JOHANNESBURG – The market seems to have approved of the results of Truworths released earlier in February.
Trading conditions have been continuously challenged for Truworths in both the African and UK markets (Office). The retail footprint of the group comprises 767 stores in South Africa and 37 in the rest of Africa, with 132 stores – including 18 concession outlets – across Office’s operations in the UK, Germany and the Republic of Ireland.
For the half-year ending December, group retail sales increased by 1percent to R10.3billion. Account sales accounted for 52percent of total retail sales, which increased by 4.3percent; cash sales fell by 1.9percent relative to the prior period. Africa retail sales grew by 2.7percent to R7.8billion, where account sales increased by 4.3percent, and cash sales fell by 1.2percent. The number of active accounts increased by 3.5percent to 2.8 million. The South African economy is faced with low economic growth, moderate wage increases, high unemployment, load-shedding, and higher fuel and utility prices – all this weighs on consumer confidence and constrains spending.
In terms of credit, the group began implementing the NCR’s new affordability assessments in 2015. This was applied to manage the risk of issuing credit, ensuring that customers are not over-indebted by way of unaffordable credit agreements.
Due to the depressed economic environment, the group will focus on tight cost and margin control, proven merchandise strategies and maintain a healthy balance sheet.
“Truworths will look to leverage technological advancements, data analytics and artificial intelligence, further integrate its physical and online retail offerings, build on its fast fashion and quick response capabilities and continue to grow its account base to position the business optimally for future growth,” the company said.
In the UK, retail sales fell 2.6percent to R2.8bn, which was primarily due to the uncertainty surrounding Brexit combined with pressure on store-based retailing hurting the economy.
Management expects further headwinds for the second half of the financial period due to negative consumer sentiment. Uncertainty relating to Brexit is expected to subdue retail sales growth.
Despite all the challenges, Truworths increased its profit margin and showed progress in turning around its UK business. In the South African business, the group continued its trend of superior cash generation.
What is concerning is the credit sales that increased, and cash sales decreased. In the current economic environment, this is not ideal. Nevertheless, the bad news might just be priced in.
The current valuation is attractive, trading on a forward price/earnings multiple of approximately nine times relative to its five-year average of 12 times and a dividend yield of around 8percent. Truworths offers an attractive forward dividend yield of 8percent and has one of the stronger balance sheets in the retail sector.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Truworths shares are held on behalf of clients.