Chief Executive Officer’s Report
COVID-19 has had a significant impact on the apparel retail sector, with the forced closure of the economies in our major markets of South Africa and the United Kingdom restricting our ability to trade and changing the way we do business.
Following the spread of COVID-19 from China to Europe, it became apparent that we were facing a universal pandemic. We responded decisively by forming a task team comprising the CEO, executive directors of Truworths and key executives to manage the impact on our operations in Africa and the UK.
Our primary focus from the outset was to ensure the sustainability of the business and to preserve cash, while managing the implications of the pandemic on our employees, suppliers, landlords and account customers (refer to Managing Stakeholder Relationships).
During the five weeks of hard lockdown in South Africa we earned no revenue from merchandise sales. Account collections were significantly reduced as customers’ income was adversely impacted and account payments, which are mostly made in store, were hampered (refer to Managing the Impact of COVID-19).
In the UK all our stores were closed for 12 weeks. Unlike in South Africa, we were permitted to trade online during this time and benefited from Office’s strong e-commerce presence.
Group retail sales declined by 9.2% to R16.9 billion. Truworths Africa saw retail sales decrease by 8.7% for the year while sales for the second half were 23.5% lower.
Office retail sales decreased by 16.4% to £233 million, contributing 27% of the Group’s total retail sales. Retail sales for the second half to June 2020 were down 33.8%.
The pandemic had a severe impact on the Group’s performance for the period, resulting in lower revenue, higher debtors provisioning levels, impairments and reduced profitability. However, the business has shown its resilience and emerged in a net cash position, reporting a high gross margin in Truworths, excellent inventory management and tight cost control.
While the world has been obsessed with the negative impact of the pandemic, our approach has been to address the challenges and implement strategies to minimise the impact on our business. We are now focused on positioning the Group to pursue opportunities to grow and prosper in a post-COVID-19 environment.
Truworths: Expanding brand portfolio
Truworths owns a portfolio of market-leading, aspirational fashion brands, offering some of South Africa’s most sought-after ladieswear, menswear and kidswear labels. We continue to expand the brand portfolio to increase customer appeal and in the new financial year will be launching or relaunching exciting brand and store concepts developed over the past year.
The Identity Superstore will capitalise on the popularity of the Identity brand to grow sales to this younger customer segment. Hey Betty, our brand for the young urban fashion lover, will be expanded with an enticing store environment and increased range and we are planning a new specialist menswear brand.
The Loads of Kids Emporium, together with a full online offering, will combine our upmarket kids brands, LTD Kids, Naartjie, Earthchild, a new baby range of LTD Kids and, in keeping with the concept of Loads of Living, it will offer baby accessories and gifting including bed linen and towels.
Our unique Truworths emporium concept will be taken to another level with the development of a new futuristic store design which is set to be introduced in the 2022 financial period.
Truworths: Growing omni-channel presence
The investment in our omni-channel capability over the past few years came to the fore as customers chose the safety and convenience of online shopping during the COVID-19 pandemic.
In the period before lockdown e-commerce sales were growing by over 100% on the prior period. Once the restrictions were lifted on e-commerce from 1 May 2020, sales increased by 207% in May and 288% in June, with e-commerce sales being 2.5 times greater than the sales of the largest Truworths store.
E-commerce is now available across all the main Truworths brands and, together with the extensive Truworths store footprint, creates an engaging omni-channel experience for customers to shop effortlessly in-store and on digital devices. The online offering will be extended in the new year with the addition of an e-commerce site for Identity.
Truworths: Supply chain
The outbreak of the pandemic had a significant impact on the international and local supply chain, affecting all aspects of the buying process, being sourcing, sampling, production, shipment and delivery.
COVID-19 has created opportunities to enhance the supply chain and buying processes. As our merchandise teams were forced to work remotely, many innovative solutions emerged to facilitate range building and product development. Enhanced design capabilities enabled product development without the normal reliance on product sampling, while new methods were developed to materially shorten lead times on quality assurance processes without compromising standards. Several of the processes adopted during lockdown are likely to be maintained as they have created opportunities to save costs and shorten lead times.
In the 2021 financial period, Truworths plans to accelerate the strategic review of the local supplier base to build significantly closer working relationships with design houses and cut-make-trim (CMT) operators and further its development of an integrated vertical supply chain to create a significant local supply cluster.
Office: turnaround strategy
The continually tough trading environment in the UK, compounded by the COVID-19 lockdown, has resulted in a non-cash impairment charge of £118 million being raised against the Office trademarks (refer to the Chief Financial Officer’s Report).
The Office turnaround plan initiated in 2019 was affected by the outbreak of the pandemic. As a result of the impact on the profitability and liquidity of Office, the board engaged advisers to consider restructuring options to secure the long-term viability of Office. Part of this process was to negotiate further funding. After the end of the reporting period the Truworths International board provided funding of £6.5 million through a secured revolving credit facility to Office over the next 15 months.
Through this process the strength of the Office and Offspring aspirational brands was highlighted due to their unique market positioning and the relationship they have with the major international fashion footwear brands.
Turnaround efforts have been intensified post-lockdown to ensure the sustainability of Office. This includes terminating unprofitable store leases as speedily as possible, a staff redundancy programme, tight management of costs and capital expenditure, growing Office’s higher-margin own-brand offering, accelerating omni-channel development and expanding the e-commerce offering and digital customer experience, and further strengthening relationships with suppliers.
The store portfolio continues to be rationalised. Loss-making and marginal stores are being closed as leases expire, although the chain has several long-term legacy leases, making it difficult and expensive to exit these under-performing stores.
After closing a net 10 stores during the 2020 financial period, up to a further 28 under-performing stores are planned to be closed in the new financial period which will reduce trading space by a further 20%. This ongoing rebalancing of the property portfolio will result in the planned closure of up to a further 30 stores between 2022 and 2024, reducing the chain to around 70 stores, which we believe is the optimum footprint for Office.
Thank you to our Chairman, Hilton Saven, and my fellow directors for their support, guidance and oversight in confronting this pandemic. Thank you to our executive teams in Truworths and Office, and particularly the COVID-19 task team, for their leadership during this time of crisis. Our employees have encountered work and social challenges on a scale never experienced before and I thank them for their commitment and resilience.
I echo the sentiments of our Chairman in thanking our external stakeholders, including our suppliers, landlords, funders and regulators, for their engagement with the Group in addressing difficult issues during lockdown.
In closing, I thank our loyal customers who have continued to support us in our stores and online during these trying times. We look forward to continuing to exceed your expectations for quality fashion apparel and footwear.
Chief Executive Officer
Trading conditions in South Africa and the UK will continue to be depressed owing to the impact of COVID-19. The possible reinstatement of lockdown restrictions, mainly in the UK, may result in store closures which could have an adverse impact on Group revenue and earnings.
Increasing COVID-19 infection rates in the UK have resulted in the government imposing new restrictions, including a renewed call for citizens to work from home, which will further impact on retail foot traffic and could negatively impact revenue and profitability.
While the uncertainty around COVID-19 is expected to continue for many months, our strong balance sheet and ability to manage margins and costs effectively position the Group to succeed in these trying times.
Consumer spending is expected to remain under pressure in the medium term owing to the effects of South Africa’s prolonged economic downturn, fuelled by the negative impact of the COVID-19 pandemic. The fragile labour market has come under increased pressure as many employers implement workforce reductions or face closure, with rising unemployment a further threat to consumer spending and bad debts. Electricity load shedding also remains a risk to trading in the months ahead. Lower consumer inflation, low interest rates and government aid packages may, however, provide some relief for struggling households.
In the months ahead Truworths will focus on the health of the account portfolio to manage the impact of higher credit losses arising from the economic downturn in the wake of COVID-19. Lower interest rates will result in a reduction in interest earned on the debtors book, while at the same time will provide some relief to customers.
Truworths’ medium-term prospects will be supported by extending its merchandise ranges, its expanding e-commerce offering, the success of the lay-by payment option offered to non-account customers, continued investment for growth, robust cash flows and strong balance sheet.
Trading conditions and consumer confidence remain under intense pressure and it is expected that the retail sector will remain constrained in the medium term owing to the adverse impact of COVID-19 and the uncertainty relating to the January 2021 Brexit deadline.
Office’s turnaround strategy will be supported by its growing e-commerce business which is well positioned to capitalise on the increasing shift to online shopping that has accelerated during the COVID-19 pandemic.