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Chief Financial Officer’s Report

It is encouraging to report to shareholders that the Group has emerged financially robust from the COVID-19 crisis, with a strong balance sheet and a healthy cash position.

David Pfaff

Chairman

The business was severely impacted by the pandemic and the related lockdown trading restrictions, which resulted in lower revenue and increased expenses owing to the significantly higher doubtful debt provision required in the Truworths Africa segment.

The adverse trading conditions in the UK, compounded by COVID-19, led to a non-cash impairment charge of £118 million being raised against the Office trademarks (refer below to Impairment of intangible and other assets).

Group retail sales declined by 9.2% to R16.9 billion. Truworths Africa experienced a retail sales decrease of 8.7% to R12.3 billion for the 52-week period ended 28 June 2020 (the period) as retail sales for the second 26 weeks declined by 23.5%.

The Office segment retail sales decreased by 16.4% to £233 million. Retail sales for the second 26 weeks were down 33.8%.

These challenging trading conditions in South Africa and the UK contributed to the Group’s headline earnings per share (HEPS) declining by 28.2% to 410.4 cents for the period.

While COVID-19 has had a devastating impact on the second-half performance we need to remain cognisant of the challenging trading conditions that prevailed pre-lockdown. Power outages, high unemployment and increasing utility costs in South Africa, together with Brexit uncertainty in the UK, all contributed to HEPS growing by only 0.5% in the first half of the period.

The Group has remained strongly cash generative, increasing cash from operations by 7% to R4.5 billion. The Group ended the period in a net cash position.

Despite the impact of the pandemic and the weak consumer outlook the directors declared a final cash dividend of 31 cents per share, bringing the annual dividend to 280 cents per share (2019: 384 cents).

IMPAIRMENT OF INTANGIBLE AND OTHER ASSETS

The continuing tough trading environment in the UK, fuelled by the COVID-19 pandemic in the second half of the period, has impacted the profitability of the Office segment, necessitating a reassessment of the carrying value of the Office segment’s assets. This has resulted in a non-cash impairment charge of £118 million (2019: £102 million) being raised against the Office trademarks. In addition, right-of-use assets and property, plant and equipment in respect of leased retail premises were impaired by £14 million (2019: £21 million).

In Truworths Africa the YDE goodwill balance was impaired in full by R52 million (2019: Rnil), while right-of-use assets in respect of leased retail premises were impaired by R95 million (2019: R12 million).

RESTRUCTURING OF OFFICE

In July 2020 the Group announced that it was negotiating further funding for the Office business as well as implementing various restructuring initiatives, including a staff redundancy process and store lease negotiations aimed at ensuring the long-term viability of Office.

Following a comprehensive process, the board decided to advance funding of £6.5 million to Office from existing Group cash reserves in a phased manner over the next 15 months. The funding takes the form of a secured revolving credit facility to Office Holdings Ltd, the main operating entity of the Office segment, on terms that are commensurate with a loan of this nature.

Pro forma information

The Group’s results for the period are not directly comparable to those of the prior 52-week period ended 30 June 2019 due to the following factors:

  • the impact of the COVID-19 pandemic on the period’s results; and
  • the recognition of impairment losses in respect of goodwill and intangible assets in both the current and prior periods.

Pro forma information (non-IFRS financial information), which excludes the impact of goodwill and intangible asset impairments, has therefore been used selectively throughout this report to provide meaningful performance comparisons, and the relevant metrics are referred to as ‘adjusted’.

ADOPTION OF IFRS 16: LEASES

During the period the Group adopted the newly effective accounting standard IFRS 16: Leases. The standard was adopted retrospectively, subject to transitional provisions, and the comparative information for the prior period has been restated. Refer to note 2 of the Group’s Audited Annual Financial Statements for further information. The most significant impact of IFRS 16 at transition date (2 July 2018 being the start of the prior period) relates to the recognition of right-of-use assets of R4.2 billion and lease liabilities of R4.9 billion in relation to capitalised store leases. The net transition impact of R490 million was debited to opening retained earnings on the transition date.

Group financial and operating targets

Financial targets are published to provide guidance to shareholders on the Group’s financial performance objectives. Targets and performance are benchmarked against JSE-listed apparel retailers and leading global listed fashion retailers. The targets are reviewed annually by the board, based on actual performance and the medium-term outlook. Note that the local and global benchmarks may not be directly comparable in terms of the impact of the COVID-19 pandemic due to the timing of their respective year-ends.

Actual 20201

Medium‑term
target2

Target achieved

Local benchmark*

Global benchmark^

Gross margin

(%)

50.8

49 – 53

47.0

54.3

Operating margin

(%)

15.0

17 – 22

15

12

Return on equity

(%)

14

18 – 24

23

24

Return on assets

(%)

13

18 – 24

16

16

Inventory turn

(times)

4.0

3.5 — 4.5

3.6

4.2

Asset turnover

(times)

0.9

0.9 – 1.3

1.0

1.5

*

The local benchmarks are based on the average ratios for comparable JSE-listed apparel retailers, Mr Price Group and TFG, for the 2020 period.

^

The global benchmarks are based on the average ratios for global fashion retailers, H&M and Inditex, for the 2019 period.

1

Adjusted to exclude goodwill and intangible asset impairments.

2

Medium-term targets pre-adoption of IFRS 16 (impacted on operating margin, return on equity, return on assets and asset turnover).

The revised medium-term financial targets are included here.

Analysis of financial capital

The following analysis of performance aims to demonstrate how the Group’s financial capital has been increased, decreased or transformed through the Group’s operating and investing activities in the period, and how the effective management of this capital is expected to contribute to value creation for shareholders in the medium and long term.

This review of financial performance should be read together with the Group’s Audited Annual Financial Statements, which are available at www.truworthsinternational.com.

Group

Statements of comprehensive income

Sale of merchandise

Group retail sales decreased by 9.2% from R18.6 billion to R16.9 billion. Account sales comprised 51% (2019: 51%) of retail sales for the period. Account and cash sales declined by 8.4% and 9.9% respectively.

Group sale of merchandise, which comprises Group retail sales, together with wholesale sales and delivery fee income, less accounting adjustments, decreased 9.5% to R16.4 billion.

Divisional sales

52 weeks to
28 Jun 2020
Rm

52 weeks to
30 Jun 2019
Rm

Change on
prior period
%

Truworths ladieswear

3 315

3 757

(11.8)

Truworths designer emporium@

1 256

1 396

(10.0)

Total Truworths ladieswear

4 571

5 153

(11.3)

Office

4 581

5 106

(10.3)

Truworths menswear

3 304

3 675

(10.1)

Identity

1 978

2 149

(8.0)

Truworths kids emporium#

1 112

1 097

1.4

Other^

1 371

1 443

(5.0)

Group retail sales

16 917

18 623

(9.2)

Wholesale sales

37

86

(57.0)

Delivery fee income

71

61

16.4

Accounting adjustments~

(646)

(676)

(4.4)

Sale of merchandise

16 379

18 094

(9.5)

YDE agency sales

209

248

(15.7)

@

Daniel Hechter Ladies, Ginger Mary, Glamour, LTD Ladies and Earthaddict.

Truworths Man, Uzzi, Daniel Hechter Mens and LTD Mens.

#

LTD Kids, Earthchild and Naartjie.

^

Cosmetics, Cellular, Truworths Jewellery, Office London (South Africa) and Loads of Living.

~

Accounting adjustments made in terms of IFRS and generally accepted accounting practice relating to promotional vouchers, staff discounts on merchandise purchased, cellular retail sales, notional interest on non-interest-bearing trade receivables and the sales returns provision.

Group trading space increased by 0.3% (Truworths Africa increased 0.5% and Office decreased 4.8%) as a net 22 stores were closed across all brands. At the end of the period the Group had 923 stores, including 16 concession outlets (2019: 945 stores, including 24 concession outlets).

Gross margin

The Group’s gross margin reduced to 50.8% (2019: 51.6%). Truworths Africa’s gross margin increased slightly to 55.6% (2019: 55.5%) while the Office gross margin declined from 42.3% to 38.7%.

Trading expenses

The Group continued to exercise rigorous expense control, with trading expenses on an adjusted basis increasing by 0.9%, constituting 45.5% (2019: 40.8%) of sale of merchandise. An analysis of trading expenses is included in the Truworths and Office sections in this report.

Interest received

Interest received was unchanged at R1.2 billion, despite the 300 basis point reduction in the repo rate in South Africa over the period.

Operating profit

Adjusted operating profit decreased by 28.5% to R2.5 billion and the adjusted operating margin decreased from 19.0% to 15.0%.

Finance costs

Finance costs decreased by 10.4% from R394 million to R353 million, mainly as a consequence of the reduction in finance costs in respect of lease liabilities.

Earnings

HEPS and diluted HEPS declined by 28.2% to 410.4 cents and 409.0 cents respectively. Earnings per share, which include the impairment of the carrying value of the Office trademarks as well as of the YDE goodwill, decreased by 191.9% to a loss of 133.0 cents. Earnings for the prior period have been restated as a result of the adoption of IFRS 16.

Operating profit performance

*

Restated as a result of the adoption of IFRS 16: Leases.

^

Adjusted to exclude the impact of goodwill and intangible asset impairments.

Statements of financial position

The Group’s financial position remains strong. Net asset value per share decreased 26.4% to 1 450 cents and on an adjusted basis decreased by 0.2% to 2 371 cents.

Goodwill and intangible assets decreased by R2.1 billion, principally due to the Office trademark and YDE goodwill impairments referred to earlier.

Inventories decreased by 4.6% to R2.0 billion at the end of the period. Inventory turn decreased to 4.0 times (2019: 4.2 times).

Group net debt, excluding IFRS 16 lease liabilities, decreased from R663 million to a net cash position of R44 million, benefiting from the timing of calendar month-end creditor payments, despite the repurchase of 11.9 million shares for R583 million during the period.

Trade and other payables increased to R1.8 billion (2019: R1.6 billion) owing to calendar month-end payments falling after the period-end.

Cash and capital management

The Group generated R4.5 billion in cash from operations and this funded dividend payments of R1.6 billion, lease liability payments in terms of IFRS 16 of R1.0 billion, capital expenditure of R435 million and share buy-backs of R583 million.

Since the inception of the share buy-back programme in 2002, 110.3 million shares have been repurchased at a total cost of R3.8 billion at an average price of R34.83 per share.

While COVID-19 had a significant impact on sales and collections, the cash realisation rate, which is a measure of how profits are converted into cash, was 136% for the period (2019: 93%). The Group’s average cash realisation rate for the last five financial years is 104%.

During March 2020 the Truworths Africa segment successfully extended the term of its borrowing facilities. The Group’s net cash to equity ratio at the end of the period was 0.7% (2019: net debt to equity at 7.9%) and net cash to EBITDA was 0.0 times (2019: net debt to EBITDA at 0.2 times).

Truworths and office business segments

Management measures the operating results of the Truworths and Office business segments separately for the purpose of resource allocation and performance assessment. Segmental performance is reported on an IFRS basis and evaluated with reference to revenue, gross margin, operating margin, EBITDA and profit after tax.

Truworths
Rm

Office
Rm

Consolidation
entries
Rm

Group
Rm

2020

Total revenue

13 290

4 700

(8)

17 982

Third party

13 284

4 698

17 982

Inter-segment

6

2

(8)

Trading expenses

5 466

4 569

(8)

10 027

Depreciation and amortisation

1 108

344

1 452

Employment costs

1 467

552

(4)

2 015

Occupancy costs

345

330

675

Trade receivable costs

1 613

8

1 621

Other operating costs

933

3 335

(4)

4 264

Interest received

1 153

2

1 155

Finance costs

278

75

353

Profit/(loss) for the period

1 670

(2 346)

(676)

Profit/(loss) before tax

2 345

(2 808)

(463)

Tax (expense)/credit

(675)

462

(213)

EBITDA

3 731

(2 389)

1 342

Segment assets

11 561

3 202

(482)*

14 281

Segment liabilities

5 250

3 500

(477)*

8 273

Capital expenditure

374

61

435

Other segmental information

Gross margin

(%)

55.6

38.7

50.8

Trading margin

(%)

12.5

(58.5)

(7.8)

Operating margin

(%)

22.4

(58.5)

(0.7)

Inventory turn

(times)

4.2

3.7

4.0

Account:cash sales mix

(%)

70:30

0:100

51:49

2019ˆ

Total revenue

14 341

5 245

(9)

19 577

Third party

14 336

5 241

19 577

Inter-segment

5

4

(9)

Trading expenses

4 986

4 175

47

9 208

Depreciation and amortisation

1 150

458

1 608

Employment costs

1 569

647

(4)

2 212

Occupancy costs

422

403

825

Trade receivable costs

1 037

11

1 048

Other operating costs

808

2 656

51

3 515

Interest received

1 150

3

1 153

Finance costs

312

82

394

Profit/(loss) for the period

2 373

(1 910)

(54)

409

Profit/(loss) before tax

3 313

(2 033)

(54)

1 226

Tax (expense)/credit

(940)

123

(817)

EBITDA

4 775

(1 493)

(54)

3 228

Segment assets

13 406

5 037

(1 804)*

16 639

Segment liabilities

4 869

3 393

(2)*

8 260

Capital expenditure

420

45

465

Other segmental information

Gross margin

(%)

55.5

42.3

51.6

Trading margin

(%)

19.2

(37.3)

2.5

Operating margin

(%)

28.2

(37.3)

9.0

Inventory turn

(times)

4.8

3.3

4.2

Account:cash sales mix

(%)

70:30

0:100

51:49

*Elimination of investment in Office as well as inter-segment assets and liabilities.

^Restated as a result of the adoption of IFRS 16: Leases. Refer to note 2 of the Group Audited Annual Financial Statements 2020 on the website for further information.

Truworths

This analysis covers the performance of the Truworths business segment, which operates in South Africa and in the rest of Africa, and includes YDE.

Statements of comprehensive income

Sale of merchandise

Retail sales in Truworths decreased by 8.7% to R12.3 billion (2019: R13.5 billion).

Account sales comprised 70% (2019: 70%) of retail sales. Like-for-like store retail sales decreased by 10.3%. Price deflation averaged 1.2% (2019: 0.2%).

Sale of merchandise decreased by 9.0% to R11.7 billion (2019: R12.9 billion).

The South African operations accounted for 96.7% (2019: 96.6%) of the Truworths segment’s retail sales, with the 36 (2019: 39) stores in the rest of Africa contributing the balance.

Retail space increased by 0.5% as Truworths opened 14 stores and closed 26.

Trading densities declined to R32 357 per m² (2019: R35 682 per m²). However, based on 47 weeks’ sales, which excludes the lockdown period, trading densities increased marginally to R35 799 per m².

Gross margin

The gross margin increased slightly from 55.5% to 55.6%.

Trading expenses

Jun 2020
Rm

Jun 2019
Rm

Change
on prior
period
%

Depreciation and amortisation^

1 108

1 150

(4)

Employment costs

1 467

1 569

(7)

Occupancy costs^

345

418

(17)

Trade receivable costs

1 613

1 036

56

Other operating costs^

933

808

15*

Total

5 466

4 981

10@

^June 2019 has been restated as a result of the adoption of IFRS 16: Leases.

*4% increase excluding forex gains/(losses) (R133 million gain in June 2020 classified in other income and R39 million loss in June 2019), and impairment of right-of-use assets (R95 million in June 2020 and R12 million in June 2019) and YDE goodwill (R52 million in June 2020).

@ 8% increase excluding forex gains/(losses) and impairment of right-of-use assets and YDE goodwill.

  • Depreciation and amortisation decreased by 4%. Excluding non-comparable stores, depreciation and amortisation of property, plant and equipment and software decreased 5%. Depreciation of the right-of-use assets decreased by 6% due to a reduction in the number of leases accounted for under IFRS 16 and the impact over time of rental reversions and rental escalation reductions.
  • Employment costs decreased by 7%. Excluding non-comparable stores, incentives and other non-comparable costs, employment costs decreased 3% mainly due to lockdown savings. Truworths received government support in respect of the lockdown through the Temporary Employer/Employee Relief Scheme (TERS) of R47 million in respect of the period April to June 2020.
  • Occupancy costs, which comprises rentals not accounted for in terms of IFRS 16 as well as other occupancy costs, decreased by 17%. A net 12 stores were closed during the period. Occupancy costs include a once-off benefit of lockdown rental concessions of R82 million. Excluding these concessions, occupancy costs increased 2%.
  • Trade receivable costs increased 56%. The doubtful debt allowance increased from 19.2% at June 2019 to 30.1% of gross trade receivables, while gross trade receivables decreased 7%, resulting in a R537 million charge to the income statement. Collection and other trade receivable costs decreased 6%. The total cost of accounts of R1 775 million exceeded total income from accounts (including notional interest) of R1 151 million, resulting in a deficit of R624 million (2019: deficit of R23 million).
  • Other operating costs, excluding foreign exchange gains and losses and impairments in both the period and the prior period, increased by 4%.

Interest received

Total interest received was unchanged at R1 152 million. Trade receivable interest, excluding notional interest, decreased by 2% to R1 066 million. The average effective interest rate earned decreased owing to the 300 basis points decline in the repo rate during the year.

Finance costs

Finance costs reduced by R35 million to R278 million (2019: R313 million) mainly as a consequence of the reduction in finance costs in respect of lease liabilities following the adoption of IFRS 16.

Trading and operating profit

Trading profit decreased by 41% to R1 461 million (2019: R2 468 million) mainly due to the adverse impact of COVID-19. The trading margin declined from 19.2% to 12.5%.

Operating profit (profit before finance costs and tax) decreased by 28% to R2.6 billion (2019: R3.6 billion), with the operating margin reducing from 28.2% to 22.4%.

Office

This analysis covers the financial performance of the Office business segment, which operates primarily in the UK, with a presence in Germany and the Republic of Ireland.

Statements of comprehensive income

Sale of merchandise

Sale of merchandise declined by 16.8% to £238 million (2019: £286 million) for the period while retail sales declined by 16.4% to £233 million (2019: £279 million). Trading space decreased 4.8% following the net closure of 10 stores.

E-commerce showed continued good growth, particularly during lockdown, with online retail sales increasing 8.8% to £103 million and accounting for 44% of total retail sales (2019: 34%). Store retail sales decreased 29.3% to £129 million.

The UK accounted for 92% of retail sales, Germany 5% and the Republic of Ireland 3%.

Retail sales
Jun 2020
£m

Retail sales
Jun 2019
£m

Change on
prior period
%

Number
of stores
Jun 2020

Number
of stores
Jun 2019

United Kingdom

213.8

254.3

(16)

114

124

Germany

10.7

12.7

(16)

8

8

Republic of Ireland

8.3

11.3

(26)

7

7

United States of America

0.3

(100)

Total

232.8

278.6

(16)

129*

139*

*Including 16 concession stores (June 2019: 24 concession stores).

Gross margin

Gross margin declined to 38.7% (2019: 42.3%) owing mainly to a change in the full-price merchandise versus markdown merchandise sales mix.

Trading expenses

Analysis of trading expenses

Jun 2020
£m

Jun 2019
£m

Change
on prior
period
%

Depreciation and amortisation*

17.5

25.0

(30)

Employment costs

28.1

35.3

(20)

Occupancy costs*

16.8

22.0

(24)

Trade receivable costs

0.4

0.6

(33)

Other operating costs (excluding intangible asset impairments)*

39.7

46.1

(14)

Trading expenses excluding intangible asset impairments

102.5

129.0

(21)

Impairment of intangible assets

118.2

102.0

16

Trading expenses

220.7

231.0

(4)

* June 2019 has been restated as a result of the adoption of IFRS 16: Leases.

  • Depreciation and amortisation decreased 30% due to assets becoming fully depreciated and a reduced right-of-use assets balance. Office incurred capital expenditure of £2.8 million (2019: £2.5 million).
  • Employment costs decreased 20% due to the lower headcount during the COVID-19 lockdown when employees were furloughed, as well as the closure of non-performing stores. Office received funding from the UK Government’s Coronavirus Job Retention Scheme and the Temporary Wage Subsidy Scheme for Ireland for all qualifying furloughed employees of £4.6 million in relation to the period April to June 2020.
  • Occupancy costs decreased 24% due to lower concession rentals as a result of the concession outlet closures during lockdown, the business rates holiday granted in the UK and Ireland, and lower rentals due to temporary store closures in lockdown and permanent closures.
  • Other operating costs (excluding intangible asset impairments) decreased 14%. Excluding the impairment of right-of-use assets and other once-off expenses, other operating costs decreased 5%.

Operating loss

Office reported an operating loss of £128.1 million (2019: loss of £109.7 million). Excluding the intangible asset impairment from both periods, the operating loss increased by 28% to £9.9 million. The operating margin on the same basis decreased from -2.7% to -4.2%.

The restructuring of Office and progress on the turnaround plan for the chain are covered in the Chief Executive Officer’s Report.

Group information technology

Capital expenditure of R72 million (2019: R78 million) was invested in leading-edge information technology (IT) systems over the past year to support the retail operations and supply chain. The Group has committed R111 million for Truworths and Office IT capital expenditure for the 2021 reporting period.

Major IT projects: Truworths

Completed in 2020 financial period:

  • Concluded two-year project to upgrade the merchandise ERP systems and enhance over 25 other applications integrated into the ERP system. The upgraded systems platform will facilitate a number of future digital, omni-channel and customer engagement initiatives
  • Enhanced the product life cycle management (PLM) system application
  • Launched Loads of Living on the Truworths website

Planned for completion in 2021 financial period:

  • Launch multi-project programme to replatform the point-of-sale, e-commerce and customer engagement applications in an integrated omni-channel environment
  • Initiate several key applications upgrades to leverage new functionality, including the Human Resources and Finance ERP, the PLM system and the warehouse management application
  • Complete systems for compliance with the Protection of Personal Information Act

Major IT projects: Office

Completed in 2020 financial period

  • Developed new payment methods with payment processor for online sales
  • Completed enhancements to customer-facing store technology
  • Integrated stock and sales information with key concessionaires

Planned for completion in 2021 financial period

  • Replace ageing merchandise and warehouse systems
  • Migrate web commerce system to the cloud
  • Implement enhanced delivery options for website

Group financial plans for 2021

Capital expenditure of R415 million (Truworths R372 million and Office £2 million) has been committed for the 2021 financial period and will be applied mainly as follows:

  • R272 million for new stores and the expansion and refurbishment of existing stores
  • R111 million for computer infrastructure and software
  • R27 million for land, buildings and refurbishment
  • R2 million for distribution facilities

Trading space in Truworths is expected to be unchanged with a net decrease in the number of stores while Office trading space is planned to decrease by approximately 20% as leases expire.

The trading outlook for Truworths and Office for the 2021 financial period is covered in the Chief Executive Officer’s Report.

Group medium-term financial targets

The Group’s medium-term financial and operating targets have been reviewed, and in some cases revised, to reflect the Group’s expected performance over the next three years. These targets set out below have been approved by the board.

Medium-term
targets

Previous
medium-term
targets

Gross margin

(%)

49 – 53

49 – 53

Operating margin

(%)

16 – 21

17 – 22

Return on equity

(%)

18 – 23

18 – 24

Return on assets*

(%)

14 – 20

18 – 24

Inventory turn

(times)

3.5 – 4.5

3.5 – 4.5

Asset turnover

(times)

0.9 – 1.3

0.9 – 1.3

* Reduced targets due to adoption of IFRS 16 resulting in increased total assets.

Appreciation

Managing our annual financial reporting and auditing processes in the COVID-19 lockdown environment proved particularly challenging. I thank our finance teams in Truworths and Office as well as our external auditors for their commitment and dedication in completing the processes under these trying conditions.

Thank you to our shareholders as well as the broader investor community both in South Africa and internationally for your interest in the Group. We look forward to continuing our engagement in the year ahead.

David Pfaff

David Pfaff
Chief Financial Officer and Chief Operating Officer