1 3 2 - truworths · group roic vs wacc (%) average: roic: jun: 5-year 19.8%, 3-year 16.7% average:...
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R E V I E W O F T H E P E R I O D
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SOUTH AFRICA – TRADING ENVIRONMENT
• Difficult trading environment.
• GDP growth remained subdued throughout 2017/2018 with negative growth
in Q1 of calendar 2018.
• Rising fuel and energy prices, VAT rate increase and weaker Rand.
• Take-home pay for SA consumers has dropped significantly.
• Consumer confidence has declined after initial boost at the start of the
calendar year following appointment of new president.
• Unemployment increased in Q2 of calendar 2018 to 27.2%.
• Uncertainty regarding land reform impacting on business and investor
confidence.
Sources: Stats SA, BankServAfrica
5
UNITED KINGDOM – TRADING ENVIRONMENT
• Extremely tough retail environment.
• GDP growth slowed in Q1 2018 to 1.2% (weakest since 2012).
• Retailers hit by soaring business rates and low consumer confidence.
• Customers impacted by Brexit-fuelled inflation.
• Number of retailers issuing profit warnings has doubled and the number of
companies filing for Company Voluntary Arrangements (CVA) has increased
substantially.
• Continued inflationary pressure with CPI growth of 2.4% has squeezed
household income.
• Brexit-related uncertainty remains, although fiscal policy has been relaxed.
Source: UK Office for National Statistics
6 6
F I N A N C I A L R E V I E W
I . G R O U P
2
7
GROUP EXECUTIVE LEADERSHIP
David Pfaff appointed Group Chief Operating Officer (COO)
• Appointment to newly created COO position effective immediately.
• Recognises David’s expanded responsibilities, which now include retail store operations in addition
to his existing portfolio of credit risk, credit operations, information systems and finance.
• He continues as Group Chief Financial Officer and head of the Group’s finance function.
• David has been with the Group since March 2013.
David Pfaff (53) BCom, CA (SA), Dip Soc (Oxon)
COO and CFO
8
• Year-on-year performance impacted by 53rd week in the prior period.
• Top-line growth affected by challenging economic environment in SA and UK.
• Trading expenses well controlled, reducing by 2% on the prior period.
• Dividend cover maintained at 1.5 times.
• Strong balance sheet with improved net debt to equity ratio.
• South African debt restructured.
• Cash realisation rate of 109%.
• Net asset value per share growing at 10% to 2 421 cents.
• Opened 13 Office London stores in South Africa.
• Acquired homeware chain, Loads of Living, with 13 stores.
• Launched sophisticated e-commerce site in South Africa.
GROUP OVERVIEW
9
GROUP PERFORMANCE AGAINST TARGETS
Jun 2018
Actual
52 weeks
Jun 2018
Target
52 weeks
Gross margin 52.4% 51% – 55%
Operating margin 22.5% 20% – 25%
Return on equity 27% 26% – 31%
Return on assets 25% 22% – 27%
Inventory turn 4.0 times 3.5 – 4.5 times
Asset turnover 1.1 times 0.9 – 1.3 times
10
GROUP FINANCIAL PERFORMANCE
Jun 2018
52 weeks
Jun 2017
52 weeks*
Change on
prior period
52 on 52
weeks
Jun 2017
53 weeks
Change on
prior period
52 on 53
weeks
Sale of merchandise (Rm) 17 547 17 582 (0.2%) 18 065 (2.9%)
Gross margin 52.4% 52.6% 52.6%
Operating margin 22.5% 22.6% 23.3%
Diluted HEPS (cents) 612.7 620.8 (1.3%) 660.9 (7.3%)
Dividend per share (DPS) (cents) 420 452 452 (7.1%)
Net asset value per share (cents) 2 421 2 201 2 201 10.0%
* Pro forma comparable 2017 52-week period.
11
GROUP DILUTED HEPS AND DPS (52 WEEKS)
Compound growth rates:
Diluted HEPS:
Jun: 5-year 1.8%, 3-year 1.2%
Compound growth rates:
DPS:
Jun: 5-year 3.0%, 3 year 1.2%
(cents)
*Pro forma comparable 2017 52-week period (2017 53-weeks: 661 cents per share).
385 405 452 452 420 569 592 666 621 613 -
100
200
300
400
500
600
700
Jun 2014 Jun 2015 Jun 2016 Jun 2017* Jun 2018
DPS Diluted HEPS
12
GROUP RETURN ON EQUITY (ROE) AND RETURN ON CAPITAL (ROC)
Average:
ROE:
Jun: 5-year 33.0%, 3-year 31.0%
Average:
ROC:
Jun: 5-year 47.6%, 3-year 45.7% (%)
37 35 35
31
27
52 49
51
46
40
-
10
20
30
40
50
60
Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
ROE ROC
Office UK acquired
13
GROUP RETURN ON TOTAL ASSETS AND ASSET TURNOVER
Return on assets
(%)
Asset turnover
(times)
Average:
Return on assets:
Jun: 5-year 31.0%, 3-year 25.0%
Average:
Asset turnover:
Jun: 5-year 1.1 times, 3-year 1.1 times
42
38
24 26
25
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
-
10
20
30
40
50
60
Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
Return on assets Asset turnover
Office UK acquired
14
GROUP ROIC vs WACC
(%) Average:
ROIC:
Jun: 5-year 19.8%, 3-year 16.7%
Average:
WACC:
Jun: 5-year 13.6%, 3-year 13.3%
25 24
17 17 16
14 14 13 13
14
-
5
10
15
20
25
30
Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
ROIC WACC
Office UK acquired
15
GROUP STATEMENTS OF FINANCIAL POSITION
Jun 2018
Rm
Jun 2017
Rm
Change on
prior period
%
Property, plant and equipment 1 726 1 637 5
Goodwill 1 629 1 552 5
Intangible assets 3 227 3 037 6
Other non-current assets 322 333 (3)
Cash and cash equivalents 982 2 055 (52)
Trade and other receivables 5 110 5 256 (3)
Inventories 2 072 1 916 8
Other current assets 423 353 20
Total assets 15 491 16 139 (4)
Total equity 10 369 9 450 10
Non-current liabilities 2 363 4 709 (50)
Current liabilities 2 759 1 980 39
Total equity and liabilities 15 491 16 139 (4)
16
FINANCIAL POSITION
• Financial position remains strong with NAV per share up 10% to 2 421 cents.
DIVIDENDS
• Final dividend of 159 cents per share (2017: 182 cents per share).
• Total dividend per share of 420 cents per share (2017: 452 cents per share).
GEARING
• Net debt to equity ratio:
– Group: Reduced to 9.3% R968 million net debt (June 2017: 18.3% R1.7 billion net debt).
– Truworths: Reduced to 5.9% R605 million net debt (2017:11.9%, R1.2 billion net debt).
– Office: Reduced to 10.2% £20.1 million net debt (2017: 18.2%, £33.5 million net debt).
GROUP CAPITAL MANAGEMENT
17
GROUP SA DEBT FUNDING RESTRUCTURE
Jun 2018 Jun 2017
Facility Base rate
Total
Rm
Utilised
Rm
Base rate
margin
(ppts)
Total
Rm
Utilised
Rm
Base rate
margin
(ppts)
Term loans 3-month JIBAR 500 500 + 1.35 2 600 2 600
+1.73 to
+2.18
Revolving credit 3-month JIBAR 1 200 300 + 1.29 350 - + 1.73
Overdraft –
Committed Prime 300 263 - 1.25 300 - - 1.25
Overdraft –
Uncommitted Prime 700 - - 1.25 300 - - 1.25
Total gross debt 2 700 1 063 3 550 2 600
18
GROUP DIVERSIFICATION
TRUWORTHS OFFICE GROUP
RETAIL
SALES
CASH:
ACCOUNT
SALES
South Africa 96%
Rest of Africa 4% Rest of Europe 9%
United Kingdom 91% South Africa 70%
Rest of
Africa 3%
UK and Europe 27%
Account 69%
Cash 31%
Cash 100% Account 50%
Cash 50%
R13 115 m R4 848 m R17 963 m
R13 115 m R4 848 m R17 963 m
19
GROUP DIVERSIFICATION
TRUWORTHS OFFICE
Clothing and accessories 89%
Footwear 11%
South Africa 95%
Rest of Africa 5%
Footwear 100%
Clothing and accessories 65%
Footwear 35%
United Kingdom 88%
Rest of Europe 12%
South Africa 80%
Rest of Africa 4%
UK and Europe 16%
813 stores 156 stores 969 stores
PRODUCT
MIX
STORE
LOCATIONS
GROUP
R13 115 m R4 848 m R17 963 m
20
GROUP CASH FLOWS
(Rm)
*Earnings before interest, tax, depreciation and amortisation.
777
(2 179) (1 402)
2 965
172
1 425
8 (244)
(855)
(86)
3 385
(1 925)
(399) (161) (123)
(2 000)
(1 000)
-
1 000
2 000
3 000
4 000
5 000
EBITDA* Working capital
movement
Interest received Dividends
received
Finance costs Tax paid Capex
maintenance
Free cash flow Dividends Capex expand Net shares
scheme buy-backs
Other Cash flow before
financing
Net borrowings
repaid
Net cash
decrease
Cash realisation rate of 109%
21
GROUP CASH REALISATION RATE
(%)
96
80
89 91
109
-
20
40
60
80
100
120
Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
Cash realisation rate
22 22
F I N A N C I A L R E V I E W
I I . T R U W O R T H S
2
23
David Pfaff (53) BCom, CA (SA), Dip Soc (Oxon)
COO and CFO
Sarah Proudfoot (50) National Diploma in Clothing Design
Director: Merchandise Ladieswear
Doug Dare (57) BBus Sc
Executive Director: Buying and
Merchandising
Sean Furlong (57) Diploma in Marketing Management
Director: Planning and Logistics
TRUWORTHS EXECUTIVE LEADERSHIP
Michael Mark (65) BCom, MBA, ACMA
Chief Executive Officer
24
David Pfaff (53) BCom, CA (SA), Dip Soc (Oxon)
COO and CFO
TRUWORTHS EXECUTIVE LEADERSHIP (CONTINUED)
Company
Secretarial
Store Retail
Operations
Information
Systems
Credit
Operations Legal
Internal
Audit
Risk and
Analytics Finance
25
Doug Dare (57) BBus Sc
Executive Director: Buying and
Merchandising
TRUWORTHS EXECUTIVE LEADERSHIP (CONTINUED)
International
Sourcing Menswear Homeware
Marketing
Menswear
Quality
Assurance
Truworths
Manufacturing Kids
26
Sean Furlong (57) Diploma in Marketing Management
Director: Planning and Logistics
TRUWORTHS EXECUTIVE LEADERSHIP (CONTINUED)
Project Office Distribution
and Logistics
Merchandise
Planning
27
Sarah Proudfoot (50) National Diploma in Clothing Design
Director: Merchandise Ladiesware
TRUWORTHS EXECUTIVE LEADERSHIP (CONTINUED)
Truworths
Ladieswear
Ladieswear
Fashion Studio
Marketing
Ladieswear
Identity
Ladieswear
28
• Retail sales up 1% relative to the comparable prior period.
• Gross margin improved to 55.5% from 55.2%.
• Expense containment, down 2% (2017: up 9%).
• Trading profit up 9%* relative to the comparable prior period.
• Strong cash generation and reduction in debt due to funding restructure.
• Truworths account metrics improving.
• Documentary requirements rescinded after High Court ruling in favour of credit retailers.
• Acquired Loads of Living.
• Opened 13 'Office London' SA stores.
• Launched sophisticated new e-commerce site.
• Successfully trialled lay-bys.
TRUWORTHS FINANCIAL REVIEW
* Up 3% excluding foreign exchange gains and losses in current and prior period.
29
TRUWORTHS FINANCIAL PERFORMANCE
Jun 2018
52 weeks
Jun 2017
52 weeks
Change on
prior period
52 on 52
weeks
Jun 2017
53 weeks
Change on
prior period
52 on 53
weeks
Sale of merchandise (Rm) 12 617 12 526 0.7% 12 907 (2.2%)
Gross margin 55.5% 55.2% 55.2%
Trading profit (Rm) 2 240 2 055 9.0%* 2 262 (1.0%)
Trading margin 17.8% 16.4% 17.5%
Operating profit (Rm) 3 667 3 555 3.2% 3 763 (2.6%)
Operating margin 29.1% 28.4% 29.2%
* Up 3% excluding foreign exchange gains and losses in current and prior period.
30
• In the 2017 financial period the end-of-season sale commenced in the last (53rd) week, which was
not the case in the 2018 financial period.
• Adjusted for the estimated sales that could have been generated in the 52nd week of the 2018 period
had the end-of-season sale commenced in that week, the following growths would have been
reported:
TRUWORTHS PERFORMANCE IMPACTED BY TIMING OF END-OF-SEASON SALE
Adjusted results Reported results
Profit after tax: 2018 52 weeks vs 2017 52 weeks 5.8% 4.1%
Profit after tax 2018 52 weeks vs 2017 53 weeks (0.4%) (1.9%)
Note: This is pro forma information prepared for illustrative purposes only, has not been subject to any independent auditor review and is the responsibility of management.
31
TRUWORTHS RETAIL SALES GROWTH ANALYSIS
Retail
sales
Rm
Retail
sales
growth
%
LFL store
growth
%
Product
inflation
%
Unit
growth:
Comp
stores
%
Unit
growth:
Non-comp
stores
%
Jun 2018 52 weeks* 13 115 1 (3) (1) (2) 4
Jun 2017 52 weeks# 13 061 (2) (5) 12 (17) 3
Jun 2016 52 weeks 13 264 14 7 9 (2) 7
Jun 2015 52 weeks 11 644 8 1 6 (5) 7
Jun 2014 52 weeks 10 762 7 1 9 (8) 6
*Compared to weeks 2 to 53 of the 2017 financial period. # Jun 2017 retail sales weeks 1 to 52.
32
TRUWORTHS MERCHANDISE INFLATION TREND
Inflation
(%)
(2)
-
2
4
6
8
10
12
14
16
2012
Summer
2013
Winter
2013
Summer
2014
Winter
2014
Summer
2015
Winter
2015
Summer
2016
Winter
2016
Summer
2017
Winter
2017
Summer
2018
Winter
2018
Summer
33
TRUWORTHS DIVISIONAL RETAIL SALES
Jun 2018
52 weeks
Rm
Jun 2017
52 weeks
Rm
Change on
prior period
52 on 52
weeks
%
Jun 2017
53 weeks
Rm
Change on
prior period
52 on 53
weeks
%
Truworths ladieswear 3 753 3 860 (3) 3 988 (6)
Truworths designer emporium 1 383 1 396 (1) 1 436 (4)
Truworths ladieswear emporium 5 136 5 256 (2) 5 424 (5)
Truworths menswear 3 663 3 656 - 3 759 (3)
Truworths kids emporium 925 872 6 896 3
Other 1 309 1 159 13 1 183 11
Truworths emporium 11 033 10 943 1 11 262 (2)
Identity 2 082 2 067 1 2 129 (2)
Truworths retail sales 13 115 13 010 1 13 391 (2)
YDE agency sales 254 271 (6) 278 (9)
Note: Truworths divisional retail sales based on new internal department structure.
34
TRUWORTHS TRADING SPACE
Jun 2018
‘000 m2
Jun 2017
‘000 m2
Truworths 290 284
Identity 70 69
Uzzi 4 4
Earthchild and Earthaddict 3 3
Naartjie 2 2
Office London 1 -
Total excluding YDE and Loads of Living 370 362
YDE 7 7
Loads of Living 4 -
Total 381 369
3.3% 1.6%
Growth on prior period Excluding Loads of Living, trading space grew by 2.2%.
2.2%
35
TRUWORTHS NUMBER OF RETAIL LOCATIONS
Stores
Jun 18
Departments
within stores
Total
locations
Stores
Jun 17
Departments
within stores
Total
locations
Truworths 346 - 346 344 - 344
Identity 255 - 255 248 - 248
Uzzi 48 233 281 52 217 269
Earthaddict 18 34 52 18 27 45
Earthchild 29 56 85 31 42 73
Truworths Man 37 311 348 37 314 351
Naartjie 26 49 75 27 38 65
YDE 21 - 21 21 - 21
Loads of Living 13 - 13 - - -
Office London 13 - 13 - - -
Daniel Hechter 3 327 330 3 349 352
LTD 2 223 225 2 211 213
Ginger Mary 2 291 293 2 281 283
36
TRUWORTHS CHANGE IN NUMBER OF STORES
Jun
2017
New
brands
Stores
closed
New stores
opened
Jun
2018
Truworths 344 - (5) 7 346
Identity 248 - (5) 12 255
Uzzi 52 - (4) - 48
Earthchild and Earthaddict 43 - (2) - 41
Truworths Man 37 - - - 37
Naartjie 27 - (1) - 26
YDE 21 - (1) 1 21
Loads of Living - 13 - - 13
Office London - 13 - - 13
Naartjie and Earthchild 2 - - 2 4
Daniel Hechter 3 - - - 3
LTD 2 - - - 2
Ginger Mary 2 - - - 2
Kids Emporium - - - 2 2
Total 781 26 (18) 24 813
Net 6 stores opened in 2018.
37
TRUWORTHS REST OF AFRICA CORPORATE STORES
Retail sales
Jun 2018
52 weeks
Rm
Retail sales
Jun 2017
52 weeks
Rm
Change on
prior period
52 on 52
weeks
%
Retail sales
Jun 18
52 weeks
Local currency
millions
Retail sales
Jun 2017
52 weeks
Local currency
millions
Change on
prior period 52
on 52 weeks
Local currency
%
Number of
stores
Jun 2018
Number of
stores
Jun 2017
Namibia 204 213 (4) 204 213 (4) 18 17
Botswana 100 93 8 78 72 8 8 8
Swaziland 94 92 2 94 92 2 5 5
Zambia 29 31 (6) 22 22 - 3 7
Lesotho 23 20 15 23 20 15 2 2
Mauritius 21 20 5 55 52 6 2 2
Kenya 9 9 - 73 66 11 2 2
Ghana* 8 21 (62) 3 7 (57) - 4
Total 488 499 (2) 40 47
* The Ghana stores ceased trading on 3 December 2017.
38
TRUWORTHS SALES DENSITIES TREND
Compound growth rates:
Sales density:
Jun: 5-year (0.2%), 3-year 0.4%
R per m2
29 307 30 462
32 979
34 849 35 656
34 586 34 857
37 350 36 317*
35,256
10 000
15 000
20 000
25 000
30 000
35 000
40 000
Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
* Based on 2017 52-week sales.
39
TRUWORTHS GROSS PROFIT TREND
Gross profit
(Rbn)
Gross margin
(%)
Compound growth rates:
Gross profit:
Jun: 5-year 5%, 3-year 4%
Average:
Gross margin:
Jun: 5-year 55.4%, 3-year 55.3%
5.8 6.2 7.1 7.1 7.0
55.9
55.2 55.3 55.2 55.5
50
51
52
53
54
55
56
57
-
1
2
3
4
5
6
7
8
Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
Gross profit Gross margin
40
TRUWORTHS ANALYSIS OF TRADING EXPENSES
Jun 18
Rm
Jun 17
Rm
Change on
prior period
%
Depreciation and amortisation 289 277 4
Employment costs 1 474 1 438 3
Occupancy costs 1 462 1 361 7
Trade receivable costs 1 099 1 207 (9)
Other operating costs 720 875 (18)*
Trading expenses 5 044 5 158 (2)
* 4% decrease excluding forex gains in 2018 (R29 million) and forex losses in 2017 (R93 million).
41
Depreciation and amortisation
• Excluding non-comparable stores, depreciation and amortisation unchanged.
Employment costs
• Excluding non-comparable stores and other non-comparable costs,
employment costs increased by 1% (June 2017: 5%).
Occupancy costs
• A net 32 stores were added during 2018 as trading space grew by 3.3%
(space growth excluding Loads of Living 2.2%).
• Comparable store rentals increased by 5%.
TRUWORTHS ANALYSIS OF TRADING EXPENSES (CONTINUED)
4% growth
7% growth
3% growth
42
Trade receivable costs
• Doubtful debt allowance decreased to 12.3% from 12.7% in 2017.
• Gross bad debt decreased by 2% compared to the prior period and recoveries
increased by 13%.
• Interest income of R1.29 billion earned on the debtors book during the period, down
from R 1.37 billion due to interest rate reductions and a decline in the book.
• Net cost of the book showed surplus of R71 million (2017: R41 million surplus).
Other operating costs
• Excluding foreign exchange, other operating costs decreased by 4%.
• Decrease attributable to ongoing cost containment efforts.
• Foreign exchange gains of R29 million (2017: R93 million losses).
TRUWORTHS ANALYSIS OF TRADING EXPENSES (CONTINUED)
9% decrease
43
TRUWORTHS OPERATING PROFIT PERFORMANCE
Compound growth rates:
Operating profit:
Jun: 5-year 1.1%, 3-year 1.9%
Average:
EBITDA margin:
Jun: 5-year 32.2%, 3-year 31.7%
Average:
Operating margin:
Jun: 5-year 30.4%, 3-year 29.7%
Operating
profit
(Rbn)
Margins
(%)
3.4 3.4 4.0 3.8 3.6
34 32 33
31 31
32 31 31
29 29
-
5
10
15
20
25
30
35
40
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
Operating profit EBITDA margin Operating margin
44
TRUWORTHS CAPITAL EXPENDITURE
Jun 2019
Committed
Rm
Jun 2018
Actual
Rm
Jun 2017
Actual
Rm
Change on
prior period
%
Store renovations and
development 355 320 335 (4)
Computer infrastructure and
software 102 59 56 5
Land, buildings and
refurbishments* 150 31 13 138
Distribution facilities 12 5 1 400
Motor vehicles 7 4 2 100
Total 626 419 407 3
* Increase 2019 due to refurbishment of additional offices and parking.
45
TRUWORTHS CASH FLOW ANALYSIS
(Rm)
*Earnings before interest, tax, depreciation and amortisation.
543
2 585
174
1 423
8 (223)
(797) (77)
3 093
(1 925)
(342)
(161)
(122)
(1 800) (1 257)
(2 000)
(1 000)
-
1 000
2 000
3 000
4 000
5 000
EBITDA* Working capital
movement
Interest received Dividends received Finance costs Tax paid Capex
maintenance
Free cash flow Dividends Capex expand Net share scheme
buy-backs
Other Cash flow before
financing
Net borrowings
repaid
Net cash increase
46
TRUWORTHS CASH REALISATION RATE
96
80 83 84
110
-
20
40
60
80
100
120
Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
Cash realisation rate
(%)
47 47
F I N A N C I A L R E V I E W
I I I . O F F I C E
2
48
David Pfaff (53) BCom, CA (SA), Dip Soc (Oxon)
Director
Jonathan Kutner (45) BA (Hons) Politics and Government
Merchandising Director
Kerry van der Merwe (42) BAccSci (Hons), CA (SA)
Finance Director
Rob Worthington (53) BSc (Hons) Psychology
Multi Channel Director
OFFICE LEADERSHIP
Michael Mark (65) BCom, MBA, ACMA
Chairman
Brian McCluskey (56) CA
Chief Executive Officer
Ghassan Hodeib (46)
Buying Director
49
• Retail sales decreased by 2.5% on a comparable basis.
• Decrease in gross margin from 46.0% to 44.4%, led by:
– A greater proportion of sales on mark-down merchandise as opposed to full price.
– A reduction in the margin of Made to Order (MTO) product (primarily in the first half of the year).
– A shift in sports brand product sales mix towards lower margin sports brands.
• E-commerce sales contribute 31% of retail sales (2017: 28%).
• Inventory turn of 3.2 times, with improvement in age profile of stock.
• Trading expenses down 1% (2017: down 3%).
• Cash generated from operations at £22.0 million.
• Interest-bearing borrowings reduced from £69.3 million to £48.8 million due to scheduled and additional loan repayments. Finance costs reduced from £2.4 million to £1.6 million.
• Net debt to equity reduced to 10% at June 2018 (2017: 18%).
OFFICE FINANCIAL REVIEW
50
OFFICE FINANCIAL PERFORMANCE
Jun 2018
52 weeks
Jun 2017
52 weeks
Change on
prior period
52 on 52
weeks
Jun 2017
53 weeks
Change on
prior period
52 on 53
weeks
Sale of merchandise (£m) 286 293 (2%) 299 (4%)
Gross margin 44.4% 46.0% 46.0%
EBITDA (£m) 21.8 30.3 (28%) 32.3 (33%)
Operating profit (£m) 16.1 23.8 (32%) 25.9 (38%)
Operating margin 5.6% 8.1% 8.7%
51
OFFICE RETAIL SALES BY COUNTRY
Retail sales
Jun 2018
52 weeks
£m
Retail sales
Jun 2017
52 weeks
£m
Retail sales
Jun 2017
53 weeks
£m
Number
of stores
Jun 2018
Number of
stores
2017
United Kingdom 257 264 270 138 138
Germany 13 14 14 8 8
Republic of Ireland 10 9 9 7 7
United States 1 1 1 3 3
Total 281 288 294 156* 156*
* Includes 40 concession stores (2017: 38)
52
OFFICE TRADING EXPENSES
Jun 2018
£m
Jun 2017
£m
Change on
prior period
%
Depreciation and amortisation 5.6 6.5 (14)
Employment costs 37.0 38.0 (3)
Occupancy costs 45.1 45.9 (2)
Other operating costs 23.5 21.5 9
Trading expenses 111.2 111.9 (1)
53
Depreciation and amortisation
• Lower capital expenditure over the last two financial years.
Employment costs
• Lower sales commissions and bonuses and reduction of store hours.
Occupancy costs
• Lower stand-alone store rent resulting from four stand-alone store closures.
• Lower onerous lease charge in current period.
Other operating costs
• Excluding non-comparable once-off items in the current and prior periods, other operating costs
increased by 5% (£1.0 million).
• E-commerce related promotion and fulfilment expenses increased by 5% (£0.8 million) as a result
of a 5% increase in e-commerce sales.
OFFICE ANALYSIS OF TRADING EXPENSES
14% decrease
3% decrease
2% decrease
9% increase
54
OFFICE CASH FLOW ANALYSIS
(£’000)
*Earnings before interest, tax, depreciation and amortisation.
Cash generated from operating activities
since acquisition of £67.5 million
21 693
327 70 (1 232)
(3 234) (465)
17 159
(3 157) (62)
13 940
(20 929) (6 989)
(10 000)
(5 000)
-
5 000
10 000
15 000
20 000
25 000
EBITDA* Working capital
movement
Interest received Finance costs Tax paid Capex maintenance Free cash flow Capex expand Other Cash before
financing
Net borrowings
repaid
Net decrease for
the period
55 55
A C C O U N T M A N A G E M E N T
T R U W O R T H S
3
56
• South African credit environment has improved.
• Demand for Truworths accounts is increasing with over 2 million applications in 2018
financial period.
• Over 50% of applications customers under the age of 30.
• Percentage of applications opened improved to 25%.
• Consistent account assessment risk criteria applied.
• Sales from new accounts show strong growth.
• Good growth in shoppable accounts.
• A sustained period of improved collections has resulted in the book having the highest
percentage current accounts since 2011.
• Reduction in bad debts.
• Provision percentage to balance has improved on prior period.
TRUWORTHS ACCOUNTS – OVERVIEW
57
TRANSUNION – SA CONSUMER CREDIT INDEX The TransUnion SA Consumer Credit Index (CCI) rose yet again in
Q1 2018 to 56 from 55 (preliminary 54)
Improving credit health can no longer be considered marginal or
temporary, with the index moving well into the 50s, suggesting notable
improvement. Is this corroborated by other consumer-relevant data?
Broadly, yes. Retail and wholesale volumes improved in Q1 2018
according to Stats SA, as did business and consumer confidence
according to BER and SACCI.
The number of consumer accounts measured increased from 53.8 to 54
million, reinforcing a turnaround from a declining trend.
New accounts in default (3 months in arrears) fell 8.3% y/y in Q1,
the largest recorded decline in 3-month arrear accounts since 2011.
Household cash flow improved 2.2% y/y.
Household debt service costs (South African Reserve Bank data)
continued declining as the prime lending rate declined by 25 basis points
during the quarter.
Distressed borrowing (credit cards and store cards) revolving credit
utilisation increased during the quarter.
35
40
45
50
55
60
65Consumer credit index at highest
level since 2011
53 Q1 2017
55 Q4 2017
56 Q1 2018
Source: TransUnion
58
724 941 1,222 1,306 1,520 1,659 1,790 1,993 1,740 2,088 -
500
1,000
1,500
2,000
2,500
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
No. of applications
TRUWORTHS ACCOUNTS – NEW ACCOUNT APPLICATIONS
(‘000) Demand for Truworths’ accounts/product is strong as evidenced by volume
of new account applications exceeding 2 million for the first time.
59
TRUWORTHS ACCOUNTS – NEW ACCOUNT APPLICATIONS
-
5
10
15
20
25
30
18 to 24 25 to 29 30 to 34 35 to 39 40 to 49 50+
Age distribution %
(%) Truworths appeals to the young market as ± 50% of
account applicants are under 30 and ± 25% are under 25.
60
-
5
10
15
20
25
30
35
40
45
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Risk approved
TRUWORTHS ACCOUNTS – RISK APPROVAL CRITERIA
Strict account risk approval
criteria maintained. (%)
61
TRUWORTHS ACCOUNTS – NEW ACCOUNT OPENINGS
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
2017 2018
Court ruling
After court ruling account openings have improved – average
number of accounts opened per month increased by 9,000.
No. of
accounts
62
TRUWORTHS ACCOUNTS – ACCOUNT SALES GROWTHS
Accounts sales growth year-on-year
Months on book
2012
%
2013
%
2014
%
2015
%
2016
%
2017
%
2018
%
1 – 12 months 27 (4) (8) 14 11 (24) 21
13 – 24 months 16 26 (2) (7) 15 6 (24)
25 – 36 months 12 16 24 (3) (3) 9 3
36+months 9 12 10 11 14 4 1
Positive
for
future
63
TRUWORTHS ACCOUNTS – SHOPPABLE ACCOUNTS
No. of accounts
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
2017 - Shoppable 2018 - Shoppable
Jul 2017: 74k fewer
able to shop
Jun 2018: 74k more
able to shop
64
TRUWORTHS ACCOUNTS – % OF BOOK BALANCE 4+ CYCLES DELINQUENT
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18
Industry Excl. Truworths Truworths GROUP
5% improvement in the percent of accounts 4+
cycles delinquent LY 14% TY13%
Source: Principa
65
• Sustained period of improved collections across all delinquency levels.
• Improved roll-rates indicative of improvement in quality of the portfolio.
• Consequential reduction in provision percentage to balance.
• Reduction in charge-off.
• Improvement in recoveries.
TRUWORTHS ACCOUNTS – COLLECTIONS
66
TRUWORTHS ACCOUNTS – STATISTICS
Jun 2018 Jun 2017
Number of active accounts (000's) 2 591 2 542
Change in number of active accounts (%) 2 (4)
Gross trade receivables (before doubtful debt
allowance) (Rm) 5 663 5 838
Change in gross trade receivables (before
doubtful debt allowance) (%) (3) -
Account sales as a % of retail sales (%) 69 70
Qualifying payment (%) 90 90
Accounts opened to applications ratio (%) 25 24
67
TRUWORTHS ACCOUNTS – STATISTICS (CONTINUED)
Jun 2018 Jun 2017
Active account holders able to purchase at
period-end (i.e. not in arrears) (%) 84 82
Overdue accounts as a % of gross trade
receivables (%) 14 14
Net bad debt as a % of account sales (%) 9.2 9.4
Net bad debt as a % of gross trade
receivables (%) 14.7 15.0
Doubtful debt allowance as a % of gross
trade receivables (%) 12.3 12.7
Trade receivable interest as a % of gross
trade receivables (%) 22.7 23.4
68
TRUWORTHS ACCOUNTS – INCOME VS. COSTS
(Rm)
577 522
581
674
785
887
1036
1273
1426 1349
516 487 503
648
877
1082 1110
1277
1385
1278
-
200
400
600
800
1 000
1 200
1 400
1 600
Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014 Jun 2015 Jun 2016 Jun 2017 Jun 2018
Income Costs
69
• National Credit Amendment Bill
– Bill proposes, inter alia, debt relief for over-indebted consumers who earn less than R7 500 per month and have unsecured debt of less than R50 000.
– These consumers will be able to apply to the National Credit Regulator(NCR) for debt intervention and follow a process to have their applications assessed first by the NCR and secondly the recommendations of the NCR assessed by the National Consumer Tribunal as to whether the debt should be re-arranged or be granted debt intervention.
– The bill has met broad opposition and Truworths is using all available avenues to respond and comment on both via the National Clothing Retail Federation of South Africa and individually.
– Due to uncertainty on how the bill will be implemented it is premature to comment on its potential impact.
• Doubtful debt allowance – IFRS 9
– Doubtful debt allowance under IFRS 9 likely to increase due to recognition of life-time expected losses.
– This adjustment does not affect our credit strategy design process as these always considered the life-time provision.
– The increase in the allowance on transition in FY19 will be adjusted through retained earnings.
TRUWORTHS ACCOUNTS – REGULATIONS AND ACCOUNTING STANDARDS
70 70
S T R A T E G I C F O C U S A R E A S
4
71
Truworths believe, as highlighted by leading apparel retail studies that:
• The predicted death of bricks and mortar retail stores at the hands of e-commerce has been
exaggerated.
• Studies have shown that omnichannel shoppers (online and in-store) are the most valuable
customers.
• Opening a new store today involves more focus on overall customer engagement and experience.
• Stores are no longer venues for merchandise selling, but are rather the locus of consumer
engagement, across all channels.
• Sophisticated retailers have systems that assign orders for fulfilment to the warehouse or to stores
based on a variety of analytical factors.
STRATEGIC FOCUS AREAS – THE FUTURE OF RETAIL
Extracts from: The Apparel Top 50 for 2018: Brick and Mortar and Digital Closing the Gap.
72
• The role of the store has changed significantly.
– Roughly 90 % of shopping is still done in a physical store and store is now just one stop along a customer’s
journey through online sites and social media.
• The physical store has moved from a place of purchase to a place of brand experience.
– Artificial intelligence is becoming the core engine to drive change faster.
• E-commerce has obviously placed new pressures and expense on apparel companies, up and down
the supply chain. (In areas of logistics, fulfilment and returns).
• Increasingly, apparel companies are addressing the returns problem on the front end with sizing
algorithms, and on the back-end with better processes and technology.
STRATEGIC FOCUS AREAS – THE FUTURE OF RETAIL
Extracts from: The Apparel Top 50 for 2018: Brick and Mortar and Digital Closing the Gap.
73
Selected comments by former CEO of J. Crew Millard 'Mickey' Drexler re his
views on bricks and mortar retail:
• Drexler defended the legitimacy of physical retail for “bringing products to life”.
• Drugstores and retailers focused on commodities are headed for “major disruption”.
• Firmly believes physical stores have their place in the world. “I’m always looking for the unique and
the surprise, and things out there that are exciting. You can’t do that without a store. It’s a canvas
to paint on. A store does bring to life the product. It brings to life a story. I think they have a place
to stay”.
STRATEGIC FOCUS AREAS – THE FUTURE OF RETAIL
Extracts from talk by Mickey Drexler (ex CEO of J. Crew) at Retail Radicals forum at Columbia University.
74
STRATEGIC FOCUS AREAS
Group focus areas
• Truworths and Office continue to collaborate
• Investigate strategic acquisitions
Truworths focus areas
• Expand e-commerce
• New store concept
• Introduce lay-bys
• Supply chain
Office focus areas
• Office DNA
• New store formats
• Marketing, customer engagement and loyalty
• Expansion and growth of e-commerce
75
STRATEGIC FOCUS AREAS – TRUWORTHS E-COMMERCE
• New Truworths website launched February 2018.
• Profitable from day 1.
• Turnover equivalent of a mid-sized store.
• Office London live September 2018.
• Cosmetics and fragrances live before peak-trade.
• Fashion Finder will be launched in early 2019 to deliver a broader omni-channel experience.
• Loads of Living to be live before year ended June 2019.
• Identity next financial period.
76
STRATEGIC FOCUS AREAS – TRUWORTHS STORES
New store concept:
• ‘Context’: An EXPERIENTIAL concept store by TRUWORTHS
– Flexible space of thoughtfully chosen sophisticated designer ladies fashion, fragrance and cosmetic beauty
brands as well as homeware.
– Curate our product offering and the manner in which we present it.
– Two free standing stores planned to open in the 3rd/4th quarter of the 2019 financial year.
77
STRATEGIC FOCUS AREAS – TRUWORTHS LAY-BYS
Customer selected merchandise is set aside until the customer has fully paid off the item over 3
months. This gives non-account customers, who are unable to pay up-front, access to Truworths
merchandise.
• Pilot has been running since October 2017.
• Encouraging results, with sales lifts of approximately 2%.
• Roll-out to all stores to be completed before festive trade 2018.
78
STRATEGIC FOCUS AREAS – TRUWORTHS SUPPLY CHAIN
• A large portion of the range is imported due to either price or manufacturing capabilities that cannot
be produced viably in South Africa. – Both fabric and actual styling is in this case committed from 19 weeks prior to delivery.
• Local production is continuing to grow. – Only commit to fabric and production capacity from 19 weeks prior to delivery.
– Finalisation of the actual style is usually done 8+ weeks prior to delivery.
• The Quick Response initiative is continuing to grow. – Fabric and production capacities are committed to 19 weeks prior to delivery.
– Tests are performed early in the season and future styling is adapted to quickly get into ‘best sellers’.
– Finalisation of colour and styling is done 4+ weeks prior to delivery.
• Another focus is our ‘Fast Fashion’ initiative. – Commit to strategic fabric and production capacity 19 weeks prior to delivery.
– Final styling, based on latest trends, is then committed to as low as 4 but usually about 8-10 weeks prior to
delivery.
• Seasonal replenishment styles – Replenishment style is ordered and delivered within 3 or 4 weeks.
79
STRATEGIC FOCUS AREAS – TRUWORTHS
• Service Obsessed Approach to Customer – Service obsessed brand ambassadors – across all shopping mediums, an exceptional shopping experience, brand loyalty.
• Data-driven decision-making – Intelligent use of customer data – enhance customer-centricity.
• Integrated brand marketing – Consistent brand image for the emporium and constituent brands.
• Expansion of new brands – Loads of Living and Office London. — Refine Loads of Living product offering and test new store concept.
— Continue the roll-out of Office London stores.
80
• Business Philosophy and DNA – Rolled out across the business and now incorporated into annual staff assessments.
• New store design – Store design concept further refined after initial roll out to Arndale Manchester, Oxford and
Bracknell.
– 'Store of the future' concept is currently being developed with initial roll out planned for
January 2019.
• Product and planning methodology and systems
STRATEGIC FOCUS AREAS – OFFICE OTHER AREAS
81 81
O U T L O O K
5
82
GROUP TARGETS 2019
Jun 2019
Target
52 weeks
Jun 2018
Actual
52 weeks
Gross margin 51% – 55% 52.4%
Operating margin 19% – 24% 22.5%
Return on equity 23% – 28% 27%
Return on assets 20% – 25% 25%
Inventory turn 3.5 – 4.5 times 4.0 times
Asset turnover 0.9 – 1.3 times 1.1 times
83
Retail sales for the first 6 weeks of the 2019 financial period.
• Continued pressure on consumers – low GDP growth, high unemployment and rising cost of living.
• Political uncertainty, consumer confidence and EM pressure remain obstacles for growth.
• Focused on strategic initiatives to mitigate pressures in the external environment.
• Lay-bys, e-commerce, roll-out of Loads of Living, new store concepts and products expected to
contribute.
• Improved debtors metrics a positive indicator for future sales.
• Inflationary outlook low at 0% for July to December 2018 (Summer 2018).
• Space growth for 2019 and 2020 at 2.5% and 1.5% respectively.
• Net new stores of 10 as 2019 will see the closure of 24 under-performing stores.
TRUWORTHS – OUTLOOK
11%*
increase
* Not directly comparable to the first 6 weeks of the prior period due to the shift in the start of the end-of-season sale.
84
• Brexit negotiations uncertainty will continue to negatively impact the trading environment.
• Stable inflation, better employment growth and wage inflation positive for UK household disposable
income.
• Improved ranges and product mix expected to address margin decline.
• Excellently positioned for growing online and mobile retail.
• Improved in-store experience aimed at attracting in-store customers.
• Marketing, customer engagement and loyalty initiatives to attract and retain customers and to
improve experience.
OFFICE – OUTLOOK
Retail sales for the first 6 weeks of the 2019 financial period. 3%
increase
85
6
Q U E S T I O N S
86
This presentation contains certain forward-looking statements with respect to the financial condition
and results of operations of Truworths International Limited and its group companies, which by their
nature involve risk and uncertainty because they relate to events and depend on circumstances that
may occur in the future. Factors that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to: global and national economic conditions;
growth in trading space; interest rates; credit and the associated risks of lending; merchandise
clearance rates; inventory levels and stock turn; gross and operating margins achieved; and competitive
and regulatory factors. The Group does not undertake to publicly update or revise any of these forward-
looking statements, whether to reflect new information or future events or otherwise.
DISCLAIMER