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Value-creating business model

As a retailer of fashion clothing, footwear and related merchandise, the Group’s business model is to procure merchandise from third party suppliers and to sell it to consumers for cash or on account through its network of retail stores and e-commerce platforms. The essence of the Group’s purpose is to provide exclusive and aspirational apparel brands to youthful fashionable consumers.

The successful execution of this business model will create value for the Group’s primary stakeholders, notably its shareholders, customers and employees, and other stakeholders including suppliers, financiers, landlords and the governments of the countries in which it operates. Several features of the business model distinguish the Group from its industry peers, which arguably provide a sustainable competitive advantage.

List of most significant external factors
Financial Capital
Continued access to financial capital through investor and financial market confidence
Ongoing investment in the Group’s stores, distribution capacity and e-commerce platforms to promote and sustain growth
Development of new and streamlining of existing business processes and the maintenance of our market-leading brand portfolio

Key outcomes

  • Sale of merchandise of R18.1 billion
  • Diluted headline earnings per share of 661 cents
  • Net asset value per share up 8% to 2 201 cents
  • Net debt to equity at 18%
  • Cash generated from operations up 8% to R3 billion
  • Return on equity at 31%
  • Annual dividend per share 452 cents

Key outcomes

  • Capital expenditure of R467 million, mostly on stores and IT infrastructure (refer to intellectual capital alongside)
  • Construction of new distribution centre delayed due to delays in obtaining local authority approvals

Key outcomes

  • Alignment of Office’s business processes (including retail methodology) with Truworths resulting in improved inventory turn and lower inventory levels in Office
  • New Truworths e-commerce platform prepared for launch in 2018 financial period
  • Launched Truworths (TruRoyalty) and Identity (iDream) loyalty programmes with more than 2 million non-account members
  • New Truworths warehouse management system issues resolved post-implementation

Actions to enhance or mitigate outcomes

Ongoing active management of the Group’s financial capital base through:

  • Strategic acquisitions to supplement organic growth
    • Office integration progressing well and results consolidated for a full year in the 2017 reporting period
    • Post year-end acquisition of Loads of Living, subject to Competition Commission approval (at the time of preparing this report), to further diversify the Group’s product offering
  • Reinvestment of profits in capital infrastructure to promote and sustain growth
  • Share buy-backs of R101 million to enhance shareholder returns
  • Dividends paid of R1.5 billion

Actions to enhance or mitigate outcomes

  • Continued investment in the Group’s store network to promote and sustain growth, with trading space growth of 1.5%
  • New Office store design finalised for roll-out during 2018 financial period
  • Office London stores launched in South Africa
  • Distribution capacity sufficient in the medium-term
  • Truworths e-commerce orders to be picked from selected large emporium stores to avoid pressure on distribution capacity

Actions to enhance or mitigate outcomes

  • Developed an Office-specific business philosophy to ensure alignment with the Group’s strategic direction
  • Impact of business process alignment enhanced through implementation of sophisticated merchandise planning system, with further systems alignment to follow in future
  • Leveraged Office’s extensive expertise in online retailing in the development process of the new Truworths e-commerce platform and websites
  • Extensive loyalty programme planning and piloting undertaken to refine loyalty offering and test account and non-account customer preferences
  • Collaborated with warehouse management system vendor and sanctioned post implementation audit of systems configuration and process efficiencies by external consultant

Optimising supply chain efficiency
(Truworths and Office )

Managing retail presence
(Truworths and Office)

Managing the risk of fashion
(Truworths and Office)

Optimising supply chain efficiency
(Truworths and Office )

Managing the risk of the book
Employment creation, employee development through skills training and workplace experience, the promotion of fair labour practices and providing job security in difficult economic times
Social and relationship capital
Maintained positive relationships with stakeholders and invested in the well-being of the communities we operate in through our various corporate social involvement initiatives
Natural Capital
Depletion of environmental resources through our business operations (directly) and supply chain (mostly indirectly)

Key outcomes

  • R2 billion paid to employees
  • 11 563 employees at Truworths and 3 031 employees at Office
  • R105 million spent on employee skills development across the Group
  • 1 124 people trained through learnership (workplace experience) programmes at Truworths
  • 124 employees on the merchant training programmes across merchandise buying, planning and quality control in Truworths
  • No referrals of unfair discrimination or employment equity non-compliance

Key outcomes

  • 93% black employees in South Africa (2016: 93%)
  • 73% female employees in Truworths (2016: 72%) and 61% in Office (2016: 59%)
  • R5.4 million invested in CSI projects through the Group’s CSI trusts
  • Engaged regulators on key matters including National Credit Regulator, Department of Labour and revenue authorities
  • Undertook wage negotiations with union
  • Zero days lost due to industrial action

Key outcomes

  • Store electricity carbon emissions of 177 kg per m2 in South Africa (2016: 178 kg per m2)
  • Electricity consumption intensity in South Africa decreased 4%, 1% and 8% respectively at head office, stores and distribution centres
  • Scope 3 (upstream transportation and distribution, purchased goods and services, business travel and waste from operations) carbon emissions measured in metric tonnes increased marginally by 1.8%
  • Recycled in excess of 10 million hangers during the period
  • 86% increase in recycled cardboard
  • Total water consumption in South Africa of 20 168 kilolitres (2016: 19 817 kilolitres)

Actions to enhance or mitigate outcomes

  • All management and specialised full-time employees now on total guaranteed packages (TGP) at Truworths
  • Extended benefits to longer-serving flexible staff
  • Consolidating significant changes made to human resources practices in prior period and making minor enhancements as deemed appropriate
  • Reduced the number of permanent and flexible positions where natural attrition has occurred to avoid retrenchments
  • Amended performance appraisal system to simplify the process to improve balancing hard and soft measurements
  • Actively engage with tertiary institutions and invested additional funds in bursary programme to attract top talent

Actions to enhance or mitigate outcomes

  • Focused on developing internal talent to demonstrate commitment to sustainable transformation in South Africa
  • Met annual Employment Equity Plan targets for 2017 in South Africa
  • Entered into new CSI initiatives and partnerships to achieve a broader spread of investment across identified focus areas
  • Ongoing focus on improving gender representivity, including formulating and adopting a board gender diversity policy
  • Concluded annual wage and substantive negotiations with SACCAWU for the 2017 period

Actions to enhance or mitigate outcomes

  • Included YDE and Uzzi in carbon footprint calculations for the first time (previously measured Truworths and Identity only)
  • All stores renovated during the period received energy-efficient lighting as well as electricity meters. Energy-efficient LED lighting also rolled out to a selection of 27 Identity stores
  • Completed testing of LED lighting in Identity stores for roll-out to other stores over the next few years
  • Several initiatives implemented in relation to international and domestic transportation by both Truworths and third party logistics providers
  • Ongoing consolidation of import shipments improving efficiencies.
    In excess of 80% of international cargo is moved in full container loads
  • Implemented water-saving initiatives at Group head office amidst drought in Western Cape, South Africa
  • Set recycling targets for the first time

External factors impacting value creation

Several factors that are partially or wholly outside the control of the Group could have a significant impact on our ability to create and sustain value for our stakeholders. The most significant of these external factors are listed below and are covered in more detail throughout the Integrated Report.

South Africa

  • Low economic growth
  • Political instability
  • Sovereign credit-rating downgrade
  • Declining consumer disposable income
  • Negative consumer sentiment

In the past year the South African environment has been dominated by low economic growth, high unemployment, deteriorating prospects, political instability, allegations of state capture and growing tensions within the ruling party. These factors have collectively contributed to the country’s credit rating being downgraded to sub-investment status. Economic conditions have also led to declining consumer disposable income and negative consumer sentiment.

  • Exchange rate volatility impacting merchandise pricing

Volatility in the Rand/US dollar exchange rate impacts value creation as 65% of fashion merchandise is imported. Product inflation in Truworths peaked at around 16% for the summer 2016/2017 season. This follows the 23% depreciation in the Rand in the 2016 financial period in the aftermath of the dismissal of the minister of finance in December 2015, when the currency declined by as much as 38%. There is a lag effect on inflation as orders for forthcoming seasons and forward exchange contract rates are secured well in advance.

  • Regulations impacting credit retailers

Affordability assessment regulations introduced by the National Credit Regulator in 2015 continue to restrict the opening of new customer accounts and consequently limit account sales in Truworths. The regulations require customers to provide documentary proof of income and many of Truworths’ mass middle-market customers are either self-employed or work in the informal sector and cannot provide formal proof of income.

United Kingdom

  • Impact of Britain’s vote to exit the European Union
  • Depreciating value of the pound driving inflation
  • Post-Brexit uncertainty and declining consumer confidence

The outcome of the referendum in June 2016 for Britain to end its membership of the European Union contributed to widespread uncertainty and the weakening of the pound, which in turn resulted in inflation reaching a four-year high. Weakness in the pound resulted in increased costs of euro-denominated imports and other costs. The weaker pound has also reduced the Group’s foreign revenues and profits when translated into Rand.