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Truworths operating profit up 3%

‘The affordability legislation is limiting our ability to grow our credit sales’ – Michael Mark, CEO – Truworths.

SIKI MGABADELI:  Truworths came out with its results for the 26 weeks to December 25, reporting a 3% drop in headline earnings per share to 392.6c for the period, a 7% increase in cash generated from operations to R2.2 billion, and an interim dividend of 270c/share.

Michael Mark is CEO and joins us now. Michael, thank you so much for your time today. Let’s start with group retail sales. When you include Office Retail, they are up 21%, but without Office they are unchanged. What does that reflect, then, in your overall operating conditions?

MICHAEL MARK:  Siki, it means that we are facing lots of headwinds in very tough markets at the moment. We were able to achieve a slight growth of about 3% in operating profit and, as you just said, a 3% decline in diluted headline earnings per share. So the environment is tough.

However, given that tough environment and headwinds, we feel that we’ve achieved quite good results. Our asset base has increased, our performance has been okay and we are looking forward to improve conditions in the next year or two.

SIKI MGABADELI:  How much of that do you think might change the balance between cash and credit sales because on the cash-sale side you are seeing growth of 53%. The credit-sale side remained unchanged, and we’ll talk about the reasons behind that as well.

MICHAEL MARK:  The cash-sale growth has been only because it’s non-comparable. We own a business in the United Kingdom which is called Office, which is a shoe chain – and that’s all cash. If you take that out of the numbers and you only look at the Truworths and Identity South Africa and southern African operations, cash and credit sales were both similar, at zero growth.

So cash and credit are equally as tough at the moment.

SIKI MGABADELI:  Goodness. And that is reflective of course of the slow economic growth that we are seeing, consumers being under pressure and all of that.

MICHAEL MARK:  Worsened by the affordability legislation. What has happened as a result of that is normally in tough times like this we would be able to use to improve credit sales while cash sales are so tough. You can do that in times like this, giving credit to the right people. But unfortunately the affordability legislation is limiting our ability to grow our credit sales, and that is also having a significant negative impact, besides the economic environment.

SIKI MGABADELI:  I know that you, along with two other JSE-listed retailers, have initiated legal action on this. It was last year, I think. Firstly, how far is that – where does it stand? And secondly, in what ways does it constrain your ability to giant credit to those who are able to comply?

MICHAEL MARK:  Well, there are two aspects of it. I can’t talk too much about the legal situation for reasons that are obvious. It’s ongoing, the legal dispute, and we are not yet sure when the court dates will actually happen – probably around April or May, I assume. The real issue is we feel, the three large retailers you are referring to, that credit enables us, using our score cards and the very many bureaus we all have regular ongoing online real-time access to, to access all the information we need to adequately assess risk.

The requirement of the credit legislation is only one aspect of it; the others we are all very much in favour of. Responsible credit is critical in South Africa. But the requirements to bring in your recent three payslips and recent three bank statements is a very inconvenient and unnatural process for a person who only wants R1 000 credit, or R1 500. They are not buying a car or a home or a large piece of furniture. And that requirement is making our ability to open new accounts and give X credit to existing accounts is much more onerous, and is causing the problem.

SIKI MGABADELI:  All right. Coming back to your operations – and I want to talk a little bit about the environment again – in the UK what is the situation there? If we look at the exchange-rate environment, for example, exchange rates currently are very much a big talking point, whether it’s the rand or even the pound sterling. The exchange rate, during the operating period we are dealing with here now, was quite weak. How does that impact your own profitability?

MICHAEL MARK:  You are correct. It has become so much more complex when you are operating internationally because, as you say, the UK has its own economic problems at the moment. The pound has weakened since Brexit and the crisis they had there and on the other hand the rand has strengthened significantly since we bought the business. When we bought it, it was about R21/pound and now it’s about R14.50, R15. That change makes some of our numbers worse because we have the same pounds but fewer rands for the pound. And so that also has an impact on us.

So we try to look at those issues separately. We  treat the UK as an entity, looking at it in pounds, and we treat the South African and southern African business separately. But it is more complicated because of all the currency and economic issues.

SIKI MGABADELI:  Which you can’t control.

MICHAEL MARK:  And we don’t try to.

SIKI MGABADELI:  What’s your outlook, Michael?

MICHAEL MARK:  Interesting outlook. The affordability legislation is a concern and we are working our way through that and trying to mitigate it as much as possible.

But, on the other hand, on a positive note, Office is starting to really look promising. We’ve made some great inroads there. Our stock turn has gone from 2.5 to 3.5. There have been a lot of things happening in Office which are positive, so we think the UK market and our business in the UK over the next two to three years should look quite good.

And then for Truworths in the South African economy, with all the tough conditions we are facing, we do feel some positives of the fact that the base that we are fighting from around April/May onwards will be much lower. And, given that lower base, and given many, many initiatives we’ve undertaken – we have a new commerce facility, we have a new loyalty programme, we’ve got lots of things we’ve been doing – are all happening over the next 12 months.

So we feel, if you look at the medium term, between let’s say the next six months and the next three years, we actually have quite a more optimistic than we’ve managed to achieve in the past 12 months.

SIKI MGABADELI: We’ll leave it there. Thanks, Michael. Michael Mark is CEO of Truworths International.

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