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Material Issues, risks and opportunities

MANAGING THE RISK OF FASHION

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Refer to MANAGING THE RISK OF FASHION for more detail.

2020 Performance against objectives and targets

OBJECTIVES AND PLANS

PERFORMANCE AGAINST OBJECTIVES

Ongoing focus on managing the risk of fashion.

  • Product life cycle management (PLM) system implemented across all merchandise divisions, providing visibility of the entire product development process.

  • PLM also assisted buying and planning teams in reducing timelines.

  • Continued strategic fabric and volume consolidation process to ensure high-quality standards while containing inflation.

  • Merchandise consolidation process assisted in strengthening relationships with key suppliers and managing the complexity of multiple brands and buying teams.

  • Developed a virtual method of creating, buying and reviewing ranges during the COVID-19 lockdown, enabling teams to maintain buying deadlines despite the restrictions in place.

  • Stock levels well managed with gross inventory up only 3.1% despite trading restrictions during lockdown, with no winter over-stock and no impact on the gross margin.

  • Gross margin stable at 55.6%.

Implementation of new brands and product opportunities.

  • Developed a differentiated brand profile for ID Kids range which is aligned with the ID Ladies and Men’s brands.

  • Continued experimentation with the product mix within Context brand, including the introduction of small local skincare brands.

  • Completed project to create a clear brand identity for the Truworths emporium.

Grow contribution from e-commerce and omni-channel.

  • E-commerce sales recorded growth of over 100% in the period prior to lockdown.

  • Post lockdown e-commerce sales have grown more than three-fold relative to the pre-lockdown period.

  • E-commerce for the period under review ranked as the fourth largest ‘store’ within Truworths in terms of total sales.

  • Post lockdown e-commerce sales were 2.5 times greater than the largest Truworths store’s sales.

Extend ID Kids to over 50 stores.

  • ID Kids department opened in 53 Identity stores.

Enhance local production capability.

  • Continued to build closer relationships with local supplier base.

  • Truworths Manufacturing division is a key supplier of men’s and kidswear.

Implementation of new merchandise management system.

  • System went live during the period, with minimal disruption to the business considering the scale of the implementation.

Commence process of fully integrating the PLM system with suppliers.

  • Owing to the scale of the project, compounded by the complexity of the national lockdown, the supplier integration portion of this project was delayed.

  • PLM system is used to provide detailed merchandise briefs to all suppliers.

  • Internal Sourcing Division, which is the largest supplier to Truworths, has been integrated onto the PLM system.

Challenges encountered

  • COVID-19-related challenges included disruption in the international and local supply chain owing to lockdown restrictions, transport restrictions, reduced manufacturing capacity, delays and cancellations of orders, port congestion in South Africa and increased transport and courier costs post lockdown (refer to Managing the Risk of Fashion and Optimising Supply Chain Efficiency for further detail).
  • Changed lifestyle requirements due to lockdown have led to a material reduction in demand for smart and formal wear in both ladies’ and men’s apparel and footwear.
  • Weaker consumer demand together with challenges being faced by certain competitors has led to higher and ongoing levels of discounting and promoting in the retail apparel and footwear market.
  • Consumers are increasingly value conscious and buying on promotion which places pressure on sales growth in Truworths. A continued focus on efficient stock management has seen Truworths not needing to discount as aggressively as competitors.
  • Managing the impact of currency volatility on product pricing.

2021 Objectives and plans

  • Ongoing focus on managing the risk of fashion through process improvements, system enhancements and developing new technologies.
  • Launch or relaunch brands including Identity Superstore, Hey Betty, a new specialist brand from Uzzi, and the large Kids Emporium and e-commerce store.
  • Assist key local and exclusive factories and cut-make-trim operators (CMTs) by investing in capacity building to increase their merchandise flows and profitability.
  • Manage changing customer demand in a post-COVID-19 environment.
  • Grow e-commerce by improving the customer experience and optimising order fulfilment.

MEDIUM-TERM Opportunities

  • Continue to grow and expand e-commerce and improve functionality and ease of shopping.
  • Develop areas within each brand to introduce competitive entry price points alongside upper-tier product and ensure both maintain quality standards and achieve product differentiation from competitors.
  • Grow Identity across ladies’, men’s and kidswear through range extensions and new store opportunities, with a specific focus to grow ID Kids.
  • Extend the product offering in Loads of Living.
  • Continue to strengthen working relationships with local design houses and CMTs to build a more sustainable and efficient domestic supply base.

Group gross margin 49% – 53%

PERFORMANCE AGAINST TARGETS

Group gross margin 50.8% (2019: 51.6%)

Medium-term targets

Group gross margin 49% – 53%

Truworths gross margin 54% – 57%

PERFORMANCE AGAINST TARGETS

Truworths gross margin 55.6% (2019: 55.5%)

Medium-term targets

Truworths gross margin 54% – 57%

Key risks and mitigation strategies

DESCRIPTION OF RISK

RISK MITIGATION

Exchange rate volatility creates challenges in managing retail selling prices of imported merchandise.

  • Forward exchange contracts are used to cover merchandise imports to lessen the impact of forward cover volatility.

  • Continue to seek opportunities to increase local supply to reduce reliance on imports, including investment in Truworths Manufacturing through the development of a ladieswear design house.

  • Improve procurement processes, consolidate fabric sourcing and adjust product ranges to limit product inflation.

Availability of counterfeit goods devalues the brands and impacts sales negatively.

  • Continuous work done with counterfeit experts, training of customs officials and conducting numerous raids on illicit operators.

  • Ongoing assessment and bolstering of anti-counterfeit measures.

  • Instituting legal action against perpetrators.

Failing to provide quality fashion to customers each season at appropriate margins. This covers buying processes, fashion monitoring, supplier relationships and ensuring Truworths has skilled buying and planning resources.

  • Apply proven forecasting, design, and assortment planning processes and key executive interventions throughout the merchandise life cycle aimed at managing and mitigating the risk of fashion.

  • Weekly monitoring of merchandise performance by executives and senior management to manage inventory within acceptable levels, thereby limiting markdowns and maintaining the gross margin within the target range.

  • Manage suppliers’ contributions of the overall buy to ensure risk is spread across the supply chain.

  • Balance local and international supply base to take advantage of both quick response and fast fashion.

  • Implement retention strategies for merchandise buyers and planners.

  • Ahieve better fabric prices to offer better value by consolidating fabric sourcing across brands while maintaining product quality.

Optimising supply chain efficiency

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 Refer to OPTIMISING SUPPLY CHAIN EFFICIENCY for more detail.

2020 Performance against objectives and targets

OBJECTIVES AND PLANS

PERFORMANCE AGAINST OBJECTIVES

Design and commence construction of new distribution facility.

  • Project placed on hold temporarily owing to financial impact of COVID-19.

  • Planning to continue in terms of local authority and building approvals as well as the design of the facility to enable construction to commence, provided authorisation is granted by the board.

Review merchandise supply strategy.

  • Detailed plans set for each supplier using a combination of performance metrics.

  • Merchandise departments placed orders with suppliers to achieve the unit objectives.

Further develop local supply chain through alliances with suppliers, design houses and CMTs to enhance speed to market, improve pricing and maintain a sustainable local production environment.

  • Review undertaken of each design centre and key CMTs used by the design houses.

  • Processes implemented to ensure the sustainability of these key partners in the supply chain.

  • Provided financial support to selected local suppliers that have been negatively impacted by the COVID-19 pandemic.

Enhance e-commerce order fulfilment times.

  • Continuous enhancements made to e-commerce fulfilment model to improve customer experience.

  • Additional stores added as fulfilment centres and enhancements made to further improve delivery lead times.

Challenges encountered

  • Owing to lockdown restrictions the local manufacturing sector has been impacted by delays in the supply of raw material while production capacity has been curtailed owing to health and safety, and social distancing requirements.
  • The inability to operate during the hard lockdown, together with prolonged periods of reduced capacity, have been a significant burden for local suppliers, many of whom entered the lockdown under financial pressure.
  • Distribution centre capacity was under pressure over peak periods, including the festive season and when large shipments of product was received ahead of the Chinese New Year. However, due to relatively low unit growth over the past year these peak periods have been adequately managed and third-party warehousing was secured where necessary.
  • Inefficiencies in the local supply base owing to the inconsistent flow of production caused by high summer volumes and low winter volumes, resulting in inadequate capacity to drive optimal volumes in the peak summer season and excess capacity in the winter period. Consumers have been increasingly price sensitive and this has placed pressure on CMTs to reduce margins, which is detrimental to their long-term viability.

2021 Objectives and plans

  • Finalise approvals and related services for the construction of the new distribution centre in preparation if project is given the go-ahead by the board.
  • Continue to develop alliances with local design centres and cut-make-trim suppliers (CMTs) to ensure the sustainability of key partners to grow local production and manufacturing efficiency.
  • Further enhance e-commerce fulfilment model to shorten lead times and reduce costs.
  • Expand Truworths’ in-house manufacturing capacity and infrastructure, and increase focus on ladieswear.

MEDIUM-TERM Opportunities

  • Complete development of new distribution facility if approved by the board.
  • Achieve high level of supplier integration on the PLM system.
  • Ensure a higher proportion of ladieswear is produced through the in-house manufacturing division.

Group inventory turn 3.5 – 4.5 times

PERFORMANCE AGAINST TARGETS

Group inventory turn 4.0 times
(2019: 4.2 times)

 

Medium-term targets

Group inventory turn 3.5 – 4.5 times

Truworths inventory turn 4.5 – 5.5 times

PERFORMANCE AGAINST TARGETS

Truworths inventory turn 4.2 times*
(2019: 4.8 times)

* Impacted by COVID-19 lockdown.

Medium-term targets

Truworths inventory turn 4.5 – 5.5 times

Key risks and mitigation strategies

DESCRIPTION OF RISK

RISK MITIGATION

The sustainability of the local and international supplier base is critical to meet Truworths’ product demand. Many suppliers have been heavily impacted by COVID-19, which could impact on the long-term viability of their businesses.

  • In the short term, identify key suppliers and provide support where possible to ensure their sustainability.

  • Accelerate strategic review of local supplier base to build closer working relationships with design houses and CMT suppliers, and build an integrated model to merge the existing Truworths men’s and kids’ design centre with a new ladies’ design centre.

  • Review international supplier base to ensure the Group has a well-balanced and sustainable range of suppliers across the wide range of product types.

  • Identify alternative sources of supply and countries of origin where necessary and develop close working relationships through enhanced collaboration and communication.

Suppliers not operating to contracted standards of ethical behaviour could result in reputational damage and interruption of supply.

  • Truworths’ code of conduct included in all supplier agreements.

  • A breach of the code of conduct amounts to a material breach of the terms and conditions.

  • Manufacturers are required to comply with ethical standards, labour, health and safety, and environmental legislation.

  • Legislative compliance audits are carried out during the new supplier take-on process.

  • Compliance with Truworths’ code of conduct monitored through internal audit process.

Loss of, or inability to access, distribution facilities.

  • All distribution centre assets are adequately insured.

  • Fire and flood protection installed at all distribution facilities.

  • Disaster recovery plans in place to ensure business continuity in the event of a disaster.

Dependency on warehouse management system and throughput required to meet peak demand.

  • System stabilised and reduced dependency on external consultants.

  • Strong in-house IT skills to support the system.

Organic and acquisitive growth in the business placing increased pressure on distribution and warehousing capacity.

  • New distribution centre is in early stages of planning and design, although the project has been placed on hold and delayed due to the financial impact of COVID-19.

  • Third-party warehousing facilities used to store imported merchandise during peak periods.

MANAGING account risk

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*The June 2018 provision was 12.3% under IAS 39. The transition date increase in the provision was processed through retained earnings. The provision on transition date was 19.0% and it has since increased to 30.1% based on the latest Markov forecast.

 Refer to MANAGING ACCOUNT RISK for more detail.

2020 Performance against objectives and targets

OBJECTIVES AND PLANS

PERFORMANCE AGAINST OBJECTIVES

Drive new account acquisition.

  • Record number of new account applications of over 3.4 million (2019: 2.8 million).

  • Number of accounts opened was 3% lower than prior year, owing to lockdown restrictions impacting customers’ ability to open accounts.

Improve conversion rate from risk approval to accounts opened.

  • Conversion rate impacted by hard lockdown in SA and a change in the channel mix of applications.

  • Risk approval rate of account applicants was 25% (2019: 29%), with accounts opened at 17% (2019: 22%).

Roll out credit limit management strategies that use decision optimisation.

  • Implemented credit limit management strategies based on decision optimisation across a selection of accounts.

  • Based on the results of the initial implementation the allocation of accounts to decision optimisation was increased during the period.

Expanding digital customer engagement capabilities.

  • Several digital engagement tests conducted.

Develop and test new loyalty promotions.

  • Continued testing loyalty promotions.

  • Testing of timing and duration of promotions delivered positive results and are being rolled out to the full portfolio.

Continue to invest in analytical capability to leverage our single view of the customer data platform across the customer life cycle.

  • During hard lockdown the analytical platform allowed for quick intervention led by predictive models with short outcome windows.

  • Combination of AI and an experienced team of data scientists allowed for decisive action in developing models which were responsive to the pandemic.

Challenges encountered

  • Collections remained challenging in the low-growth economic environment pre-COVID-19.
  • Lockdown forced the closure of all stores and offices, including all call centres and collections facilities.
  • As the majority of customers pay accounts physically in stores, customer payment channels proved challenging at the start of the lockdown before new channels were developed and opened.
  • Assessing and quantifying the impact of COVID-19 on the allowance for doubtful debts, taking into account forward-looking information. The allowance for doubtful debts as a percentage of gross trade receivables increased from 19.2% in 2019 to 30.1% in 2020.
  • Converting risk-approved accounts to opened accounts.

2021 Objectives and plans

  • Respond appropriately to COVID-19 and position the account portfolio for the future.
  • Sustainable new account acquisition.
  • Improve efficiency of new account opening process.
  • Enhance fraud prediction and prevention processes.
  • Upgrade the account management software used to implement all the account scorecards and execute the account management strategies.
  • Invest in omni-channel retail system encompassing stores, e-commerce and customer engagement suite.
  • Implement daily tracking of data, models and strategies to identify new opportunities or areas of concern.
  • Roll out all strategies that will be appropriate in the post-COVID-19 economic environment, including predictive models using the latest data.

MEDIUM-TERM Opportunities

  • Continue digital customer engagement transformation to improve revenue and reduce the cost of managing the account portfolio.
  • Deliver an effortless customer experience enhanced by seamless omni-channel shopping.

Implement test strategies in the credit limit management decision area that grow profit by either reducing bad debt and maintaining sales, or by growing sales while maintaining bad debt.

PERFORMANCE AGAINST TARGETS

Several test strategies implemented across Truworths and Identity.

Reduce communication costs while maintaining sales and payments across several campaigns and customer touchpoints.

PERFORMANCE AGAINST TARGETS

Realised material communications cost saving.

Test a combination of collections agencies, customer communication and collector actions.

PERFORMANCE AGAINST TARGETS

Successfully tested various strategies pre-COVID-19 and implemented them across the entire account portfolio.

COVID-19 regulations and lockdown had a material impact on the collections operating model due to store closures.

Internal and external agencies responded well to the challenge and delivered results above expectations under the circumstances.

TARGETS FOR 2021

Manage the account portfolio to mitigate the implications of COVID-19:

Monitor and adjust predictive models

Evaluate all account decision strategies for portfolio quality and profitability

Track return on investment of all acquisition and promotional expenditure

Implement test strategies in the credit limit management decision area that grow profit by either reducing bad debt and maintaining sales, or by growing sales while maintaining bad debt.

PERFORMANCE AGAINST TARGETS

Several test strategies implemented across Truworths and Identity.

Reduce communication costs while maintaining sales and payments across several campaigns and customer touchpoints.

PERFORMANCE AGAINST TARGETS

Realised material communications cost saving.

Test a combination of collections agencies, customer communication and collector actions.

PERFORMANCE AGAINST TARGETS

Successfully tested various strategies pre-COVID-19 and implemented them across the entire account portfolio.

COVID-19 regulations and lockdown had a material impact on the collections operating model due to store closures.

Internal and external agencies responded well to the challenge and delivered results above expectations under the circumstances.

TARGETS FOR 2021

Manage the account portfolio to mitigate the implications of COVID-19:

Monitor and adjust predictive models

Evaluate all account decision strategies for portfolio quality and profitability

Track return on investment of all acquisition and promotional expenditure

Key risks and mitigation strategies

DESCRIPTION OF RISK

RISK MITIGATION

Inability to effectively manage account risk could result in increased bad debt, lower and slower collections, limited new account growth and a reduction in the number of customers able to buy on account.

  • Apply account risk criteria and processes consistently using advanced analytics, scorecards and models.

  • Review account management, collections and acquisition strategies regularly and refine to leverage new data and predictive models.

  • Implement and maintain best-of-breed account management tools that accurately execute policies, processes and strategies.

Debt relief legislation approved by Parliament will enable the National Credit Regulator (NCR) to extinguish the debts owed to credit providers by low-income consumers with unsecured debt of less than R50 000 who are critically indebted.

  • Engaged with the NCR through the National Clothing Retail Federation and other industry bodies to have legislation amended or withdrawn.

  • Align with other credit providers to propose workable alternatives so that debt review and debt counselling is affordable for low-income consumers.

  • Contingency plans developed across the account operations and account risk management areas should the legislation be implemented.

  • The allowance for doubtful debts under IFRS 9 includes a provision relating to the potential impact of debt relief legislation.

National Credit Act: Review of Affordability Assessment Regulations could hamper new account growth.

  • Truworths participated in a submission that was made in respect of the government’s notice of its intention to review the Affordability Assessment Regulations.

Managing retail presence

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 Refer to MANAGING RETAIL PRESENCE for more detail.

2020 Performance against strategic objectives and targets

OBJECTIVES AND PLANS

PERFORMANCE AGAINST OBJECTIVES

Trading space expected to grow by approximately 0.7%.

  • Trading space grew by 0.5%.

  • 14 stores opened across all brands.

  • 15 store openings delayed due to COVID-19 lockdown.

  • 54 stores closed, consolidated or converted.

  • 794 stores at period-end (2019: 806).

R291 million committed to store development.

  • R223 million (2019: R252 million) invested in store development.

  • Lower-than-budgeted spend due to impact of lockdown restrictions for two months when no store development could take place.

Continued consolidation and rationalisation of trading space where trading densities are low, and close under-performing stores.

  • Net 12 stores closed (14 opened and 26 stores converted, consolidated or closed).

  • Trading space reduced in two stores.

  • Trading density decreased by 9.3% to R32 357 per m², as a consequence of the lockdown.

Ongoing roll-out of the emporium formats.

  • Enhanced Truworths emporium store in Fourways Mall.

  • New combined Loads of Living and Context store design concept launched in Fourways Mall.

  • New Office London concept launched in Fourways Mall.

Extend e-commerce offering to include Loads of Living and Identity.

  • Loads of Living e-commerce offering launched and the range is constantly being expanded.

  • Identity online offering will be available late in the 2021 financial period.

Challenges encountered

  • Rental negotiations with landlords regarding payment of rentals and utilities on stores which were closed during lockdown.
  • Expansion in certain existing locations was challenging as Truworths is overtrading and unable to secure additional space, with the high trading densities inhibiting growth.
  • Rentals in good-performing malls are high and it was difficult to secure rental reversions and reduced escalation rates from landlords.
  • Ongoing electricity load shedding, with landlords in key centres being slow to install generators.
  • Local authorities not paying monies owed to Eskom which results in electricity being cut in certain towns during trading hours.
  • Poor trading results in stores outside South Africa, particularly Namibia.

2021 Objectives and plans

  • Trading space expected to be unchanged with net decrease in number of stores.
  • R272 million committed to store development.
  • Continued consolidation and rationalisation of trading space where trading densities are low, and closure of under-performing stores.
  • Launch project to develop ‘futuristic’ emporium store.
  • Introduction of new menswear brand in free-standing format.
  • Launch enticing new design concepts for existing and new brands, including the Identity Superstore, Loads of Kids Emporium and Hey Betty.
  • Increase the brand awareness in the e-commerce space to off-set lower store sales.
  • Launch e-commerce site for Identity.

MEDIUM-TERM Opportunities

  • Consolidate trading space further to improve operating efficiency and trading densities by renovating key stores and reprofiling stores by adding new brands.
  • Develop new brands and concepts to utilise under-performing space.

Trading density per m² of
R35 550 – R36 500

PERFORMANCE AGAINST TARGETS

Trading density of R32 357 per m²
(2019: R35 682 per m²)

Trading density excluding the lockdown period was R35 799 per m²

TARGETS FOR 2021

Trading density per m² of R35 550 – R36 500

Store electricity carbon emissions of
20.5 Wh per m² (South Africa only).

PERFORMANCE AGAINST TARGETS

Carbon emissions of 18.34 Wh per m²
(2019: 22.34 Wh per m²), with the decline mainly due to the lockdown. Carbon emissions of 20.29 Wh per m² based on 52 weeks’ trading.


TARGETS FOR 2021

Store electricity carbon emissions of
20.2 Wh per m² (South Africa only).

Key risks and mitigation strategies

DESCRIPTION OF RISK

RISK MITIGATION

High demand for well-located retail premises in established malls, impacting availability of retail space and expansion opportunities.

  • New malls present opportunities in prime positions.

  • Renovating key stores and optimising existing space to introduce new brands.

  • Opening stand-alone stores for key brands to create space in existing high trading density emporium stores.

  • Securing expansion options in new and renewed leases.

Fixed annual rental escalations and high utility costs and rates increases impacting store profitability.

  • Engage with landlords to secure prime space at competitive rentals and escalation rates.

  • Negotiate and secure rental reversions where possible.

  • Securing rental escalations that reflect the constrained economic conditions and over-supply of retail space.

  • Consolidating and rationalising trading space where trading densities are low.

  • Reducing electricity consumption through smart metering, energy-efficient lighting and enforcing operating discipline.

  • Rigorous review of rates increases.

Electricity load shedding in South Africa remains a risk to trading.

  • Ongoing engagement with shopping centre owners to connect malls to central generators.

  • Evaluating alternative power supplies.

  • Equipping stores without alternative power supply to continue trading during load shedding, where possible, without undue risk.