In the retail sector, Truworths has attracted considerably less publicity in recent years than the acquisitive Foschini (now restyled TFG) or the innovative Mr Price.
This is certainly reflected in its rating. After the recent rerating of retailers in the consumer discretionary sector, it trades on a historic earnings multiple of 12.5, well below TFG’s 15.4 and Mr Price’s 20.5.
Though Truworths is at a discount to these companies, it is priced at a comfortable premium to NAV, which in the last annual report was R25.53 a share.
Truworths is firmly in the consumer discretionary sector, unlike Pepkor with its more basic range of products, which trades on a 17.2 times multiple.
Truworths is also not really comparable with its old stablemate (when it was part of listed retail conglomerate Wooltru), the frequently troubled Woolworths, a hybrid upmarket food and basic clothing business. Truworths focuses on what it calls aspirational fashion.
There is undoubtedly some fatigue in the market, with no changing of the guard for decades. Michael Mark is now 71 and has been at the helm of the business since 1991. There are some distinctly elderly South African faces on the board, such as former Old Mutual South Africa boss Roddy Sparks, 65, and Rob Dow, 67, a founder of the short-lived African Merchant Bank.
The name Truworths International is grandiose as it has significant business only in South Africa, the UK and the Republic of Ireland through its Office shoe stores. Just more than two-thirds of its sales are in South Africa.
It’s hard to think of a more dreary name for a fashion business than Office — but apparently it is a big hit with British millennials and Gen Z.
In South Africa, the group is much wider than just the Truworths brand itself, with boutique offerings such as Inwear, Identity, Daniel Hechter, Earthaddict and Naartjie. Loads for Kids is the most recent brand to join the portfolio, just two years ago.
There are even a few branches of Office in South African-branded Office London, in case customers confuse it with Bidvest Waltons.
Office is growing its footprint (if that’s the right term) through e-commerce, which accounts for 46% of retail sales
Truworths needs to keep refreshing its portfolio, as it not only faces competition from its traditional competitor but also from international chains such as H&M and Zara, which offer apparel at similar price points.
The company has at least benefited from the demise of the big gorilla in its sector, Edgars, which is now a marginal player after a disastrous experience under the control of the Bain Capital Private Equity group.
Just as important as keeping an interesting brand portfolio for the business (there are no less than 802 group outlets in Southern Africa) is the management of credit. The group still has a self-funded debtors’ book, while its competitors often outsource this to credit specialists such as RCS. But there has never been a disastrous credit experience in fashion retail to sink a business, as commonly occurred in furniture retailers such as Ellerines and Profurn.
That’s not to say it wouldn’t be catastrophic if the debtors’ book weren’t managed sensibly. There are a substantial 2.9-million Truworths account holders, more than twice the size of the membership of the Government Employees Pension Fund. Based on the latest results, the case can be made that Truworths is looking ex-growth. There is no doubt that it has been tough trying to grow in the dismal South African economy — and the UK has hardly been more encouraging.
At least Office is growing its footprint (if that’s the right term) through e-commerce, which accounts for 46% of retail sales; the e-commerce footprint for the group in Southern Africa accounts for just 5% of sales.
But to maintain its positioning as what it calls the leading fashion footwear retailer in the mid-level price range, Office has 86 stores in Britain and Ireland, including 11 concessions in large department stores. It combines private label brands with the usual suspects such as Nike, adidas, Converse, Doc Martens and Crocs. Its sales increased 10.8% in a UK market in which retail fell 0.2% over the Truworths financial year. In contrast, South African sales fell 3.2%.
Sales declined in all main categories — ladieswear, menswear, Identity and Truworths Kids Emporium — but not in “other” which includes cosmetics, cellular, Truworths Jewellery, Loads of Living and Sync. This miscellaneous category of arguably noncore products saw sales increase 5.4% to R2.05bn.
Yet, in spite of this, group profitability metrics remain robust. The gross margin remained above 52%, while the trading margin increased from 15.1% to 20.4% and the operating margin from 22% to 27.3%. The return on equity was an enviable 45%.
Stephen Cranston
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