Truworths released its 1H21 results (to 27 December 2020) on 18 February, reporting a 7% YoY decline in diluted HEPS to ZAc339/share. Group sales were down 9% YoY, while the local retail division’s sales fell by 7% YoY and sales in Office UK declined by 25% YoY in British pound terms, with physical store sales plummeting 53% YoY. However, we note that online performed very well in the UK. The Group’s gross profit margin was down by a 100 bpts to 51.5%, with the South African (SA) gross profit margin falling by 150 bpts to 54.7%, due to a very weak performance over November 2020, that Truworths could not make up for in December. This led to greater markdowns than management had expected, which impacted the gross margin negatively. The gross profit margin in its UK Office segment held up slightly better – down only 70 bpts to 42.3%. Operating expenses were extremely well maintained with employment and occupancy costs remaining almost flat over the period. This good cost management and the release of the bad debt provision led to the Group’s trading margin being more resilient and dropping by only 60 bpts to 16.5%.
Truworths continues to impress us with its strong cash generation – R2.6bn in operating cash flow for the period under review. The Group now has a net cash balance of R1.64bn or just below 8% of its total market cap, enabling Truworths to continue with its share buyback programme. In FY20, the company bought 10.1mn shares for R352mn and it has continued to buy back shares in the market since its financial year-end (December 2020), buying back a further 2.2mn shares, and with this programme expected to continue. The Group’s ROE continued to improve (to 40%) after impairing the Office asset in 2018, while ROA remained constant at 26%. Encouragingly, asset turnover also continued to improve to 1.3x from a low of 0.9x in 2018.
Figure 1: The TransUnion CCI measures consumer credit health – 50.0 is the break-even level between improvement and deterioration
Figure 2: Truworths divisional retail sales
^ Truworths Man, Uzzi, Daniel Hechter Mens and LTD Mens, ~ LTD Kids, Earthchild and Naartjie, # Cellular, Truworths Jewellery, Cosmetics, Office London (South Africa) and Loads of Living divisions.
Interesting developments to keep an eye on
Truworths is trying actively to diversify its product offering and, over the next few months, it will be launching five new initiatives. These are:
It will be interesting to see how the market reacts to these new initiatives.
Truworths continues to trade at a discount to other SA discretionary retailers. It is currently trading on c. 10.8x forward PE ratio and is on a 7% dividend yield (see Figure 3).
Figure 3: Truworths vs the peer group BEst P/E ratio (blended 12 months)
Source: Bloomberg, Anchor
Truworths’ results came in at the mid-point of the company’s recent guidance – down c. 7% YoY. The retailer maintained its dividend policy of 1.5x cover and declared a final dividend of ZAc232. Although management must be commended for a good performance in a very tough operating environment, the quality of these numbers does not inspire us with confidence. The stronger-than-expected result was driven mainly by a significant unwind in the provision for bad debts.
Although we acknowledge that, at the face of it, Truworths’ credit book looks to be in rather good shape, it is debatable whether it is appropriate to unwind the provision as aggressively, especially in the current economic climate. Truworths is still struggling to get sales momentum going in its businesses, with sales in the first six-weeks of 2H21, declining by 6.9% and 38% YoY, in SA and in the UK, respectively. These sales trends result in us remaining cautious on the company and, although the valuation appears attractive relative to other SA retailers, we currently prefer to remain on the sidelines.