Modification of the Truworths Limited credit offering for Apparel and Homeware products saw the group’s margins improve in the 52 weeks to July 8, 2018. Revenue in the period increased 9,46 percent to $16,26 million from $14,86 million in the prior period.
Chief executive Temba Ndebele told analysts last Thursday that the group had managed to return to profitability due to the change in the sales mix. Retail sales were 9.7 percent higher at $13.45 million.
The group saw increased GP margin at 50.9 percent (2017: 40.2 percent) due to increased sales at full margin and no markdown in the period compared to a markdown of 13 percent of sales last year, and a change in sales mix in favour of apparel.
Credit sales made up 67.3 percent of sales from 70.6 percent last year, cash sales were 30.8 percent while laybye sales were at 1.9 percent. By store, Truworths cash sales were 30 percent higher and credit sales were up 11.6 percent. Topics saw a 35.3 percent increase in cash sales but credit sales were down 1.3 percent. There had been an increase in the number of accounts to 91 745 from 88 982.
Other income of $646 303 related to income from the CABS credit card facility.
The group’s manufacturing unit reported a loss of $10 365, which narrowed from the $171 739 loss achieved last year. Trading expenses were 6% lower at $8.08 million than last year although there had been an increase in employment costs due to return to full time work for all employees in September. Employment costs were 4.4 percent higher and Occupancy costs were down 14.2 percent but made up 16 percent of retail sales.
Ndebele said occupancy costs had declined due to store closures. Six Number 1 stores had been closed down and this had also had an impact on lease expenses which were down 13.5 percent.
Other operating costs had increased 3.1 percent due to higher distribution volumes than prior year and increase costs of computer consumables and motor repairs.
The group had extinguished all long term and foreign obligations while short term borrowings were down 3.9 percent to $7.5 million. Trade receivable costs decreased 48.1 percent after the net bad debt write off was 28 percent lower than last year. Trade receivables were down $8.98 million from $9.05 million. Doubtful debt allowance charge for the year was down 53.3 percent and debt collection costs were down 12 percent. Operating profit was 15.1 percent of retail sales at $2.02 million after the group overturned a loss position. Subsequently the pre-tax line was at $1.11 million from a loss of $2.38 million and the bottomline closed at $806 916. The group’s return on capital and NAV were at 14.6 percent and 1.02 in that order.
Giving an update on performance post year end, Ndebele said sales for the two months (July and August) were positive on the apparel side. Truworths sales had gone up 26.7 percent, Topics 41.6 percent and Number 1 at 52.3 percent. Ndebele however said that shortage of foreign currency will continue to pose a challenge to product availability and will negatively affect product supply and sales. “Resurgent inflationary pressures will negatively affect consumer disposable incomes and confidence.”
Our thoughts on Truworths: In the just-ended earnings season, there have been a host of different outcomes depending on what band of inflation you find yourself in, which ultimately determines whether an increase is due to inflation or inflation and some growth. Generally, top lines have risen by 20-30 percent and the bottom line depends almost entirely on whether you have a large imported component in your cost of sales – but it is anything from 10 percent to 200 percent.
For all the brouhaha about the economy growing, Truworths (and for that matter Edgars last week), have high imported components in their goods, and had different outcomes – Edgars did the industry standard of 30 percent on the topline and 200 percent on the bottom-line, while Truworths was 9.7 percent and a return to profit. Firstly, lets qualify that Truworths was reporting YE results, so a direct comparison is unfair and it’s also difficult.
By its own admission, Truworths makes its annual profit in the two weeks over the Christmas period and has a quieter H2 – this year H2 was as strong as H1 and activity in the past few months has warmed up even more with Topics and Number 1 reporting sales growth of 41.6 percent and 52.3 percent. Ndebele gave two examples of people walking into stores and buying everything in a single line as they worked out the “value proposition” of buying the items on credit.
Behaviour such as this, and profit increases of the order of the past earnings season are out of keeping with a “low inflation economy” such as is claimed by the authorities. But it was not so much the results of these two retailers, but the ‘other evidence’.
If this economy was roaring, the number of accounts would be too.
Edgars had slightly fewer overall, while Truworths had slightly more and the number of outlets increased marginally. Much will depend on what happens over the next month as the past year of ‘economic growth’ has been driven by quasi-fiscal expenditure programmes (Command Agriculture and ‘subsidies’ for small scale miners) that have put money in peoples’ pockets. Whatever may be claimed, this drives inflation and many of us have seen this picture before. As Ndebele pointed out, it really depends of what level of debt Truworths opts to take on to finance this.
As is the case with varying levels of inflation, there is also a varying levels of valuations in the market and, as was the case in 2003 when the first Great Stock Market Rally of the inflationary period started (with NMB’s note on the expected performance of Colcom F03), it is not quite apparent what will ignite this in the market. The top stocks are sitting on PEs of 20-30 while others, most notably the banks, are on single digits historic PEs.
We have seen revaluations of some of the smaller companies in recent months – among them the long overdue rise in Powerspeed, Proplastics, Turnall, and Zimplow – even Truworths and Edgars have been on the move – but there is a good deal of value in the lower capitalised retail stocks – Truworths ($5.45m) with its 61 branch network is certainly among those – and we are only going to see earnings acceleration in the year ahead.
