INTEGRATED REPORT 2023

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OPERATIONAL REVIEW: TRUWORTHS

TRUWORTHS

Account sales comprise
70%
of Truworths’ retail sales
(2022: 69%)
New account applications of
5.4 million
(2022: 5.0 million)
Opened accounts increased by 19% to approximately
840 000
Active account base increased 5.7% to
2.8 million
(2022: 2.6 million)
Gross trade receivables increased by 11.7% to
R6.6 billion
(2022: R5.9 billion)
Net bad debt to gross trade receivables increased to
14.8%
(2022: 11.3%)
Overdue balances to gross trade receivables at
16%
(2022: 14%)
Expected credit loss allowance to gross trade receivables decreased to
20.6%
(2022: 20.9%)

ACCOUNT PERFORMANCE

The percentage of account applications resulting in opened accounts increased to 15% from 13% in the prior period. A record number of new accounts (of approximately 840 000) were opened, and active accounts grew by 5.7% to 2.8 million.

Truworths operates the account portfolio statistically, based on a consistent credit risk appetite and criteria. This involves scoring all new credit applications using a number of scorecards, while all existing account customers are scored monthly. These scorecards react to the experience in the credit market externally and the experience in Truworths' portfolio internally and as such the portfolio, to a large degree, self-regulates. This means that during periods of heightened credit stress new account and credit limit approval rates will automatically tighten in reaction to worsening predictive scorecards.

Gross trade receivables in respect of the Truworths accounts portfolio, comprising collectively of the Truworths, Identity and YDE books, increased by 11.7% to R6.6 billion (2022: R5.9 billion).

Account sales increased by 8.2% and contributed 70% (2022: 69%) of retail sales in Truworths. Lay-by sales grew by 5.8%. Active account holders able to purchase were at 80% (2022: 82%) at the period-end, while overdue balances in the total portfolio increased to 16% from 14% in the prior period.

The expected credit loss (ECL) allowance reduced from 20.9% in 2022 to 20.6% of trade receivables at the reporting period-end. The provision methodology was unchanged and is made up of four key components, a Markov model which looks at historic performance and applies this to the book composition at year end, a forward-looking macro model which considers changes in the macro environment and models to predict the loss given default rates. There is an additional overlay for the National Credit Amendment Bill (also known as the Debt Relief Bill) which considers the timing of when this legislation may come into effect.

Trade receivable costs increased 48.6% to R1.3 billion (2022: R851 million). Net bad debt and related costs increased 29.8% to R1.3 billion (2022: R1.0 billion) as a result of higher gross bad debt following the strong account sales performance in the second half of 2022, and first half of the 2023 period. In addition, there were lower bad debt recoveries than in the prior period, but it should be noted that the prior period experienced higher bad debt recoveries as bad debt levels were higher in the 2021 period due to COVID-19.

MACROECONOMIC ENVIRONMENT

South Africa's macroeconomic environment with high inflation, sharply rising borrowing costs, sustained levels of high unemployment, modest wage increases and persistent load shedding has put pressure on the credit health of consumers, resulting in worsened credit conditions and increased credit default rates. This has also led to constrained sales as consumers have had to balance lower disposable income with payment requirements.

The TransUnion Consumer Credit Index, which measures the credit health of consumers in South Africa, declined sharply to 39 index points in the second quarter of calendar 2023 from 49 points a year earlier. The decline in the index reflects the deterioration in household credit health as higher living costs adversely impact domestic finances.

The account collections environment has understandably been particularly challenging as financially stressed consumers are under pressure to meet payment obligations. Management responded decisively by reviewing and tightening collections strategies, assessing new scorecards, implementing tests to improve collection rates and commissioning international consultants to conduct a health check of the portfolio, including collections strategies.

ACCOUNTS ENABLING MERCHANDISE SALES

Truworths uses credit accounts to initiate an ongoing relationship with its customers in its targeted consumer market. Truworths' strategy is to use credit as a tool to enable South Africans to buy its premium-quality aspirational fashion merchandise.

Many consumers in the middle-income market have limited access to traditional bank credit, such as overdraft facilities and credit cards, and are therefore reliant on store accounts to buy apparel merchandise. For many customers, their first credit exposure is with Truworths and they utilise the credit to not only purchase merchandise but also to start building a credit track record and profile. The Truworths account cost is low, with an annual account service fee of R52, and no initiation, club or magazine fees are payable. Financial services income constitutes only 0.8% (2022: 0.8%) of sale of merchandise in Truworths.

Account facilities are offered to customers across all Truworths brands in South Africa, Namibia, Botswana and Eswatini.

Payment options include offering customers terms of 6, 9 and 12 months to settle their accounts. Many customers are offered a six-month interest free payment plan that only attracts interest if the customer is in arrears on their account. Customers are billed monthly and are required to pay the minimum 90% qualifying payment of the amount due to remain current.

Customers who do not qualify for an account can use the lay-by (set aside) payment facility, enabling them to select merchandise and pay it off over three months. This gives non-qualifying account customers access to Truworths' merchandise that they would have not been able to purchase for cash.

ACCOUNT MANAGEMENT IN 2023

New technology has been implemented to enhance Truworths' ability to deliver an omni-channel experience to customers. The e-commerce platform is integrated with a customer engagement system, and a new point-of-sale system has been developed and is being piloted in several stores.

The new account application process was further streamlined during the period, resulting in a material improvement in the conversion rate from approved customers to accounts being opened.

A suite of over 50 predictive models (scorecards) are used to encode consistent
performance-based decisions in all aspects of the customer and credit lifecycle. Decision optimisation is used across most areas of the portfolio, with actions taken to maximise profit at a customer level. A new
high-performance analytics platform was implemented during the period and investigations have commenced on the use of artificial intelligence to facilitate the credit lifecycle.

Digital engagement with customers across account acquisition, account management and collections are increasing significantly, in particular via mobile phones, as online shopping gains momentum. Accounts can be opened on mobile devices while most account payments on the
e-commerce site are via mobile phones.

GROWING CUSTOMER LOYALTY

The TruRoyalty (Truworths) and iDream (Identity) customer loyalty programmes are aimed at attracting and retaining customers, while increasing both the basket size and frequency of shopping of account and cash customers. The Truworths experience is that loyalty programme members spend on average more than cash customers.

The combined membership of the loyalty programmes has increased by 2.4 million to 18.8 million members, including 4.2 million account customers and 14.6 million non-account customers.

Loyalty programme members are offered a suite of benefits, including loyalty-only merchandise promotions across brands, additional discounts on sale product, vouchers and competitions.

INTEGRATED REPORT 2023