South Africa entered the COVID-19 lockdown in a fragile economic state on the back of a protracted downturn, with low growth, high levels of unemployment and consumers under serious financial pressure.
The reduction in interest rates to record low levels, payment holidays from banks and credit providers, government aid programmes and reduced living expenses during lockdown provided some relief to consumers in the short term to off-set household financial stress.
However, the full extent of the economic impact of COVID-19 may yet be felt. As financial assistance packages and payment holidays come to an end living expenses will normalise and possibly increase, while job losses could escalate. The South African credit environment is therefore expected to deteriorate in the third and fourth quarters of calendar 2020.
The Group’s response to the pandemic and closure of the economy demonstrated effective business continuity, robust risk management and the ability to operate in a state of disaster. On behalf of my board colleagues we commend our Chief Executive Officer (CEO) Michael Mark and his COVID-19 task team for their decisive and effective response to the pandemic.
Business sustainability, employee well-being and cash preservation were management’s priorities during the lockdown and contingency plans were implemented across all areas of the business and with our customers, employees, suppliers, landlords and funders.
We also acknowledge the human toll of this disease and remember those who have lost family and friends to COVID-19, and others who have suffered hardship during this pandemic.
Resilient financial performance
After a difficult first six months of the 2020 financial period, the devastation of the economy in the second half saw headline earnings per share in Truworths decline by 23.0% and in Office by 162.5%, resulting in the Group’s headline earnings reducing by 28.2% to 410.4 cents for the period.
The business has, however, remained highly cash generative, increasing cash from operations by 7% to R4.5 billion, despite the cash flow implications of losing 5 weeks of trading in South Africa and 12 in the UK.
Despite the impact of COVID-19 on the earnings for the period, the board has demonstrated its confidence in the Group’s cash-generating ability and prospects by declaring a final cash dividend of 31 cents per share, maintaining the dividend cover at 1.5 times and bringing the annual dividend to 280 cents per share.
The board also took advantage of the weaker stock market and repurchased shares totalling R583 million. Since the start of the programme in 2002 the Group has returned R3.8 billion to shareholders through share buy-backs.
We enter the 2021 financial period in a healthy cash position and our balance sheet is strong. Importantly, the Group’s business model has proved its resilience throughout the crisis and our investment case remains robust.
Commitment to Office
The COVID-19 lockdown had a material impact on our Office footwear business which had for the past few years been contending with the negative consumer sentiment in the UK owing to the prolonged uncertainty over Brexit.
The fragile trading conditions in the UK resulted in a non-cash impairment charge of £118 million being raised against the Office trademarks, following an impairment of £102 million in the prior period.
Late in the reporting period the board engaged advisers to undertake a comprehensive review of the business and to evaluate all options for the future of Office. The Truworths International board has committed to maximising the value of its investment in Office and has refinanced the business (refer to the Chief Executive Officer’s Report).
The trading environment in the UK remains uncertain in light of the COVID-19 pandemic, the Brexit transition and the migration to digital retail. The tightening of restrictions announced by the UK Government in late-September with a renewed call for citizens to work from home is a further blow to the ailing retail sector.
Despite these challenges, the board believes that Office remains a strong brand and a key strategic partner to the world’s leading fashion footwear brands. We are committed to the turnaround and success of Office, and are working closely with the management team and other stakeholders on the restructuring.
BOARD AND GOVERNANCE
Diversity and transformation in the boardroom ensure balanced decision-making, and that the needs and concerns of our stakeholders are addressed. Our board is diverse in its skills, thinking and composition, which assists the board in adding value to the strategic direction of the business.
We welcomed the appointment of Tshidi Mokgabudi as an independent non-executive director in February 2020. Ms Mokgabudi is a chartered accountant by profession, with cross-industry experience predominantly in banking and financial accounting. At year-end female representation on the board was 31%, in line with the voluntary medium-term target contained in the board’s gender diversity policy.
In last year’s Integrated Report we paid tribute to Dr Thandi Ndlovu, one of our longest-serving non-executive directors, who sadly and tragically passed away on 24 August 2019.
Our board has a healthy balance of longer-serving directors and those who have been appointed more recently. We are following a succession process of refreshing the non-executive component that will enable us to maintain continuity from long-standing directors while newly appointed non-executive directors grow their knowledge and begin to influence board deliberations. Four of the nine non-executive directors have been appointed to the board in the past 30 months.
Transparent and accountable financial reporting underpins good governance and Truworths International continues to be recognised for its standard of integrated reporting.
In the Ernst & Young (EY) Excellence in Integrated Reporting Awards the Group’s 2019 Integrated Report was ranked 8th (2018 report: ranked 10th) among the 100 largest companies on the JSE, again the only retailer in the top 10. The Group has been ranked in the top 10 in the EY reporting awards for 13 consecutive years, one of two companies to achieve this distinction.
At the time of releasing the Group’s annual results in September 2020 we advised shareholders that the Group CEO, Michael Mark, will be retiring in two years. Michael has successfully led the business for over 30 years. In addition, other senior members of the management team will be retiring within the next year, including executive director Doug Dare who has served the Group for 36 years.
Recognising this vast loss of experience and acknowledging the material issues impacting the business, the Nomination Committee of the board, which I chair, has assumed responsibility for developing and implementing a Group-wide senior executive succession plan over the next two years. This will ensure a smooth transition in a number of senior management positions, including the CEO.
We believe the company is well positioned for the succession process, having developed substantial depth of experience and highly competent senior management. The board is confident that all senior appointments will be filled by internal candidates.
After the successful implementation of the succession plan over the next two years, Michael will retire as CEO at the annual general meeting in 2022. He will then move into a consulting role for a further year to advise the board and support the transition as the Group seeks to maximise several long-term opportunities that have been identified.
We thank Michael for committing to lead the Group for a further two years to navigate the aftermath of the COVID-19 pandemic, Brexit in the UK, the turnaround in Office as well as the myriad of local and global economic headwinds.
Sustainability and governance
The COVID-19 pandemic has resulted in a focus by investors on the environmental, social and governance (ESG) performance of companies globally. Effective ESG practices are crucial for long-term sustainability and many companies that have not integrated these practices into their businesses have been exposed during the pandemic.
It is therefore pleasing that the Group again qualified for inclusion in the FTSE4Good Index Series which measures the performance of companies demonstrating strong ESG practices against global standards. We maintained our overall ESG rating of 4.2 out of 5 compared to the apparel retail industry average of 2.5. Our governance standards are assessed as part of the evaluation for inclusion in this index, with the Group obtaining the maximum score of 5 for the governance pillar, while recording 3.5 for the environmental pillar and 4.1 for the social pillar.
No business could have been prepared for the magnitude of the COVID-19 impact and I thank Michael Mark and his executive teams in Truworths and Office for their astute and uncompromising leadership in guiding the Group through this crisis. I also thank my fellow non-executive directors for the benefit of their wisdom and experience as we dealt with many unfolding challenges.
Thank you to our external stakeholders for their engagement during lockdown and for the candid discussions in addressing the challenging situations brought about by the pandemic and resultant lockdown. We look forward to building on these relationships in the months ahead.
Independent Non-executive Chairman