Truworths International Limited (TRU) Earnings Call Transcript & Summary

Good afternoon, everybody and welcome to the Truworths International webcast in this very strange and usual COVID world. We're all on Zoom. I'm in my office, in Truworths head office; and David Pfaff, he's also in his office, the CFO; Sarah Proudfoot, who is Head of a significant portion of the Truworths operational side of the business in merchandise is also here; and Kerry van der Merwe, who heads Office, is also here. We are the 3 presenters. I will take you through the slides in the normal way, actually. And then from time to time, I will refer that just to one of our colleagues, and they will discuss it. And then questions in the normal way will be entertained via the technology that we're using, and I'll try my best to either answer them myself or to refer them to some of my colleagues. So let's get straight through to it. Just let me make the point upfront though, I'm going to try and do this presentation in a slightly different way, which really means it's going to be more of a casual, informal presentation. There are the traditional slides in front of us, and that's fine, but I'm not going to go into all the detail of the context. That you can look at yourselves afterwards. I'm going to try as best I can to focus on the strategic issues and the bigger picture issues. The detailed content, I understand you guys analyze results at your own discretion, at your own time. So firstly, year in review. We know the background. South Africa's marketplace is tough as is the world. I don't need to talk to you about COVID. You all understand it well, and you know what's going on. And let me say, however, that besides everything else and besides the problems of the COVID world, we do know U.K. has got the Brexit overhang, which is really a big problem; and South Africa, besides our challenges and our economic challenges now, have electricity problems which clearly will constrain growth and it's a big challenge for all of us. I think you know. So let me tell you how we approach the COVID pandemic. I guess similar to most companies, we saw when it first hit China, and it became apparent that this thing was going to get out of hand and was something we've never experienced before, we created what we call the war room. I suppose everyone did the same thing. And the war room, day 1 already, we established a series of objectives. And I've highlighted them on the screen. First and foremost was business sustainability, and that was the highest priority. We said to ourselves we've got to make sure that the business is sustainable as we get through the crisis. Remembering, when it first started, no one knew how serious it would be an indication. So it did feel like it could be like hectic, and it has been hectic, but we didn't know what that meant. So we prioritized. First thing, business sustainability. That was our highest priority, not how much profit are we going to make. It was business sustainability. Second, cash is king. They were the 2 things. And we wrote those -- we put them in our heads as an overwhelming force. Those are the 2 issues: business sustainability, cash is king. Of course, we knew real estate has to be taken care of. It could never get overstocked because you can imagine when we know that our stores are going to be closed. And from the very next day, stores are suddenly going to be closed, you know that there's a big stock problem coming. So therefore, how are we going to protect the overstock issue? Secondly, how do we protect our gross margin? Then protecting the supply chain because in a business like ours, we know that most of our suppliers -- remember, we're about 45%, 50% local, are dependent on us instead of another way around. Therefore, how can we look after them, and yet we can't be overstocked. So it's quite a challenge. Of course, we have to look after our staff. We realized our customers are going to take massive strain in South Africa, with all sorts of economic challenges, in the U.K. with perhaps just as many, if not more, without the tourism. So how are we going to look after credit in the South African environment and our customers, generally, to retain them? And then we didn't forget our shareholders. We took a view that shareholders are also going to attract strain. They're not going to get dividends. Company's profits are going to decline. So what can we do to play our role there? We took a view right upfront there, our goal must be to try and make sure we can still pay dividends if all the other things weren't. So we did all sorts of things. Most of them, everyone did. We applied all the government relief measures, which were in South Africa and the U.K. U.K. had a furlough system and various relief measures for landlords that we took advantage. And in South Africa, we had what was called a Ters, T-E-R-S, system which was similar, which we took advantage of. The directors, the executives and some members of staff contributed up to 1/3 of their salary for 3 months to support their colleagues, who are the sort of poorer people in the business. We communicated with our staff and our suppliers and our landlords. I couldn't tell you how many times. We did it very verbally, we spoke to them, we sent them e-mails and letters. We continue to communicate with our staff throughout the process, and we still are to this day, as well as to our suppliers. And we were honest. We tell the suppliers, as an example, that we're canceling because we can't accept the merchandise. And we were completely honest, we told them what was at risk, what we're going to cancel. And also, we put in an enormous amount of effort to take stock that we felt was not essential for this winter and perhaps delay it for next winter and what we had to cancel. So we kept on giving them information. We, of course, enabled work from home. And technology-wise, we're very good at that, so there's no problem. We had managed social distancing for those skeleton staff that worked at the office, but that was not a problem. Credit intervention was a big problem. I mean most of our customers pay their accounts in-store. They don't like to and are not used to using the Internet to pay their accounts. So what are we going to do? Our stores are closed, after all. And that's in South Africa; the U.K., even worse. They can pay accounts, but I mean they can't shop. And we negotiated with landlords. It was a big thing, both in South Africa and the U.K. And so that was the process we went through, and we carried that all on the way through. As a result of the COVID war room plan, we finally -- it took a long time in South Africa, we reached agreement with most landlords. There's still a few that is outstanding, but it's not a big deal. And we ended up paying approximately 15% of the rental during the closed period, that is to help the landlords with things like wage and taxes and utilities and things like that. But we basically paid about 15% of the rental. And we came to agreement over a long period of time working with some of the retailers, but eventually on our own with the landlords. We -- as a result of the problems of some of the bigger competitors, which are well-known in the marketplace, we have reinforced our position as a really important anchor tenant in every single mall in South Africa. I'll talk about the U.K. separately. And because, I mean, we are such a -- are a sustainable business, and we are right in the middle of the fashion port of every single shopping node in South Africa, as many of you know. We've ended the season with good stock position. No winter overstock and no impact on the Truworths gross margin, which was one of our major objectives. The supply chain is enhanced because we did all sorts of things to support the suppliers. We were very tough at first, but as we got into -- in control of our stock, which we did very quickly, and the levels of stock, we were able to, funny enough, to release and buy stock that we had previously talking about canceling. And in the end, it worked out really well because at the end of June, we -- our stock was as clean as ever could be. Office, we took advantage of the opportunity. We said, look, it's already got problems. The economy has already got problems, you know about the problems we've got in Office. Let's go through a restructuring process. And we consulted with experts, and we did that. I'll tell you about that later. And then cash is king. Yes, I've seen some of the reports today about [indiscernible] the creditors weren't paid at the end of the month and the timing helped us. But for God's sake, our cash position is amazing if you think about the situation, of everything that we've been through. And so we are really in a cash position. There might be a few hundred million whichever way you look at it, but essentially, we are in a cash position. And then let me sort of jump and go straight to the end and make a point about something. I've noticed in a lot of reports today about our sales since the end of June. And Truworths was down by 11% or whatever; and Office, 30%. Let me make something clear. Office is down by 30% because only 70 stores were open in the month of July. They opened others in August, but for the month of July, 70 stores opened and 30 or 40 were closed. So that's a big part of it. I admit that they are down on last year, and I don't know the exact figure, but that is seriously exaggerated by the fact that so many stores are closed. They've had to open in a slow way because we had a formal view on the profitability of opening. And especially, because there is a furlough system and the staff are being paid through the furlough system, so it had to be a decision as to whether the store would be profitable to open at first when we knew it was going to be difficult. So we only opened the stores gradually during the month of July, up to 70 by the end, and then some in August. So that's been one of the factors. In the Truworths side is another interesting thing. In the Truworths side, we actually managed our stock really well. Therefore, by the end of June, we had a normal winter stock level in every way. However, what did happen because of COVID was the supply chain was seriously disrupted, especially from China and the harbors in South Africa and all sorts of things with COVID. The result of that meant that our early stock input of summer goods, which we call July 1 summer goods, onwards, was very poor. Therefore, during the month of July and in some degree in August, we had been running with too little stock. In other words, our stock levels have been something like, of new season, 20% and 25% below what we would like it to be in the early part of the season. So that has a big influencing factor. That's more or less getting sorted out by now. I'm not in any way negating the reality that our debtors book is under strain, and the customers, of course, are under strain. So therefore, sure, there are challenges, but our figures are a little bit worse in the opening period of the season in both instances for extraneous reasons that at least, to a large degree, were outside our control and almost all because of COVID. So where do we stand today? We feel that we have an established portfolio of great brands in both businesses. In Truworths, we've got very high stable margins. Gross margins are excellent. And despite what some shareholders feel, we're very comfortable that, that's the right place to be. We're strongly cash generative, we work in a net cash position. By the way, if you look at it, and that is after buying back ZAR 583 million worth of shares in the period. And we'll continue our share buyback program. Strong inventory management in both businesses. We reacted -- we feel very -- and we're proud of it, speedily with employees, players, landlords and with our book. We accelerated vertical integration with our supply chain. Sarah will talk about that in a few minutes. In the restructure process with Office, we had a really good look at it. And it became very clear to us -- because we looked at all options, and whatever you saw in the news, Sky News, et cetera, that was partially true. We were looking at everything. Every possibility was open. And what surprised us during that period were 2 things really, one was the e-commerce performed much better than expected, which was amazing. And you'll see how stock levels in Office plummeted over that time because we're able to reduce stock levels because of e-commerce, which held up remarkably well. Remembering, in Office, the stores of Truworths for about 3 months as opposed to South Africa's 6 weeks. So in all that time, we were managed -- the e-commerce did better than we thought. And the other thing that surprised us during the restructure negotiations, discussions, consideration was interests in the business by 3 lots of parties. One, we saw in social media, the love of Office and Offspring was amazing. Two, the brands, the big, big brands. I'm talking about the Nikes, the Pumas, the big brands, Doc Martens, et cetera, love Office business. And we were amazed at how supportive they were with the difficulties we were going through as were everyone else. They really were worried about us as a business surviving through the process because they saw the brands are so important in their own strategies. And of course, it was interesting because some of the big labels wouldn't just -- similarly felt it was important. The customers -- so we sort of got a feeling at the end of that. And also, we saw the interest shown by some of the big, large competitors in wanting to acquire the business and how much they prepared to pay for it. We started to realize that, yes, Office has got its challenges. Let's look and rethink and just make sure that we don't overreact to this crisis. And Kerry and the team went through, with David, numbers of scenarios and looked at cash flow. In the end, they came to the conclusion they're going to need about GBP 6.5 million, GBP 7 million at worst over the next 12 months. And we took a decision as a Board after very careful consideration, that it really was a good idea to invest that money or to provide finance to them under certain but strict conditions. Out of interest, the cash flow is still excellent, mainly because of working capital management. We did have to increase the provision in the book for pretty obvious reasons in Truworths. And we did manage to declare a final dividend at the same cover that we always pay. Looking at the strategic perspective, let me make another point. I show this, you've seen it many times before. The Truworths purpose is an emporium of unique -- and I use the word 'aspirational' fashion brands. Now that means aspirational fashion brands of really high-quality means that we are a little bit more expensive. And maybe quite a lot more expensive. That is our unique position. That is what we stand for. South Africa is a poor country. When people buy for cash, wherever they buy, they tend to be in debt, maybe not to that place they're buying from, but they owe money, whether it's through money lenders or wherever. People in South Africa are in debt. What we do in Truworths is not that we take a view that credit is important because we want to be a credit and not a cash business. It's simply because we've taken a view that everyone is in debt in South Africa, an enormous number of people are. We want to manage the risk of the debt of stores because we don't want to be at the mercy of other people. So we've developed expertise over many years to manage that debt ourselves properly, which is what we do. And that enables our customers to get credit from us instead of other people such as money lenders, et cetera, at a better rate, and we can manage and control the process better, which is our philosophy. You may or may not agree with it or like it, but that is the truthful way in which we see things. So strategic focus areas from now on. Where do we go? Firstly, it's succession, and we'll talk about that in a few minutes. My own role in the business, because that has to come to an end in the next 2 years. The Office turnaround strategy. What are we going to do there? Supply chain. There's been some significant strategic thoughts. We didn't waste time over the COVID lockdown period. We've been very busy. We see some quite interesting opportunities to grow and revert profit growth because our business is very profitable, but it has not been growing profits. And then space rationalization, which we've been aggressive with, both in Office and Truworths. And landlord negotiations are very interesting. In South Africa, particularly, we have 5-year leases. So they come up for renewal all the time. And we have many stores in each and every mall. So we are having many opportunities for rent provisions, and we've said it's about 15%, but also for consolidation of space. And there's a lot going on in the landlord space. And especially now that we've become a primary anchor tenant -- we've always been, but we now are even more important, let's call it, than we were in the past. And then we do -- we've been working on some new concepts, which we've been working on for quite some time actually. But COVID gave us the opportunity to put more effort in, and we're going to launch some new ones in the short term. And then, of course, Office did remarkably well. E-commerce, I've already told you, I think that's now over 40%, 42%, 43% of the sales. In Truworths, to our surprise -- I mean, I know you can expect it. Of course, stores are closed, e-commerce should do well. But it did better than we expected in e-commerce. So we see e-commerce omnichannel is even more important than we did in the past. So let me talk about the succession issue. That should be quite an easy one. We have presented to the Nomination Committee, and this has been discussed for many years, so -- that it's now come to a [indiscernible]. I'm leaving the business as CEO in 2 years' time. I've made up my mind that, that's kind of the time for me to retire. I would have been happy to leave any time the Board felt it was appropriate, but they've asked me to see us through this transition of the 2 things, really: the succession, but also strategy as we evolve and emerge from the COVID crisis, both in Office and in South Africa. And I'm very happy to do that because I love the business and I love of people. We also are, unfortunately, going to lose Doug, who's been with the company also for 30 years or more actually because he retires in April next year, and he's got other plans. Hopefully, he can stay on and consult us, but that's a personal thing of his. And then Sean, who is our other Director, the 5 of us at the top level, David, Sarah, and the 3 of us; Sean is over 60 now. He is also probably going to retire in the next year or two. So between us, there's 100 years of senior executive service in Truworths. And that is why there needs to be a very well thought through transition process. We've put an enormous amount of effort in judging. The Nominations Committee has actually seen and been presented with a phased succession plan right down to executive level, which is about 28 people in our business over the next few years. So it's very clearly laid out. And just out of interest, I mean, yes, there are 3 of us leaving with 100 years experience. But if you look at the next 24 people under us, broken into groups of 8 from 40 to 47, 47 to 54, 54 to 60, in groups of roughly 8. Between each group, the average length of service is, themselves, about 20 years each, 18 to 20. So we've put enormous depth of management under us. And succession, therefore, in our business is a very important factor that we feel we've properly dealt with over the years. Who's going to succeed me? We don't know yet. The non execs and the Nomination Committee has to make the call, and they go through a very structured formal process so we're able to do that. And for the time being, at least anyway, it's Sarah, David and I are going to be the 3 that are going to run the business as we evolve into the future. So what are the new concepts? Well, Sarah will present some of them to you in a few minutes, but there are really a couple of them. One is, Identity is doing nicely, very nicely. So we are -- we've decided to create what we're calling an Identity superstore. Superstore means a similar transition Truworths went through 25 years ago. Again, smaller stores or 400 square meters, 500 square meters grew them sudden, quite large, made separate entrances for men's and ladies and kids and made it into a kind of a mini department store, yet it was still a specialty store. Well, Identity is not going to go the same way. It's doing really nicely, and we see a big opportunity for Identity superstore. We have a brand called Hey Betty, which we had for a good for a number of years. It's a cool, casual, relaxed brand. Sarah will tell you more about it in a second. We're going to do something interesting with that. Uzzi is going great. And Uzzi, we're going to create an offspring. We haven't decided on a name yet, but sort of -- it will give both a new interesting concept, which will be an extension of but separate and run separately. And then our kids business, as you know, has been mixed. And we've decided to launch a business called -- an e-commerce business, by the way, called Loads-of-Kids, which is all of our kids brands and other stuff. And it will automatically also flow into some superstores, physical bricks-and-mortar stores. Those concepts are all going to be launched in the next few months. We also have -- we've been very busy over the last few months. So we have now gone quite a long way towards integrating our own design centres. We've got a number of them. Design centres, for those of you who don't know, are the people who sit and design, and they design the product. They make sure they get a hold of them by the fabric and the trimmers. They find a place to store it, and they hand it out to CMTs that make and trim manufacturers and assemble it. Well, the design centres, we've got a few that work with us. And we have in-house design centres. They're going to be integrated. And then we have a number of manufacturers, mainly local, but also, of course, in China. But we focused local first, that we have a -- we don't own them, we have a unique relationship with them, let's call it that. And we are pretty much exclusive to most of them. And so we are working on a complete integration of the design centers with those manufacturers and even with the fabric to get a kind of a vertical operation to integrate the supply chain. We made some nice progress there, and it's going to be an ongoing process over the next few years, but Sarah will tell you more about that. And we're going to also launch a new futuristic emporium, big Truworths store. It's going to be up and running in the early part of 2021. And then we are very busy with restructuring Office for long-term sustainability, and we've made some nice progress there. Governance. We're very proud of our governance. We're included in the global FTSE4Good Index with an ESG ranking 4.2 out of 5. And our supplier code of ethics and good business practice has been -- suppliers have been audited. Adherence is very good, but we're working on that. And now in the Ernst & Young Excellence in Integrated Reporting Awards, we are in the top 10 for the 13th consecutive year. We are only 2 -- 1 of 2. I think the other one is Sasol, who's made that. And just to get into that a little bit, let me make the point to you. Our philosophy is not to try and sell you as shareholders anything. That is not our role. We don't try and convince you of anything. It's up to you to be convinced or not. We just are honest and disclose and tell you what we think about things and why we're doing things. It's up to you then to make the call on how it works or not. Now I know that's obvious, but that philosophy is quite empowering because it means we don't feel a need to sell. We just need to explain and communicate and then for you to make the call. And we have adopted that philosophy for [ 30 ] consecutive years in our integrated reporting and with our interaction with shareholders, and we will always do that. Environmentally, we are very aware of the urgency of environmental protection, and we do plenty of things in-store and with our stores to deal with it socially. And the social and ethics side of our business is very critical to us. We have a trust fund now, which has now ZAR 205 million invested in them. And they use those funds very well to do many, many things which I can't explain now, but they are in an integrated report, and you'll see more about it in the future. Focusing a little bit more on Truworths, putting much more emphasis into our customer engagement systems. We know we've already got excellent debtors and credit management systems as forecast. Very good merchandise systems. We are integrating the 2 so that we are able to have one single view of the customer. And we've gone a long way towards doing that. And then with this whole e-commerce and finding what's in stores, bind the seams and in-store transaction and seamless transaction e-commerce in store. In other words, a customer is in-store and they're shopping online, even though they're physically in-store, and all of that is being integrated into a seamless back-end operation. And it's already working, but it will be 100% integrated over the next 3 months. E-commerce did really well in the 2 worst environment. We're talking about Truworths now. In May, it grew by 207%; in June to 90%; in July, 160%; in August, 170%. So it's sustained. Now yes, the base was lower in Truworths. It's very high in Office. As I said, Office is 43%, I think. In Truworths, it was only 1%, I think, 18 to 20 months ago. It's now getting close to 3%. So it's by far, the fastest-growing part of our business, and it gets sustained subsequent to the stores opening in South Africa. We have now world-class data-enabled credits. We've got the ability to track 8 million Truworths shoppers and 4 million Identity shoppers. We call them loyalty members. They do -- some of them have credit, some not, but it doesn't matter. We treat them the same. We have all sorts of predictive modeling and artificial intelligence. We use maths and science in our [ actuarial ] department as part of our day-to-day operation. Maybe, Sarah, do you want to spend just quickly for 2 minutes, just talking about the supply chain?

Yes, absolutely. Thank you, Michael. So I think Michael has covered the philosophy of the supply chain. But I think what's important is just to sort of mention the fact that it is a unique supply chain that is specially created to support our business model. And I think one of the most important things to focus on is that diversity of brands, which results in a very wide range of specialized products. And therefore, the regular supply chain that focuses on a narrow range of products with great debt is not appropriate for our business. So we need the variety and we need a supply chain that can really deliver variety, speed and at the quality that we require for our -- to set us apart.

If you want to take it a little further, maybe talk to them a little bit, Sarah, about this PLM system and this collaboration with suppliers.

Yes. So interesting. I mean this slide talks a little bit to the COVID experience. And it's been fascinating to see the learnings that have come out of it when one has no choice other than to work totally with systems and digitally, not together in a traditional meeting scenario. So I think we've learned lots of lessons on how to use technology that will unquestionably help us in the future to shorten lead times. And I think one of the main things that set us up to be able to continue work so seamlessly over this difficult period was the use of our PLM system, which is an amazing glass pipeline. It is a product lifestyle management system. And it essentially gives you visibility on every single product in the business, from its inception as an idea through to its delivery in the warehouse. And that has enabled us to really create speed and efficiency, irrespective of the fact that we were locked away in individual locations.

Thank you. So offshore, we've also got an integrated supply chain. I mean we have our in-house sourcing division, which, out of interest, is by far the largest supplier of our business. They import merchandise from every corner of the Earth, mainly in Asia. But I mean, I'm talking from Bangladesh to China to India and all over the world, Vietnam. And their lead times are getting shorter and shorter. And we've spread the risk, and it's been going for a long time. It's a superb department, offshore supply chain. And in this process that we've agreed to work through over the next short term, actually, and over the next few years thereafter of integrating our supply chain and our manufacturers, we are looking at doing that worldwide. In other words, it's a holistic perspective of supply chain, whether it's local, in a vertical way or whether it's offshore. And some design houses and centers will do both, using international importing as well as local at the same time in creating the ranges for presentation to shareholders. So I'm going to go over very quickly through this because Sarah has already mentioned -- maybe, Sarah, just a very quick point. Just talk about the supply chain, the design centres and the manufacturing base. Just a quick note to just summarize.

Yes. Thank you. So based on what I said about the breadth of product, we, for a long time, had an amazing network of these design centres that are very carefully selected in order to cover the breadth of product from men's, to ladies and to kids. And then in recent years, we have really put a lot of effort into developing in-house design capabilities for men's and kids. And over this lockdown period, in particular, we have progressed excellently in the development of our in-house ladies capability. What this does now as a whole, as an entity, is allow us to support the manufacturing bases. So I'm talking now about the actual CMT factories who are in what we call our Truworths cluster and who are exclusive manufacturers for Truworths. It's enabled us to support them through the COVID period and also to really gain a much better, detailed understanding of how they operate where their strengths lie, but also where the requirements are to develop those businesses towards a much more sustainable and efficient future, which will give us better speed to market and unquestionably be better prices for our merchandise.

So I'll quickly run through these. Identity Superstore, I've mentioned it. It's a [indiscernible] lower-priced, high fashion, younger business. It's won an award, I think for 4 years running, as the coolest brand in South Africa, mainstream, young. We launched the kids range over the last 12 months. We've been experimenting and it's doing remarkably well. So that's great. It's going to look like this is a superstore, separating the ladies and men's entrants. We've never done that before, much larger store. Sorry I'm rushing through this, but I'm very aware of that -- I'm going to try and finish in such a time to give you time to ask us questions. That's a little bit of the insider story, modern, relaxed and young, [ cashless ] environment, finish your hook. It's a young business. So it's going to have signs on the walls and on the columns that are communicating in a younger, fashionable way to young people. And then, of course, a completely separate but linked to the store, kids store, which we haven't had before. Sarah, just take us quickly to Hey Betty, just for, honestly, less than a minute.

So Hey Betty is our cool, young casual wear brand. And we see really an opportunity to expand this brand, driving in the sort of elements of sustainability and social issues that are very important to the younger consumer and the developments of a community around the social media platforms that really create engagement with the customer directly. It's a young lifestyle, very casually based, so good value merchandise but also mixed in with some aspirational brands. And we believe that, that has really got the ability to develop a new side to our business that we don't really have at this point in time.

Sort of a better and cool. It's a bit like Office, our Office London [indiscernible] in South Africa, which is doing nicely. It's -- I think about 16, 17 stores doing well. That's also got a young sort of cool, modern better end sort of image. Hey Betty is a clothing fashion ladies side of that. That's the kind of merchandise. Uzzi through quickly. I keep looking at the time. Then Uzzi, which I think most people know, it's a young aggressive male sort of brand. Strong t-shirts, strong branding, very well known in South Africa, well priced. Well, we're going to launch Offspring Uzzi. We're not calling it Offspring, I'm just using that word to explain it because it's a secret. Partially because we don't know [indiscernible]. We've chosen 2 or 3 names. So the secret we've discovered ourselves is similar. The answer is it's a young, urban, men's, teenage, unisex brand very focused; sweats, t-shirts, casual product, well priced -- better even priced than Uzzi is. Narrow range, very into DJs, music, social media, young sort of African scene. Good response is going to be key to it. That's going to be launched in the next -- early '21. And then the Loads-of-Kids emporiums [indiscernible]. We've got these amazing kids brand, Naartjie, Earthchild, LTD Kids. And in LTD, there's a couple of brands. So they all do great, Max & Mia, et cetera. So it's going to be a whole Load of Living -- Loads-of-Kids. Loads of Living meaning sort of London for kids, if you want to call it that. And various other products that we're going to have for babies, et cetera, in our kids emporium. There's a kind of a feel for which we're going to launch some baby wear and -- it's really not [indiscernible], but now we're going to put it into LTD as well, the baby wear side. Sees the cute pictures, they're not my grandchildren. They're also very cute. That's a store. The kid's emporium. It's going to be a big store, and it's going to be great. Next year, it begins. Office. Okay, I've talked a bit about Office. We took a more positive view, meaning -- just to take a second there. Kerry, you and David ran this whole sort of restructure process. Maybe you want to just give us a very short [ tracing ] of the perception you got when you interact with the big brands. We're not naming them because they might be sensitive. But the big brands, what the perception of the business was when we had these COVID process kind of store difficulties, the support they gave you, et cetera, because you were the closest to them.

Thanks, Michael. I'll start, Dave, and you can just add in where you need to. So I think, Michael and the listeners, is that when we went into this difficult lockdown process, the support that we got from our key brand partners was overwhelmingly positive. They were incredibly supportive, understood the issues and the dilemmas that we were facing and what we were trying to contend with. And I think the key for us was the constant communication that we had with our key brand partners. And through this process, through the key communication, we were able to come out of this COVID lockdown period with a much better and a much stronger relationship with our key brand partners than what we actually had going into the COVID lockdown period.

Thank you, Kerry. If you look at Office, it's actually got 2 big challenges. I mean because the brand is well positioned. The brands like Office. The 2 major challenges are in this order, but 40 stores that make big losses. And the worst of those are about 10 or 15. And then the other problem is MTO, the made to order, our own brand. That's shrunk now. It's only about 10%. There's a big -- and that's, of course, higher margin. That -- there's a big emphasis there on repairing that. Sarah Proudfoot is working with Kerry and the team on the MTO side of it because Truworths is very good at that. And we hope to grow that over the next 2, 3 years, which will increase margins significantly. And it used to be 30% of the business 6 years ago. So we have no reason we can't act the 10% to 20%, which will make a difference to margins just that alone. And then we had to relook at costs as part of the process. And Kerry and Dave, who've been running Office together as the Board of Office, I'm not on that board, have been putting an enormous amount of effort into containing cost there. You'll see the success they've had and they have commenced and are well progressed in the staff redundancy process and in Office in stores. I would -- this presentation was meant for Kerry to give you a bit of a pace. Maybe, Kerry, just so quickly, a quick thing of Office and Offspring and make them sort of understand how they're positioned.

Yes. So from an Office perspective, we've got 2 iconic brands within the business. We've got Office and Offspring. So Office is positioned as the omnichannel hub for her and all her footwear needs and as well as a cool place for her boyfriend to shop. It's the larger part of our business, 112 stores. It's a unique offering because we offer our own made-to-order product, as Michael was referring to earlier, as well as branded sneakers and footwear. And it's a really strategic positioned brand within the U.K. footwear market because we offer branded as well as our own labeled product. On the Offspring side, that is the most authentic and connected sneaker community globally. It's our -- almost a sneaker boutique. It is -- we have 17 stores. And the main iconic store is in Selfridges in London in Oxford Street. From an online perspective, we have an Offspring website. We've also got an Office website. And as Michael referred to earlier, our e-commerce sales penetration between those 2 is sitting at 44% now of our business.

And I must say the 2 websites, the Office one is brand new and also massively reconfigured and redesigned. And the Offspring is also being done in that way. And it's -- I think it's going to be launched in a week or 2, a new Offspring one. And just to show you, the level of support is -- I can't -- I'm not allowed to use the names of brands but one of the biggest, most successful brands in the world was an incredibly important partner in helping us redesign these websites, and we're really grateful to them for that. Stores. Office has got 129 stores, but for only of 101 in a year's time. So we are managing to exit 28 unprofitable stores, which is a significant number. As I said, ideally, if I could have my perfect choice, I would have about 60 stores to 65 right now. So there's another 35 to 40 stores. And unfortunately, we're going to need 4 years. If nothing happens and we aren't able to use either methods to deal with it, it's going to take us 3 or 4 years to get through that. If I could tomorrow do it, you would find that Office, instead of making 2 million, GBP 3 million a year, which is what it probably will make -- GBP 4 million, GBP 5 million, I'm not sure. It will make significantly more than that, yet it will be a smaller business. So those loss-making stores are an incredible weight for the business. And if we can deal with those stores at the same time as improving NPL, everything else is in place. Kerry, by the way, was recently appointed Managing Director of Office after being -- serving, there for, I think, 5 years now. Dave, I'll come to you in a minute. Do you want to say anything about these steps, Dave, I think, maybe in 2 seconds?

Yes. Thank you, Michael. Good afternoon, everybody. So these actual percentages are excluding the impairments. So it's the underlying trading. So you can see our gross margin stood up very well in these tough times. Obviously, with COVID and the issues around the reduced sales that have come and the reduced margin in Office, the operating margin is below target as are the return on equity and return on assets. But the inventory and asset turn, in line with target and in terms of managing our assets, I think we've been doing very well, as Michael pointed out upfront.

So I don't think I'm going to go through these numbers because this is your bread and butter, all of you, you understand this backwards. Obviously, COVID hit us massively. Had we not had COVID, I think we would have perhaps gotten roughly equal profits to last year or thereabouts. COVID did the damage. And you can see how our statistics worked. And you can see we had this twin problem of IFRS 16, COVID-19, IFRS 9. We've been joking whether IFRS 23 which will probably be -- somewhere else, someone will dream up an IFRS 30. So IFRS and COVID were not the easiest things to deal with at this time and to make the numbers easily understandable. But you can work your way through these. And if anyone's got questions, of course, David and his team are very happy to answer that afterwards. The return on equity and return on capital have been declining over the years, even though they are still both very high numbers. We hope to turn that around in this coming year. Cash. We've spoken about our -- basically our neutral cash of the band at ZAR 580 million worth of shares. There lease of credit's timing, the 30th of the month for [ naught ] but I mean essentially, our business is ungeared. So gearing, we've spoken about. We bought back the shares. Dividends, we're paying a dividend. Financial position is very strong. Since the buyback program started, we bought back 110 million shares out of 400 million originally, 420 million or something. So we continue to buy back shares, and we will do so this year. The group is very cash generative. You can look through all these numbers on your own. Truworths, the highlight here is good cost control, great gross margin, inventory -- gross inventory are only up to 3%. But actually, as I said to you when I started this presentation, during the month of July, we had shared less stock buybacks, 15%, 20% than last year, especially with new books. And it's only coming right now. We did impair YDE as well. And of course, you know that Office, which we spoke about earlier. David will explain the bad debt provision, which is the other big issue to talk about the size of impairment. Units declined. They haven't been good the last few years. Unit growth comp stores declined by 9%. I think it would have grown by about 3%. Inflation, in terms of how to deal with the fact that is the reality in South Africa, our people are poor. On the other hand, our positioning of the reality is, we are more aspirational and therefore, more expensive. That's the differentiating factor. So how can we marry the 2 things? Well, one is credit. The other is to try and be clever about how we buy without pulling up our prices. And we've been really good at that. Since 2017, we've had no inflation in our products on average compared to the inflation in the country, which has been 3% to 4% or 5%. So we've been managing our prices really well without dropping quality. It's just been clever buying and planning. And Sarah and her teams have been doing all of that over the time. I'm seeing blank here for a second. I don't know why. So let me just work my way back on there. Okay. So now getting back to this slide. I hope you're on the same one as me. If you look on the very right there, you'll see that this is the change prior to lockdown. And there essentially, Truworths retail were 3% up. And because there's no inflation, the units were about 3% up. So post-COVID, it's 9%, but then the stores were closed, and you know about COVID. And the lady segments were kind of neutral. The design improvement merchandise was a bit better, 4% growth. And the kids grew nicely at 11%. Identity grew by 2%. Just so you know, an interesting thing. During COVID and since, of course, you read about it everywhere, the big thing is that people are buying much more casual and relaxed, very relaxed wear and much less smarter wear. Now smarter does not necessarily mean a suit. Of course, it's there as well. And smart dress is in formal wear, but it's also the idea of smarter. In other words, in Truworths, we believe in smarter, what our customers love. That's why it costs more. When you're buying a period of jeans from Truworths, it's a smarter pair of jeans. It's a higher quality. It's better finish. It's better trims. It's branded properly. Those are how things we define as smarter. And generally, smarter product is very slow in this COVID environment for all the obvious reasons. Therefore, a mix of product at the moment is not ideal to deal with the realities of COVID. Of course, we can [ slice ] it, change it a lot, which we're doing. And we have -- and summer anyway lends itself to casual wear for obvious reasons, which is from now on until -- February or so is high summer product. But still, that is one of the problems and challenges we've got where our smarter product, which is -- which we sort of -- very strong in the country, in South Africa, sell slower at the moment. We're reducing the space in our stores. And the sales per square meter actually pre-COVID would have been very high at this 35,800, slightly up on the year before. Of course, because of COVID, it dropped. Gross margin impact. We contained our expenses really well. The main problem, of course, is our [ dates ] and accounts. David will explain to you some stuff about that soon. So I wouldn't -- really, Truworths is a very cash-generative business. Generates tons of cash. Office, the impairment, I think you all know how impairment works. We impaired the majority of the business now. That doesn't mean we've given up on the business. We impaired it because it was the right thing to do and which is the right mathematical calculation. On the other hand, as I have tried to point out, we see green shoots in Office. A very strong e-commerce performance. Gross margin has dropped, but I've told you how we hope to increase it. In U.K. stores, we reopened 68 stores by period end, and we now move slowly up to 115 stores. But the main thing that we're able to do is reduce stock. I mean the current stock is actually GBP 36 million. It used to be GBP 50 million. I think it was GBP 50-something million a year ago. We've got it to GBP 46 million year-end and now GBP 36 million. And we've done that because of the e-commerce, keeping stores closed, taking stock out of the closed stores, moving to the other stores. Same with e-commerce. So that's been a real win because essentially now, a stock is nice and clean and fresh, and that's a wonderful place to be besides that it generates tons of cash. Could you go through these slides? I'm sorry, I'm doing this quickly, but we are going to be running short of time. Office has been very good and managing cost. Kerry has done an amazing job there. And as I've said to you before, we are going to continue that. There is a redundancy program underway. They're very careful with costs and expenses. And e-commerce is the focus in the right stores. So sorry for jumping through there. They generated quite a lot of cash in Office, mainly because of the working capital business. David, do you want to say anything about this cash flow? Or Kerry?

Yes. I think that, Michael, so it says, at the end, you can see the GBP 2 million. But that takes into account that we actually repaid debt to the old bankers when Truworths bought out the old bankers of nearly GBP 11 million. So effectively, it generated about GBP 12 million or GBP 13 million of cash.