Truworths International Limited (TRU) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to the Truworths Group results presentation for the 52 weeks to the 28th of June 2026. So I'd like to introduce myself for those who don't know me, I'm Sarah Proudfoot, I am the Co-Deputy CEO. And on line today, we have our CEO, Michael Mark, who is currently in New York. And because his Wi-Fi connection is a little bit unstable, he will be listening and joining when possible. And other than that, we have Manny Cristaudo, who's the other joint Deputy CEO; and our CFO; and Gideon Smit, who is our Financial Director. So we have quite a lot to share with you today. We -- this is our agenda, and we're going to try and move through it quite quickly so that we can cover the strategic areas with more of a focus there than on the numbers themselves, which you will have had the opportunity to read from our results presentation -- from our results statement. So you all know, it's been a challenging year for us, and we are a little bit disappointed in the results, understandably. But it's been a challenging year for consumers generally in both the markets in which we operate, both South Africa and the United Kingdom. But we feel happy that there are some very nice positives that have come out of these results. For the first being, we've protected our margin. We've been -- continue to be highly cash generative. We in fact have a cash conversion rate that improved to 97% from 90% the previous year. We grew office in the U.K. by 4.9% in a difficult economy in the U.K. and Truworths, although we had a very difficult first half had a much improved second half of the year. We continue to invest in both, particularly in store expansion in the U.K. and our online contribution grew to 21%, and we had more than 20% growth in online in Truworths South Africa. As always, we build on the long term. Truworths is always guided by its business philosophy and many of you will be familiar with it. But it essentially is our beacon and our guide. And it's ensures that we always focus on the long term as opposed to reacting ideally to any short-term things happening in the economy or in the business itself. So because of that, we invest in organic growth, and we really try and return and are successful at returning our surplus funds to our shareholders [Audio Gap] section with a clear sense of how they are going to enable us to accelerate our business in the long term. Our growth is our challenge in Truworths Africa, in particular. And we are very, very aware of that. And our growth is going to be deliberately driven by a combination of our brands and our product, which is what we call our hero and we're going to talk to you a little bit more about that and obviously, by [indiscernible] in customer engagement through our very large account base and a very large number of loyalty customers. And we believe that we are well positioned to move forward for the next century. We're currently [Audio Gap] familiar with it, and I think it speaks for itself. So today, we're going to be focusing on telling you quite a lot about the strategy that we have for growth and a fundamental illustration of the essence of our business philosophy. And we refer to this as the hero and the pedestal, and it is the relationship that determines everything that we do. So to explain it a little bit further [Audio Gap] all of which are wholly owned and exclusively available in Truworths stores only. And it is that, that creates the unique model of our Truworths Emporium, which we believe we haven't seen anywhere else in the world. So that's the hero. Very importantly, the hero is supported by what we're calling the pedestal and we are seeing this as if you [Audio Gap]

Good afternoon. I know that there were some problems. There was some network issue. I think we had an issue with the service provider. And so we'll carry on. And I know that we've lost some time, so we'll have to move through quite quickly. Apologies for that. So we'll switch back to Sarah, who will carry on going with her presentation.

Okay. Thank you, everybody, and sorry again for that. I'm going to try and do a very brief synopsis of what we said. And hopefully, it will be clear enough to everybody the essence of what we're trying to get across. So essentially, the challenge we face is we operate in Truworths is we are operating in a constrained economic environment. And we have limited upside store growth because we already have such a mature and well-positioned store portfolio in all of the top malls in South Africa. We also are sitting in a situation with a really well-established and mature account base. And so the ability to easily scale good new accounts at this point in time also represents a challenge. Therefore, in order to achieve the top line growth that we're very aware of the fact that we need to achieve it has to be through product. So we are focusing a lot on a strategy that is -- or an illustration that is the essence of our business philosophy, which is the concept of the hero and the pedestal, where the hero is the combination of our product and our brands, which is a very unique offering. And the pedestal is the plate on which the product is presented, and that is made up of the store portfolio, the credit book and the e-commerce and digital components and obviously, others that form the pedestal of the product. Then very quickly, we are focusing on a product tiered architecture and really expanding on this and using our brands in very considered way to build what we're showing you here our product staircase. We've worked very hard in the last few years at establishing a core range, which was largely absent in the Truworths offering in volume and we are very pleased with the progress we've made in this regard, and we now feel we have a nice range of well-priced, excellent quality basic product across the men's ladies and kids product, and we're going to continue to focus on building and scaling that. But then it comes to the tiering part. Now because of our positioning, we can offer, and we are required to offer our customers elevated products of a high quality and a high level of fashionability. So that is the first step, and that's what we're focusing on. But then importantly, we are specifically tiering up from there with better quality fabrics, more elevated and detailed styling, adding detail into the product as opposed to chasing cheaper prices. And been lastly introducing some top-tier product new ranges to the mix and they are specifically Hechter and Ovillo, and we can talk to you a little bit more about that. So the concept is we've got to make the product more desirable through the entry price point through the tiering up. We believe that if we do this correctly, the customers will choose to trade up voluntarily because although the prices may be higher, the desirability of the product will be greater. This will change and impact our sales mix and give us some inflation. We've been operating in a negative or a deflation situation intentionally for the last few years through the tough cycle but we're now seeing the opportunity to actually drive some inflation into our mix, which we believe will be very helpful, along with other things in driving sales growth. So that's what we're calling the architecture of aspiration, and it's really, we believe, our key strategy for growth in Truworths. So the merchandise has to be desirable and then importantly, our accounts enable the purchase of that elevated product to our customers and supports the -- it will enable the desire purchase. So importantly, we've got 17.4 million unique loyalty customers and a total of 24.3 million memberships to Truworths. In other words, people were able to communicate with which is a significant percentage of the potential adult customer base in South Africa. But Manny will talk a little bit further about that.

Okay. So I'll go through the financial review. You've seen the results, so I won't spend much time on it, and I'll try to catch up a bit. And again, apologies for the technical issues and thank you to those that messaged us. Else, I think we would have been chatting for 45 minutes and no one will be listening. But anyway, I'm glad it's sorted. So I'll just start off with saying how have we done relative to our plans. So we launched Fuel Ladies, and we're preparing for the launch of new brands, Hechter, Ovillo and Offspring in summer '26. Some of those products have gone to stores very early days, but we're quite excited about that. As Sarah mentioned, there's been a lot of progress on product and brand differentiation and elevating our appeal. We managed to sustain gross margin. And in fact, our gross margin increased by -- if you take -- there was an accounting change with our cellular sales. If you take -- if you go like on like as to how we accounted for that before, our gross margin would have increased by 20 bps. So we thought that was good in this really tough environment. We consolidated our distribution centers with a state of our DC with part allocations running at high volumes of replenishment. And we acquired the Office U.K. DC that was ZAR 105 million to support expansion plans of the U.K. business. And then we refine emporium concept, we constantly refine the stores, and we've got some fantastic slides to show you about our plans around East Gate and Santen, which will be the first 2 of the refined Emporium concept. We invested ZAR 12 million in Office U.K. store development. We opened at stores and the weighted average trading space growth was at 8.1%. There's still room to grow stores, and I'll show you later what our plans are there. The online contribution performed well. It went to 21% from 20%, and Truworths Africa is 8.1% at the moment and Office U.K. stabilized at 44%. I must add that the online -- Truworths online and office. We've never had a -- it's been profitable from day 1. We ensure that it's profitable, and we think that we've got really good technology and expertise in this area with sustained investment in technology. AI is a key component of our strategy going forward, and it's infiltrated in many areas of our business. We returned ZAR 2.8 billion to shareholders through a difference in share buyback. The share buyback you'll see later, you probably read it was ZAR 749 million worth of share buyback, and we generated net cash of ZAR 196 million and that's after the buybacks. If you look at what KPIs and what we achieved, we were all within our medium-term targets that we published last year and what's interesting for a long time now, we've outperformed local and international benchmarks. So although the -- some of the KPIs would have reduced like from last year, they are really good on local and international norms. This slide here, really I just want to point out this is that cash generated from operations, which is down 12.9%, but on a comparable basis, when you take the timing of month-end payments, it decreased by 2%. So excellent cash generation. You'll see that in the slide later. Gross profit trend, ZAR 51.3 million. I spoke about the change in cellular sales, it would have grown up slightly. So really good consistent gross profit performance in this market. This, you can see it's -- there's been some normalization, particularly this return on equity and return on capital from the post-COVID period. But these KPIs are still relatively good. And we feel that we've performed reasonably well with these. If you look at our return on invested capital versus WACC, so this is something that's very important to us, and we focus on this. We outperformed WACC at 21% to 13%. So we continue to add to our business. And we think that this is a really good measure for us to focus on. I must say when we build stores, we always look at the return on invested capital. In the U.K., it's excellent. It exceeds what we think essentially exceeds the initial plans. In South Africa, it's a little more difficult, but we -- one must keep investing. But we are pleased with this performance. I won't go into the balance sheet. You would have read it. And just for time, I'll just -- I'll move on from here. You can see here that we finished up with net cash of ZAR 196 million, and this is after share buybacks of ZAR 149 million. And Truworths Africa is still sitting at ZAR 2 billion. That hasn't really moved ZAR 2 billion in debt, but from a group perspective, we're sitting at ZAR 196 million of cash, which is, I think, really good, particularly in an environment that we face at the moment. The cash flow analysis will show you that we generated ZAR 4.4 billion of EBITDA cash. We received some interest as per normal. We acquired the Office U.K. DC that was ZAR 105 million of the ZAR 267 million CapEx maintenance. We funded the dividends, and there was ZAR 949 million worth of share buybacks, and we would have generated ZAR 826 million of net cash excluding the share buyback of the acquisition of the Office DC and the acquisition of some land next to our DC in at the airport. That land was around, I think, about ZAR 52 million that we bought, so very, really good cash generation. If you look at Truworths Africa, so a better second half performance, as Sarah mentioned, and -- but it has been a tough environment. Gross margin has increased. That's the 54% to the 53.6%. Excluding the cellular change, I think it would have gone up by 30 bps to 54.3 versus 53.6, so a nice improvement in margin, and that's essentially from less promotional activity. Retail sales, so a tough all around the ones that battle the most were the kids business and identity. But generally, we -- it was really tough. Menswear had a relatively decent performance. Newer flat on the prior period. Stores, this is -- we closed 26 stores and we opened 24, so 2 down. And our sales densities at 36,000 are still good considering -- and if you look at the trend, which is the stated loan that goes across here, the trend is still slightly upwards. On the merchandise inflation trend, this is what Sarah was talking about. We had negative inflation. We typically don't perform that well with negative inflation. So we're expecting positive inflation in the next year, and we will force it where we can by adding more value to the product to increase the inflation. So probably finished at 4% -- 3%, 4%, I would think. GP trend, quite consistent, which is, I think, relatively quite good analysis of the trading expenses. I won't go into this. You can see the detail other than the trade receivable costs, so we had an increase in provision. The South African economy is quite constrained, and there is -- the consumer has some challenges at the moment. I'll show you a slide a little later on the TransUnion Index, which indicates some of the concerns in the credit environment. I'll just skip through those. This is ZAR 2.8 billion last year to ZAR 2.6 billion. This year in profit before finance cost and tax. As you know, these numbers -- in terms of store development or CapEx, I should say, you can see we spent ZAR 186 million on store development. And we spent ZAR 33 million on computer software infrastructure and ZAR 58 million on land buildings and refurbishments. So in totality, we spent ZAR 280 million in CapEx versus the ZAR 467 million last year. I don't know if you recall, but largely, we had the distribution facility that we were applying money into, and that is now fully live and operating very well. Cash flow in Truworths is pretty good. You can see that even after we've paid the dividends and Truworths funds, the dividends paid completely. So we don't get a contribution from Office in this regard, but we were essentially flat on movement of cash. Office U.K., profit before tax, up 6% and retail sales up 4.9%. So not a bad performance. The second half was struggled a little relative to the first half, but we are fairly pleased with this performance and a 19.6% trading margin relative to the 18% last year was good. I won't go into this too much. This is essentially just shows you where the sales come from. So the majority come from the United Kingdom, and we have some sales coming from the Republic of Ireland. And from a store perspective, we closed one store, and we opened 9 and approximately 50% of our stores are now renovated or new or renovated the new format. And I'll show you some pictures of those. They're looking wonderful. Sales densities are slightly lower than last year, but we still think they're pretty good at GBP 15,000 per square meter. The GP trend, slight decline in GP. There was additional promotional activity in office relative to last year. So just a slight downtick in the gross -- in the margin. Trading expenses, I won't talk too much about this. We can go through it. If you guys are good questions, we can just click on the link and ask us, we'll try and answer that. Those profit before tax, ZAR 66.7 million versus ZAR 61.5 million last year and improvements in EBITDA margin and in operating margin. Capital expenditure, you can see most of the bulk of the CapEx is in store innovation and development, where we've invested substantially and then our distribution facilities. And we mentioned that we bought the DCs in [indiscernible] in Scotland, and that was a purchase that we made. And then we're starting to invest in computer software and infrastructure, putting in a new merchandise management system that should be live in about 18 months. Good cash flow. We would have generated ZAR 33.6 million net cash, excluding the dividends paid to Truworths and those dividends were paid to Truworths to do the share buyback and excluding the D.C. acquisition. So a highly generative cash business. Account management, I'll go through a few slides here. So it is an asset to us. It's how we communicate with our customers. Sarah explained that it's part of the pedestal that supports the growth. So it enables our customers to buy merchandise that is more expensive than many of our competitors. We had really good targeted account acquisition strategies. So we opened more new accounts at less cost this year. loyalty has become a primary origination engine for that. So we've got 17.4 million unique loyalty members. And of course, we score those regularly. And the ones that came to open an account to then failed, they then pass once we rescore them, we offer them an account. So that represents about 55% of all new accounts opened. So it's a tremendous asset. Our PAY3 product, which is our group's in-house buy-now-pay-later product is gaining momentum. So it's still relatively small in the grand scheme of things, but we're showing some good traction with this product. some really good disciplined credit management and some strides that we've made in customer engagement. We put some new technology in place to enable us to personalize -- help personalize our communications. And then AI, of course, as one would imagine, has moved into top gear here in this space with all our scorecards. We run the portfolio with around about 56 scorecards. This is the TransUnion Credit Index. It comes out regularly. And if it dips below 50, and it's currently at 49%, it shows debt stress. And one can see that this is really to do with the petro price increase and the pressure on the consumers that it has dipped when one looks at it, the household income as the plan lending has increased on credit card and personal loans, which is essentially a sign of distress. This is available on the TransUnion website, if you want more detail. But this shows that there is pressure on the consumer in South Africa from a credit perspective. Hence, we raised the provision. I was talking about this. So we still had 4.5 million account applications, slightly down on last year, but with just more targeted and we had a better risk approval rates and a better open percentage as a result of that. The age distribution, 40% of new applicants are younger than 30. Of course, many of them can't get accounts because they don't have good credit profiles, but they do become loyalty members, and they feed into our pot and then 58% are younger than 35. Some statistics around the credit book. So a number of accounts is essentially flat on last year. The gross -- the trade receivables book is just slightly up. We increased the provision from 20.8% to 21.7%. The accounts -- you saw this on the previous slide that we made improvements in accounts opened as a percentage of applications and risk approval rate. And we -- the overdue percentage of debt is sitting at 17%. Is there anything else I can speak on this slide? I think it's -- that's about it. I can answer any questions on that. This one, your active account holders purchased 77% versus 79%. We have got a query as to -- why is the overdue rate the same as last year, but the percentage of account holders able to purchase at period end is slightly lower. One is a value and the other one is a number. So they're 2 different statistics. We're going to start to talk about aspirational fashion in our strategic initiatives, just cognizance of times because we have 20 minutes left. I'll hand over to Sarah to go through these next couple of slides.

Thank you, Manny, and I'm going to move through quite quickly. We've already spoken about the initiative to elevate the product mix. and the rollout of the new brands. The one I didn't mention was the brand-new streetwear brand called [indiscernible]. That's a men's very cool street to elevated streetwear brand and then you're familiar with our fuel ladies brand, pure men's brand, which is also a young energetic street brand. And in this period, we introduced fuel ladies and we're very pleased with the early performance of that brand. The basics, we continue to scale and develop. And then importantly, the use of our branding, the brands that we have which our customers love and often think our international brands, by the way, the application in very creative and elevated ways of those brands onto our product to drive aspiration and elevation through that technique. We continue to have very good response capability out of our design division. And we are doing a lot of work with virtual product development, which is obviously shortening lead times and improving dynamism in product development. We are investing in a new AI-enabled product lifestyle management system, which we're going to be implementing over the next year and a lot of advanced AI integration into the merchandise side of the business as a whole for design, planning and forecasting. And then we've seen very nice synergy opportunities between Office and Truworths on the merchandise buying side, through supplier collaborations and then also continued synergies within our design centers across men's, ladies and kids, which are giving wonderful economies of scale. So we're testing and scaling the brands, Office and Offspring in the U.K. So we're particularly focused on, again, the aspirational tiering up. There's a lot of opportunity for Offspring as we see it. Office is going really well. in terms of the expansion there. And the MTO made to order or own brand range of shoes within Office U.K. has seen an improved performance, and we believe there's opportunity to grow that component of the range. And obviously, it comes with a higher margin. And then we've got work actively in place at the moment on both warehouse and merchandise planning systems in Office U.K. Those will go live in the next financial period.

Thank you, Sarah. I'll quickly go through these. I really want to try to leave some time for questions. So I'll run through these quickly. Just as a reminder, this will be published on our website. In fact, I think it's already published at the moment of this presentation. So supply chain is really to leverage the Truworths Africa distribution center and to make improvements in the way we part allocate and we also need to be looking at reviewing the logistic partnership to reduce costs. Of course, that's a massive cost in a retailer such as ours. So there's a ton of work happening there. We continue to strengthen the supply base and some of the local CMT suppliers we help and when we support. We're looking at -- to shorten the lead times. And in the U.K., we want to expand capacity, which is why we bought the DC. And in terms of the customers, expand the range of the credit products, so we can continue to scale PAY 3, and then we will commence rolling out with third-party buy-now-pay-later products. Hopefully, we can get some of those in the start of the year. That's quite -- but we'll see how that goes. If we want to grow the active account base through targeted conversion of the loyalty members, deepen the customer experience with this new product that we've purchased, which enables us to personalize our communications. AI integration I spoke about. It's a really low-hanging fruit component of use in our business when one talks about credit risk and operations. But I'll be -- the AI is permeated across many aspects of our business. We're going to grow our commerce contribution and integrate the office and Offspring apps into the CRM system. And if I talk about retail presence, we've got the largest store opening program planned since COVID that's in South Africa, I can't remember the percentage, but I think it's about a 2.5% retail space growth in South Africa. We've got this new format concept, which I'll show you, which is looking absolutely amazing and we'll continue to grow out the new brands, which are showing promise. And we've integrated [indiscernible] format into our identity. And we'll, of course, continue to optimize trading space by introducing the brands. There's not -- let's look at here. This is transform the in-store customer experience through technology-enabled stores. So there is a push to put more technology into our stores. And we're always working to reduce performance costs in e-commerce. We want to expand and modernize the Office U.K. store portfolio. I'll show you some slides and then selectively expand offspring that seems to be an opportunity for us. So I'll just go through these slides with the new concept is called [indiscernible]. We regularly redesigned to keep fresh. This one here is in East Gate, in Johannesburg. This is the Truworths entrance, which is absolutely beautiful. It leads into Hey Betty, Inwear and Ginger Mary. This is what we're doing in Hey Betty and what we're doing in smart leisure and formal and you'll see in where it's young and fresh and very enticing. [indiscernible] and Hemisphere is our Jeanswear store. This is a concept that can be rolled out to be a stand-alone store, but this is what the entrance will look like. And it's the first time we've combined men's and ladies in a format such as this into an actual jeans store. Truworths Man, that's the entrance there. It's looking actually really good. Some other pictures of the menswear side, you'll see is there [indiscernible] men street to on the bottom right. And then we've introduced fuel ladies, and that follows our introduction of fuel men's, and that's performing well. Context that's -- and loans of living, that's what it will look like looks amazing. And you'll see it over there. This is [indiscernible] and Sarah to speak about this leading into Ovillo, our upmarket product range which is not -- we'll still have Daniel Hechter of course, but this is Hechter, which is tiered up a few price points similarly to Ovillo. So these are just some images of what they'll look like in stores. Shoes and accessories area and our jewelry cash desk and a concept called scrub that we're experimenting with is essentially a stationary concept that we'll be experimenting with. Identity, this is the new concept is called signal. This is the entrance what it's going to look like in East Gate. You'll see a fantastic entrance with man, with identity ladies and with kids to entice customers in. And the landlords are very excited about this as we are. And you'll see this is just some images of what we've done here. I think that we've introduced in our entities. You can see that the side there on the top left. And then you can see what it looks like on the bottom right. And we'll be introducing Sync Beauty. And then there'll also be a stationary component in sync those will be new experimental brands that we'll introduce. Now off to Santen. So East Gate was really quite different, but we decided to push the envelope a little further in Santen. And this is still in development phase. So still conceptual, but this is what we're talking about, beautiful around entrances, great architectural features massive shop front as you walk. So this is across from Zara in Santen City. We'll have our Jeanswear store there as well. It looks like this. It's a combination, I guess, of we think it's a combination of [indiscernible] and Zara. So you have these pockets of enticement and different feel for each of the brands as you walk through this over here where you see this brightly colored sort of area here is [indiscernible], got a different look at fuel. Ladies, this is a young fashion concept that we've got going here Ginger Mary, what it's going to look like, this is conceptual, of course, but it should be something close to this than anywhere. And then just to the U.K. now. So now we have a fantastic location in Conoby Street [indiscernible] and so we'll be building an Offspring store there. This is the rendering of the images, the entrance to Offspring and the first floor, which is very, very exciting. And then we're also taking Offspring further into salvage. So this is what the concept looks like or fit. This is the Offspring Selfridges Men's concept of here. It's really good digital displays that looks fantastic and enticing. This is our office stores, which we have this new format, and we're rolling this out. It looks beautiful. I'll show you some before and after images. And you can see the difference. So here as before in [indiscernible] High Street. This is what it looked like before. This is after we finished it. And this is in Leeds Trinity, what it looked like before, pretty dark and this is what it looks like afterwards. And the landlords love this concept of those. So that's what the stores look like. I'll go through the outlook because we have literally 9 minutes. So you saw this trading this update, we centered out. I just want to point out that this increase -- the gross profit increase in Truworths Africa in rand value and Office U.K. and pound value increased by 3%. This is not a margin is not an increase in the margin percentage. This is an increase in GP, and it's essential 16.4% on the weighted average in the U.K. So some really good growth in the U.K. We believe the group is very well positioned to take advantage of improvements in the macro environment. We're confident that there's a gradual recovery in retail spend spending over the medium term. And the new fashion brands and store concepts will be introduced in trial to extend that [indiscernible] expected to be driven primarily through product innovation through the brand development that Sarah was speaking about. And of course, through customer engagement and improved value extraction. We'll leverage off our 2.9 million active customers and our millions of royalty members, and the growth will be supported by the large Investor Relations mailbox. And if you have any questions, that you need to send to us after this presentation, please direct them to this mailbox. We've got a team of people that respond. We try to get back to you within 24 hours. So I'll now go to the questions.

In office, the cost growth will come primarily from new stores [Audio Gap] debtors book primarily. But other than that, it's well contained. There's a question here. Michael, when will you retire and spend more time with your loved ones. We joke and we say Michael's loved ones are Sarah, myself and Reon and other people in the business. But seriously, the Nomination Committee is comfortable with Michael and they will decide and he will decide when it's time to step down. I've just been told that we're hanging again. I'm not sure if that's how true that is, but I'll just carry on. SA sales came under pressure to what extent did SA's relatively short winter have on this? We started off winter quite well. It's a good question. We did start off quite well, but June was fairly poor. I don't think -- we look at the weather, and it was perhaps a little milder this year, but we don't really talk like it and look at it. We just focus on what we can do. So it was milder and probably contributed a bit, but I'm not too sure by how much. What level of inflation you see in Truworths Africa in 2027? I answered that about 3%. Why change in accounting policy for telecoms revenue? So we were -- it used to be commission-based. It's now sales-based with a gross margin. And that was -- the partner that we had in the telecoms area asked us to do that. It looks like we're hanging again, guys. I'm not sure. Let's have a look at this. I'll just carry on. Please clarify what the normalized Office U.K. EBIT margin was and what the profit growth, excluding the adjusted and excluding foreign exchange gains. Reon, I don't know if you want to answer that one.