Truworths’ Michael Mark: Running a retail marathon

A politician who has been in charge for 29 years is derided as a dictator. But in the business world, leaders who spend decades at the helm are often loved by the board of directors and shareholders.

Michael Mark has been CEO at Truworths since 1991, and is said to still sign off on every decision. He is widely (and rightfully) regarded as the driving force behind the credit fashion retailer’s glory days in the 1990s and early 2000s.

"Mark is Truworths," says one analyst. The CEO is well liked, has board support and runs a tight ship with extremely well-controlled expenses. "Mark didn’t put a fashion foot wrong in the early 2000s," says another analyst. Richard Cheesman from Protea Capital Management says: "Mark has done well. It has been a very successful business [with] very good metrics."

Truworths, Identity and YDE are focused on youngish customers — and their need for credit. The group received more than 2-million credit applications in 2019, and 18% of these were granted. Truworths excels at granting credit, which drives 70% of its sales.

This makes Truworths a cash-generative company, and it is at least able to pay a dividend to shareholders if it chooses to this year. The company has a gross profit margin of 52.5% and a captive audience of 2.6-million people with accounts (an enviable 77% of them in good standing).

In 2019, before the coronavirus pandemic had even begun, Truworths had made provisions for nonpayment of accounts to hit 20%. Its projections have been remarkably accurate. At the end of June, Truworths disclosed that one in five customers couldn’t pay up, from 13% the year before.

The bottom line is retail seems to be something where it is best to stay close to home. But at home there are challenges too

But does one want to invest in a stalwart fashion retailing company where the succession plan is not clear and one man has been running the show for almost 30 years?

In 2015, Mark told a Business Times journalist he was ready to retire and planned to hand over the reins to Jean-Christophe Garbino, a Frenchman and the CEO of Kiabi (a European clothing retailer). Garbino was announced as Mark’s successor in late 2014. He officially joined Truworths as CEO designate in March 2015, but left in December 2015, after just nine months.

IM understands he presented a strategy to the board that was apparently initially accepted but ultimately rejected. He visited stores and wanted to improve the brand and its online capabilities, but left with Mark still in charge.

Sources close to developments say Garbino was never allowed to take over. "There cannot be two CEOs."

At the time of Garbino’s departure, retail analyst Chris Gilmour told Business Day: "It doesn’t sound right. I don’t know if he even physically ever took over from Mark in the first place. They needed someone new to breathe life into the business. Truworths is not what it once was — it has not held on to its iconic status. Mr Price, Woolies and TFG (The Foschini Group) have taken over."

In a recent Sens announcement Truworths highlighted troubles at UK shoe chain Office that cost it R5.5bn — including £80m of debt.

In a trading update on its 2020 results it predicts a loss of up to 188% of earnings per share, a measure of net profit after impairing Office a further £131m (R2.9bn). It will record a negative R1.27, or a R1.45 earnings a share loss, in 2020, down from R2.03 in 2019 and R6.15 in 2018. It ominously warns of restructuring, the need for more funds, staff redundancy and rental negotiations — all in a bid to "secure the long-term viability of Office".

Sales at Office’s UK and German shoe stores between the end of December and March 23 decreased 16.4% before the lockdown in the UK had started. Fortunately, online sales make up about 35% of business.

The question, of course, is: if new life was needed at Truworths in 2015, would it not be even more the case now? Over and above a difficult few years abroad, the local core has faced increased competition from fast-fashion European brands H&M and Zara.

One might well ask: if Garbino had been allowed to deploy his strategy, would Truworths have been in a better place? Given SA’s weak economy and the cheaper fast fashion from global retailers, perhaps not. But Garbino had a strong European fashion background, and Europe’s fashion sets local trends.

IM’s source says Garbino found Truworths’s pace of change slow and wanted things changed quickly. "There was a lack of urgency."

Mark is known to say: "It is a marathon, not a sprint" — and Hilton Saven, the chair of Truworths, quotes these exact words to IM.

It may be a marathon, but competitors have jogged past. Local rival TFG appears to be doing much better than Truworths. TFG now has a 28% market share of online sales and Truworths 8%.

The offshore endeavours of the two companies also contrast. TFG is doing exceptionally well with its Australian acquisition of Retail Apparel Group (RAG), with sales up 9.6% year on year to June making 15.5% of turnover.

In the UK, TFG has not done as poorly as Truworths. TFG owns Phase Eight, Hobbs and Whistles. It reported a decrease in revenue of 4.5% in the year to June — not quite the Office fiasco.

TFG’s UK stores equate to than 20.7% of revenue.

Back in SA, TFG recently bought about 371 viable Jet stores for a measly R470m, worth half of the R800 stock it holds, to tap into the lower-income market as constrained consumers buy down. The Jet purchase gives it a better range of children’s clothing — which is more likely to sell, as cash-strapped adults settle for last season’s clothes.

TFG sells about 26% of its clothing and accessories on credit. But its gearing is far higher than that of Truworths, and TFG embarked on a rights issue to help it shore up a balance sheet.

By contrast, at Truworths cash sales have been falling in recent years — they are almost 9% down year on year. This suggests customers not forced to buy on their account are going elsewhere.

But Truworths is good at giving credit, and giving it right.

An analyst critical of the company said Truworths relied too heavily on captive customers buying out of "habit" rather than choice. But year on year account sales fell to 8.4%. Perhaps new vision is needed?

But Mark is going nowhere. The board says he is needed to steer the company in the short to medium term after Covid-19 struggles have decimated retail globally.

Chair of the board Saven tells IM: "The board is confident that [Mark’s] tremendous experience and energy is still needed at Truworths, now perhaps more than before. The board is, however, well advanced in progressively implementing its managed succession plan for the CEO."

Mark told a Sunday Times journalist in 2018 the same thing. "The board is keen for me to stay on for the time being to navigate successfully and remain focused through this challenging period."

Elaborating further, Saven says: "It is foreseen that Mark’s vast experience and skills will be needed in the short to medium term as SA and the world emerges from the Covid-19 pandemic, while the board believes it is crucial for continuity in managing the turnaround in Office."

In some sense Truworths was unlucky to buy the UK shoe chain in December 2015, before unexpected Brexit events destroyed consumer confidence. Saven says: "Office is not alone in struggling through the UK’s lockdown. It is important to see our challenges with Office in the UK in context. So far this year 49 retail companies have failed, on top of 43 retailers (more than 2,000 stores) that closed last year."

Zoowun retail analyst Kirsty Laschinger says:"Truworths was not cavalier in its approach to international expansion. It went cautiously, It took a small bet, took on small debt to fund it." Laschinger says only two retailers have done well in expanding globally — furniture chain Ikea and itex, owner of Zara.

"Stalwarts such as Walmart, Carrefour, Tesco and H&M have all lost money in various international forays. The bottom line is that retail seems to be something where it is best to stay close to home."

But at home there are challenges and increased competition too. Is Truworths’s succession planning in place to keep the business on the road?

TFG CEO Anthony Thunström tells IM retention and succession have always been a focus at TFG; strong succession planning has resulted in successors being selected from within the group — well in advance of potential appointment.

Saven names executive directors David Pfaff, Sarah Proudfoot and Doug Dare as potential leaders in the succession plan.

Saven also contends TFG and Truworths are not very different from each other.

"Over the past five years both companies have lost considerable values, in common with retailers worldwide, and the difference is now relatively insignificant."

In five years, the TFG share price of R73.25 has gone down 46.62% and that of Truworths, at R31.62, is 60.77% lower.

Saven admits: "It is true that some businesses have performed better than Truworths. Many others have fared far worse. Emerging from Covid-19 the group has no debt, generates strong cash flows and will be one of the few retail companies able to pay a dividend. Some others have closed their doors, had to seek significant external funding, undertake rights issues or forego dividends."

Saven says the Truworths brands are among the most appealing to SA and UK consumers. "The company’s debtors book will recover following the pandemic, and the supply chain strategy is well placed for future growth."

Whatever happens, Mark will be there … finishing the marathon.