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Truworths sees tough environment continuing, price inflation at >10% in H2: Michael Mark – CEO, Truworths

This environment ‘one of the worst’ in 23 years.

HILTON TARRANT: South Africa’s largest listed clothing group, Truworths International, reported results for the 26 weeks to December 29 today. Group retail sales for those 26 weeks up 7.1%. Growth in comparable stores up 1.1%. Over that period product inflation – i.e. the prices of the clothes that Truworths sells – averaged 7%.
   We say good evening to Michael Mark, chief executive of Truworths International. Michael, you’ve been in the top job for 23 years now. You’ve seen it all – perhaps several times over. For some perspective, how challenging is this environment right now?

MICHAEL MARK: One of the worst ones, Hilton. [Chuckles] It’s not the worst. We’ve had bad times before and downcycles are frequent. One’s got to have bad to appreciate good, as you well know. But this one is quite a difficult downturn. There’s a lot of headwind.

HILTON TARRANT: And quite patchy as well.

MICHAEL MARK: Patchy, yes. But that’s I would say normal. When you’re in a downturn things do become unpredictable and in a sense all the bad things come together at the same time. That’s how life is in the normal way. So yes. But this is quite severe, and its been carrying on for quite a while.

HILTON TARRANT: Inflation in these six months 7% – the last six months of 2013. What about these current six months? Are we starting to see the impact of the weaker rand in a more pronounced way?

MICHAEL MARK: Definitely. We are expecting inflation in our product to go up by in excess of 10% in the next six months. With the rand weakening by over 20% that’s almost an inevitability if you don’t want to change your merchandise range too much.

HILTON TARRANT: Are you doing any more promotional activity than usual at the moment?

MICHAEL MARK: Not really in the way you imply. Yes, we are changing our merchandise ranges in the sense that we are trying to change them to anticipate and meet what we perceive to be changed customer tastes and needs – more dramatic than in the past. But promotionally – not really.

HILTON TARRANT: In the July to December period, if you look through the different divisions of the business, menswear was really the standout. Off a relatively high base – R1bn in sales – and you’ve managed to grow that sustainably.

MICHAEL MARK: Ja, the menswear business, which of course includes a number of our brands – one of which is Uzzi, which performed particularly well – did really well. And then the other one you will have noticed is the LTD, and the main component there that’s grown so well is the children’s wear.

HILTON TARRANT: Michael, the credit environment at the moment is obviously impacting you with almost three-quarters of your sales being credit sales. In today’s announcement you speak about the general deterioration in the credit environment. In terms of new accounts and applications you are receiving for new accounts, the approvals for those – how are those rates coming down at the moment?

MICHAEL MARK: Well, we actually say we are in 71% credit. We are approving 26% of the applicants who apply for credit with us. It was 35% just a year ago, and 40-something percent a year before that, which obviously means 74% of new accounts are being declined. So partially that’s because we’ve tightened up on our credit criteria, but the other part of it is that the general risk of the applicant base has increased.

HILTON TARRANT: And in terms of managing the book, you have traded through a cycle like this before.

MICHAEL MARK: We have. And what we do is we take the pain immediately, so we are very immediate in terms of our write-offs, tough in terms of our provisions. We reacted about in October 2012 to what we saw then already as being a declining trend, and we made some quite dramatic changes then. And only now are we starting to see the slightly positive change in our statistics coming through as a result of that.

HILTON TARRANT: Are you still planning to add stores in 2014?

MICHAEL MARK: Ja, in 2014 until June the space growth will be about 10%, but the following year about 6%.

HILTON TARRANT: So a slowdown there. And trading so far in the first couple of weeks of the second half?

MICHAEL MARK: Still not great – about 8%, whereas it was about 7% for the six months. So we expect the next six months to still be quite tough, and then we are hoping that from July this year, which is what we call our summer season all the way through to the next year, we are hoping things will improve at that point.

HILTON TARRANT: Thanks to Michael Mark. David, he’s been there, he’s done that – 23 years and a couple more to come.

DAVID SHAPIRO: Well, when he says these are the toughest years, one’s got to believe it. I think the big worry is the inflation, the 10% inflation over the rest of the year, and also the deterioration of the credit book. I think we are seeing it coming through in all the retail results.

HILTON TARRANT: If you are approving 26% of your applications it means that you are only approving 2.5 people out of every 10 that apply.

DAVID SHAPIRO: Sure. That’s part of it. But you’ve still got the legacy issues – you’ve still got to run down your book and it’ll take some time before that actually filters through. But I think it’s a common trend in all the results that we are seeing – that consumers are under pressure and finding difficulty in paying off their debts.

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