.8 12
Employment costs 38.0 37.7
Occupancy costs 45.9 41.1 12
Other operating costs 21.5 20.6 4
Total trading expenses 111.9 105.2 6
#   Excluding exceptional items.
  • Depreciation and amortisation increased by 12%, owing to a change in the depreciation policy during the 2016 financial period to align with Truworths, resulting in a lower base. Excluding this policy alignment, depreciation and amortisation decreased by 2%.
  • Employment costs remained unchanged compared to the prior period. The increase in UK minimum wages and higher recruitment costs was partially off-set by a decrease in headcount as well as savings in store employment costs due to lower sales resulting in reduced incentives being paid.
  • Occupancy costs increased by 12%. Rent review releases during the 2016 period resulted in a lower base while a net three stores were closed during the current period. Costs were impacted by further recognition of onerous lease provisions in the reporting period, whilst the depreciating value of the pound sterling against the euro resulted in increased costs of stores in Germany and the Republic of Ireland. Comparable occupancy costs increased by 4%.
  • Other operating costs were 4% higher because of increased sales-related e-commerce costs.
Operating profit

Operating profit increased by 7% to £26 million (decreased 1% on a pro forma 52-week basis) with the operating margin (excluding exceptional items) increasing from 8.5% to 8.7% (decreasing to 8.2% on a pro forma 52-week basis).


The Group continues to invest in best-of-breed information technology (IT) to support its retail trading operations and supply chain. Capital expenditure of R71 million (2016: R82 million) was invested in the upgrading and installation of new IT systems and infrastructure.

The Group has committed R132 million for Truworths’ and Office’s IT capital expenditure for the 2018 reporting period.


Major IT developments undertaken during the reporting period include the following:

  • Completed and stabilised the implementation of a new automated warehouse management system
  • Implemented systems that support the new customer loyalty programmes for Truworths and Identity
  • Improved processes to open new accounts that align with the affordability assessment regulations
  • Continued the development of the new e-commerce solution, which will be launched in the first half of the 2018 financial period
  • Started the development of the Office London South Africa website and in-store improvements to provide for omni-channel customer experience
  • Implemented a new customer master data management application bringing all customer-related information into a single mastered environment

Key projects for the new reporting period will include upgrading core components of the retail merchandising systems and enabling centralised pricing strategies across all channels. Omni-channel capabilities will continue to be enhanced with broader online offerings.


The main focus during the reporting period was enhancing Office’s e-commerce capability while the merchandising planning system was implemented towards the end of the financial year.

IT priorities for the 2018 reporting period are:

  • Merchandising: improved commitment visibility, business analytics reporting and style performance system
  • E-commerce: online multi-currency transacting; enhancement of payment gateway; store stock visibility; improved delivery options and enhanced in-store pricing
  • Finance: replacement of the financial accounting system and implementation of e-procurement
  • Supply chain: replacement of the warehouse system


The financial and operating targets have been reviewed for the 2018 reporting period. Three of the targets have been revised, while the targets for gross margin, return on assets, asset turnover and net debt to equity remain unchanged. These targets are as follows:

Gross margin (%) 51 – 55 51 – 55
Operating margin (%) 20 – 25 21 – 25
Return on equity (%) 26 – 31 30 – 35
Return on assets (%) 22 – 27 22 – 27
Inventory turn (times) 3.5 – 4.5 3.0 – 4.0
Asset turnover (times) 0.9 – 1.3 0.9 – 1.3
Net debt to equity (%) 25 25

Capital expenditure of R636 million (Truworths R493 million and Office R143 million) has been committed for the 2018 financial period and will be utilised mainly as follows:

  • R431 million for new stores and the expansion and refurbishment of existing stores
  • R132 million for information systems
  • R39 million for buildings
  • R23 million for head office refurbishment

Trading space is planned to increase by approximately 4% (Truworths 4% and Office 2%). This has been revised down from the 5% previously reported as a result of the development of some shopping malls in South Africa being delayed.

Product inflation for Truworths is expected to be low to negative and for Office approximately 3% to 4% in the 2018 reporting period.

The trading outlook for Truworths and Office as well as the Group’s prospects for the 2018 financial period are covered in the Chief Executive Officer’s report.


Thank you to our shareholders and the broader investment community both locally and internationally for their continued investment and interest in the Group. I also extend my appreciation to the finance teams in Truworths and Office for their dedication and professionalism, and for ensuring that the Group maintains its high standard of financial reporting and disclosure.

David Pfaff
Chief Financial Officer