Truworths International Limited (TRU) Earnings Call Transcript & Summary

Good day, everybody. Thank you for joining us for our half year results announcement for '21 in December. I have with me my colleagues, Manny Cristaudo, who has just been promoted to Chief Operating Officer. Congratulations, Manny. Fantastic having you with us. And Manny will assist me in the presentation. Then Sarah Proudfoot, who's Deputy Managing Director of Truworths. You know both of them already, I'm sure. Sarah will also assist. And then Reon Smit is our Financial Divisional Director, and he's here for support in case any of the questions are too technical for us. So I'll get straight into it. I have got some questions already on here. I'll try and address them in the presentation. I think we do. But anyway, if we don't, you can ask questions afterwards. And as I always say, after the presentation, you can [ redress ] our Public Relations, Investor Relations area, and we'll respond to you in written form as quickly as possible. So in summary -- and by the way, as I go through the presentation, I'm not going to go through all the numbers and talk about them. They're on -- there's a lot of detail on the presentation that you can read in your own time. I want to leave adequate time for discussion afterwards and questions. So I will go through some of the slides quite quickly. But I'm trying to, let's say, look at the bigger picture. And -- we are -- let's put it in the final of COVID, COVID, but as you all know, things are changing quite speedily in a positive direction. And so it's a good time to reflect, and our own reflection says the following. In the last 3 years, we intentionally engaged in a defensive strategy. We have actually told you about that we've been defensive because of what we saw as the headwinds facing us in the world economies, not just in COVID, but also other issues. And we intentionally adopted the strategy of protecting our balance sheet. We took a decision at Board level after very careful consideration that we must not risk paying dividends at any point, no matter how tough things hit. We always said that if there's opportunity, we will return excess cash to shareholders. And our chosen method of doing so, at the moment, has been in studies share buyback, but especially aggressive into what we consider to be a weak share price and when we consider accretion a strong possibility. Continue to assert and distinguish ourselves as South Africa's leading aspirational fashion retailer. And we decided in this time of toughness, let's build and enhance our brands. Let's go almost the opposite way of everyone else. And we enforced our uniqueness and our aspirational side of our business. We realized there will be massive real estate opportunities. And considering that we've proven over so long to landlords that we are reliable and we are great partners to have, we thought we could take advantage of those. And then as we've said to you for a long time, we thought that the Office brand is underrated and underestimated. And so we thought that this was a really good period to see how we can turn the business around. It's going well. You've seen from the results, we've been saying for a while. We felt that we did well. And so we now feel that we're in quite a strong position. Our business is looking good. And we, therefore, are now reverting to a much more aggressive strategy as opposed to a defensive strategy. During these tough times, you know we remained completely true to our business philosophy. We did not give in to the pressure to drop margins to go into the value space aggressively to stop credits. We decided that that's not the way we want it to go. The result of that, as we see it, we may have a different view, but that's up to you. We are summarizing how we see the results of our strategy over the last few years, which is we generated ZAR 4.7 billion in cash in 2 years. We continued to pay dividends throughout the COVID period. And we kept our dividend covered and we didn't drop it. We didn't stock dividend. We didn't have , just [ everyone ] [ efforts]. We bought back -- we saw the share price in our estimation was very seriously underrated. So we were aggressive in the buyback program. And in fact, if you look back to January 20, we bought back 9% of the shares for ZAR 1.6 billion, at an average price of ZAR 45. And we restructured the way we have established our data finance team that is a nice finance saving -- finance cost saving of ZAR 20 million a year. And then what Office U.K. business has really turned around with a vengeance. It did benefit from the various factors, which we'll go through just now. But it's ended the year with net cash of GBP 23 million. Stock levels 43% lower, and a wonderful EBITDA of GBP 25.6 million. We launched 2 new brands you know about them Fuel, Primark We also have launched a new identity megastore in a couple of sites, our New Kids Emporium and Loads for Kids. We'll talk about that just now. And then we bought -- we sort of bought Barrie Cline, which is a design center. Design centers are the guys that are in between the retailer and the factories that manufacture the product. They buy the fabrics, the trimmers and they design the product and then they hand it out to the manufacturers or the CMPs who's [ reporting ] [ that ] assemble a product. So we are very far advanced now in integrating Barrie Cline into our retail business. And we are -- we [ provide ] a innovative program in integrating our key and strategic local manufacturers, or CMPs, into our supply chain. We wanted to have a sort of seamless supply chain, from top down, retail demand down to manufacture and bottom-up manufacturer expectation for supply and capacity by week, by month, by day into the retail. So it's sort of trying to get an integrated supply chain going better than we've ever had it before. We consistently applied our credit risk management strategies. We didn't change them because of [indiscernible] as a result of that, it's growing our market share in a number of active accounts from just under 34% to over 35%. And by the way, the source of that is Principa Credit Compass that provides consulting services to all the big retailers. And we improved the credit health of our book, which is now just under [ 6 billion ] in size. We were successful in negotiating with our landlord partners. And in [ such ], we want to have a brilliant relationship with them and we want them to see us as dependable appealing long-term entertainment. The rent reversions were 20% as we negotiate it to market rates. And we're also trying to take up space in areas where we think there's opportunity. We have been a little bit successful there. We've got a ton of that because we are already well located everywhere. , we all are negotiating opportunities with landlord. And in the U.K., which had a much tougher time, renegotiations accounted for savings of nearly GBP 7 million over 2 years. And these are ongoing booking saving of GBP 1.5 million a year. So the landlord situation has gone well. Our business philosophy, you do know I've shown to you every time, and I always say the same thing, which is that please don't get [ old ] with it. I show you to you every time just to remind you that whilst you might see it only once every 6 months, we live by this. This is what makes sure when we have COVID or any other crisis, we are so confident and sure of our direction. And we sort of withstand the pressure to change it, because we so buy into this. And when I say we, of course, all the executives have some team do so does the Board. It's very much part of our lives, Truworths and office. So we're positive about the future. We think we've emerged very strong, well positioned. We have a portfolio of market-leading aspirational fashion clothing footwear brands, most of which are exclusive to Truworths that's in South Africa. It's different in the U.K. because they're a sneaker business and branded. And we are targeting usual, not always young, but usual and useful fashionable South African in South Africa. And in U.K. office, the office business is driven by the London Bill [indiscernible] image for fashion shoes and sneakers. And it's also driven by Offspring, which is male, female, sneaker-obsessed community. Very upmarket, better end. The brands and our relationship in those 2 businesses are quite unique. We are so thankful for that relationship. We appreciate it. We respect them, and we like to believe they respect us as well because of our unique position. Our account portfolio is in a very healthy position. A record number of new account activation for the last 3 or 4 years. Our portfolio of stores in the [ best malls ] [ hospital ] locations, U.K., South Africa and London, world-class e-comm offering in the U.K. with 50% of total sales. That's 2 websites, Offspring and Office, are world class. And our South African website is modernized, it's in the cloud and it's performing very satisfactory, although it's very small at about 2.5%. And we have significant strategic opportunities for the future. Looking at the finance numbers very quickly. The operating profit grew by 33%, profit before tax 37%, diluted HEPS 32%. And yet, only a 2% sales growth. Bearing in mind however that the 2% sales growth was, to some degree, influenced by the riots in South Africa. But still, it is a significant profit growth, with small sales growth. All of our metrics are as good as they've been for a long time. Our HEPS and our diluted HEPS and dividends per share are more or less at all-time highs. Return on equity is at 55%. I think it is an all-time high. Return on assets, which is a primary measure of our internal productivity. We use EBIT divided by total assets as a real measure of management's ability to control -- to get productivity out of investors. And that is also at an all-time high. Certainly, high for the last 5 years. Our profit is the highest -- our trading profit and operating profits are the highest we've ever achieved for a half year. December 15 was the previous best 7 years ago in trading profit. And operating profit was 6 years ago. So we were fortunate enough to beat both of those. Some things were fortunately in our favor, some things not. And so we are really proud of the numbers given the circumstances. The main feature of our asset liability position really is, if you look at it, most of our balance sheet is pretty predictable. But the inventory dropped by 13% on a group basis, I think, is notable. I've already summarized and said, but I'll say again, we bought back. We have a long-term philosophy to share buybacks. It goes something like this, we will always continuously buy back shares. I see one of the questions I [ saw ] buyback during the close period? The answer is yes. We don't disclose until we finished it, how much we bought back. So what we bought back in the post-December period, we're not disclosing at this stage. But we -- over since 2002, we bought back 140 million shares. So we always buy back to much more [ recently ] into weakness, as we see it and accretion more conservatively and slower than [ over ] around. In the -- back since January 2020, as I said before, we bought back 9% of the shares at an average price of ZAR 45 and spent ZAR 1.6 billion. We're proud of that because, of course, it's good for shareholders, but we also see it as a great investment company. And it's one of those things we've felt so confident to talk about, such low hanging fruit to us because we saw an opportunity so so [ clean ]. We've retained our dividend [ 1.5% ] consistently done. Cash flow. Our business is -- I mean all the analysts know this well, we are an extremely cash-generative business. We have net cash at the end of the year ZAR 1.6 billion. We generated ZAR 2.2 billion cash and bought back shares 800 million in the period. Dividends -- our CapEx is pretty much predictable. This confirms again the cash utilization rates at excess of 100% since 2017. It's very really under that. Looking at Truworths separately from Office. The Truworths numbers are very solid, although sales is only 1%, trading profit, 21%, operating profit 16% and profit before tax 18%. The main reason is sort of pretty obvious, I suppose, everything went quite well. I mean, our gross margin ticked up by 2% almost. That's a significant amount of money. It's driven partially by the fact that we were short of stock as we went [indiscernible] in fact for the whole of October, November, December [ tenure ] our stock was tied by few hundred million as of the supply chain challenges. And the stock was wanted by customers that sold really well. Of course, that meant much lower market, even though we lost sales. And then we controlled the expenses very well and our provisions are being [ reduced ]. There is a question will add. So I think it's going to continue that. I think I've told you before, and I still say the same thing. If it continues like it is and the credit health continues, then, for sure, it will continue to be released steadily every 6 months as we negotiate with our auditors. So all the margins are good. We haven't yet recovered units because, I mean, unit comp store growth was 4%, you have to bear in mind the year before was minus 8. So we still have some way to go in units for recovery. Inflation in the products. Summer '21 -- I mean we didn't -- since 2017, we've managed to hold our prices at 0 inflation. That's changing in winter '22 to around 5%. Average for the year, probably 2% or something, I'm sure exactly. But partially, that's because of the land. But that [indiscernible] the smarter products that even better. So the proportion of the smarter and glamor and more expensive product is growing, so that will cause inflation in the mix. Once a day, in one of our star performance was our Kids Emporium. There, we've got those 3 aspirational kids brands: LTD Kids, which is the biggest, Naartjie and Earthchild, which are very aspirational and quite sophisticated [indiscernible] that's more based on sustainability. But the Kids brands together are an incredibly compelling force. And it really does well, and that's been for years. I would never have dreamed, if you'd asked me 5, 6, 7 years ago, would we do almost ZAR 1 billion sales at our high margins and more expense prices, by the way, than any of our competitors that I know of in the right scale that it compared to almost ZAR 1 billion in a 6-month period. Trading space, not much changed. Quite a few stores closed. But the space is pretty similar because often when we close stores, we consolidate them into existing space. And we did open 16 new Primark stores, 6 Fuel stores. So the sales density, sales per meter, still a way to go to recover to this [ ever ], but better than last year. But there is upside with the 2% sales growth. So I think it's pretty clear, we aren't there yet. And you know the gross margin is fantastic, even higher than 2019. We've historically tried to imagine it will be about 55.5%. And I do believe, by the way, that we'll settle back at 55.5%. The 56.4% is unusual because [ is ] all of the things I said [ herein ]. Trading expense all under great control. Trade receivable costs dropped. We'll talk about the provisions soon. Not much to talk about other than occupancy cost. When you look at the rent paid the actual -- because there's IFRS 16 complications. So if you take that out and just look at the rent paid The actual rent paid was about 3% down. I mean the rent reversions I told you is about [ 21% ]. It's on about 1/4 of our portfolio, on a long-term basis. Trade receivable costs, net debt dropped by 40%, mainly because of the lower gross bad debts. That's not the provision. The doubtful debt in the provision allowance decreased from 23.4% at June to 20.7%. That's done very scientifically by the way. For those of you who are skeptical how we do that, there's a very thorough scientific process that goes through a governance committee. and then it's extremely thoroughly audited for consistency. And the total cost of accounts still exceed the income by ZAR 127 million. We make a loss. Of course, we don't mind making the loss because we're using the credit to facilitate sales at our margin. They have been used, by the way, that could make profits there [indiscernible]. Operating profits and your operating EBITDA margin and our operating margin, 37% and 30% [indiscernible] as good as our fund more or else anywhere in the world. Capital expenditure, not an enormous amount to talk about, but you will hear about our distribution facility. We have spoken about it before. We've committed ZAR 54 million to June. But that's just because it's getting going, Namely, it will cost about ZAR 1 billion over a 4-year period. So our cash flows is not a big issue, but I'm telling you about that. The reason is pretty much predictable and consistent. Cash flow of Truworths is such a great money spending business, ZAR 2.3 billion generating cash -- free cash flow in the 6-month period. And net cash at the end of the period, ZAR 1.1 billion, despite the share buybacks. When we look at Office. Also, I mean, Office was the shining star. Online sales now 47%. That's obvious why we all know that, during COVID, online became significant 59%. I think [indiscernible] was [ 47 ], [ 45 ] to [ 50 ], probably the [ norm ]. Operating profit of ZAR 22 million from the half year before. That's a significant turnaround. And so is the profit before tax, driven by gross margin. I mean they -- actually Office was similar to us, they're now -- their structure is pretty much getting similar to Truworths. We always say we're going to work our way up. It's not because we're growing the MTO yet, that's still to come. It's really because the structure and lower markdown situation similar to Truworths and the operating margin through a very, very good expense control. Some governments subsidization and re-subsidization, which does mean, next year, although we will grow the profit, I think, it will be fighting 53 years -- 53 weeks versus 52. I'm talking about the next financial year. We have to bear that in mind. Although this 6-month period is like-for-like because the 53rd week happens the last week of June 2022. Back -- 2023 year, Office will be fighting the 52 versus 53-weeks as well Truworths, and they also want to have all the benefits of government rent and so on subsidization. But I'm still saying our intention is to equal our EBITDA achieved this year. It's a U.K.-based business. It's very much a London-inspired business. I've sent you the expenses were under superb control, and there's some more detail there. The one I want to note is that the other operating costs, the main decrease -- the reason for the decrease, the main one, was GBP 8 million right-of-use impairment in the prior period, whereas no impairment in the current period. And then occupancy cost is influenced a lot by a 25% decrease because we closed some stores, loss-making stores. Just by the way, we're not closing as many stores as we thought we would because the landlords are wanting us to stay there with better deals, and they are in a good position. Again, it's a partnership. We want to pay commercial rates, then go to [indiscernible]. So if that works, we're stable. We don't just close it for the sake of it. And then, of course, with our business doing a bit better and the sales better, some stores that were a bit marginal -- not marginal, but a little bit more profitable. So it's not fact as aggressive as we thought it would be. And Office is going to -- they have quite a significant GBP 500,000 infrastructure computer software, but it's getting much bigger because we are on a campaign on the merchandise systems to improve them. And although we've spend nothing on store renovation, we are going to spend almost 700,000 by June. And because we are starting to renovate, especially the London stores, we want to make a big thing there. And this business generated a ton of cash. I mean it was a wonderful period. It generated GBP 18 million of cash. At the end of the period was GBP 23 million. That's, we think, a fantastic achievement to our Office team, who we think are doing an amazing job. They are a fantastically competent team. And the new Managing Director, who's been with us for 7 months, is doing great job with a very, very enthusiastic and committed team. Let's talk a bit about our credits. So the credit industry in South Africa, and you all know how important that is, we are, I think, overwhelmingly the largest percentage of credit in our total business. And despite the sentiment of some of the market around that, we're proud of that. We strive for that. We want some push the credit side of our business because we see it as the relationship side of our business, which we enhanced . But we're actually a real team there. Just as competence as you find everywhere in the world. We've got 30 years experience in credit. So we think we managed [ up ] very consistently, conservatively and sensibly. But what's good is that industry is doing well. I mean, when -- and I think many of the analysts know this, the index we've shown here for TransUnion, which is one of the largest bureaus. When it's more than 50%, and you can see it's been 55%, 59% and 54% in the last 3 quarters. So that's 9 months. But even since 2007, we showed it on the graph. When it's above 50, it means there's improving health in credit, in the industry and the economy. And when it's below of 50, it's becoming -- it's deteriorating and has been improving health in the whole industry over the last -- kind of a long time actually. If you look at, that since about 2016 with a hiccup during COVID. So it's a very interesting thing that despite what's going on in the families and with the economy in South Africa, the creditor is excellent in the industry, which, of course, is our dream. We want the creditor to be good. So our credit book is in a very good stage. The shoppable accounts, the roll rates, delinquency, collections all looking good. The credit market is looking strong. As I've just said, there was good growth in transactions over the festive season in the net spend. And as I said, we'll sort of stop. New accounts has, again, recorded the highest application volumes ever and more than half -- or just about half of them are under 25. It's a great thing. Young people in this emerging middle class in South Africa coming to our stores and want to open an account. Lay-by has done well. Our royalty programs doing nicely. And so that's all good. And then the account balance, if you look at the good to bad ratio, it's very well-established way of looking at the [ out ] of the book. [ Ours ] is improving. And when you look at the sort of aged side of the book, 4 plus cycles. So it's looking like it could be there. That's also improving. So as the industry. So they -- all signs of our credits are looking really good in our business and in the marketplace. We are opening -- I mean, look at those applications, which is a pretty bar graph. Highest-ever, but I mean the last July to December 2020, '19, '20, '21 and '22 [indiscernible]. Unfortunately, though, because of the changing mix and because of the strict credit granting criteria, although we're getting tons and tons of applications, we are not opening as many accounts because they have to be risk approved. And so the risk is such that because of the economy and also the mix of the kind of customers and channels they're applying to, we are only getting about 1 in 5 that are passing the risk and about 15% actually end up being opened. There's a gap between risk improved, even though they [ were ] applied and those they get opened. We're always trying to close that gap, but it's obviously a difficult thing to do. I'm not going to go through this much [ over ] those [indiscernible] statistics all show a nice, steady, good improvement in the health of the book. Some strategic issues. I mean I can't tell you everything for obvious reasons. But the main broad strategic initiatives are -- we think there's opportunities to grow in our key product categories in Truworths and in Office, but especially in Truworths, where we feel they're under-represented. We think there are opportunities in certain product categories, and we're working on that. That can be big money if we get it [ right ]. In Fuel, I said at the beginning, I'll say it again, we're uniquely positioned as the aspirational [ bed ] and fashion retailer for the mainstream big markets in South Africa. There are lots of opportunities across the board in our business. We've got new and larger store formats for our Truworths Emporium. There's a new design and look at the site for big Emporium store. We only opened 4 or 5 over the next 2 or 3 years because there's a thing. But then there's a trickle down to the next 100, 150 thereafter. Then we are opening [ an ] Identity mega store in [indiscernible]. Identity is now starting to show signs of being able to grow in physical sites, from 250, 300 square meter stores to 550, maybe 600. And we'll see about that. In Kids Emporium, there's a massive opportunity there last Kids stores. And then Context, which comprises a bit of Loads of Living, some glamor products of Truworths, but primarily LTD and [indiscernible] a concept of our [ break-in ] [ exploration ] brands is showing lots of promise. So we're going to sort of expand that within -- then expanding in foreign stores. And then on newly launched brands, Fuel Loads for Kids, Primark all store in this phase, moving graph, steady or satisfactorily. Supply chain. A whole thing about this vertical integration all the way through from bottom, upwards, top, downwards. It's all about flexibility and agility. We're doing a lot of work there. And then I told you about our new DC, distribution center, where we are planning to start and build a new one. We'll start probably later this year, and it's a 3.5-year project. And it's going to state of the art[indiscernible] cost is just over ZAR 1 billion. I'm guessing probably a little bit more by the time it's finished. It should reduce overhead cost. It should add significant functionality and be able to cater for our needs as we grow our other sides of our business. We are also introducing new products and services. We always do that. We've got some great innovative ideas. And it's all about growing the [indiscernible] and increasing basket size and frequency. And then omni-channel, I mean that's what it's all about in the U.K., and we are seeing a steady [ order ] growth from a lower base in South Africa. The beauty of having this very sophisticated successful Office U.K. e-commerce operation, supporting and working together with our South African one is -- means that I think we have an advantage there. We are upgrading our concepts. As I said, we are -- we have launched the larger format Identity Megastore and the Kids Emporium store. There's a whole new look and feel for Truworths Emporium, and they're kind of a futuristic storage. The first one will open later this year and roll out our Context store. I've mentioned that there's a kind of a feel for it assist very early stage sort of inspirational [ sort ] of work. Next context, the more sophisticated one I mentioned, which is the sort of LTD [indiscernible] sort of glamor, smarter, better and aspirational mainly [indiscernible] better [ anywhere ]. Then there's a Kids Emporium with 3 wonderful brands, 1 big store. [indiscernible] we've got 1 or 2 up and running already, but we've got a vision of taking it to another level altogether. But [ like ] [ at ] Context, whatever we've got, we're going to take them to another level. [ There's ] identity this new superstore. We've got some. They used to have only one entrance from men and ladies. They don't really have kids. Now there's a men's entrance, a ladies entrance, and kids is a proper full-fledged department, doing really well. So it's becoming -- there's sort of many Truworths in a way. But as you know, it's about 30% to 40% cheaper, lower priced than Truworths. Still of great quality. And Emporium, the big Truworths Emporium store, is going to really be broken down into these [ compartments ]. The big ladies emporium, [ patents ] the store -- one store or those brands you see there. And the men's Emporium, which you see there. The Kids Emporium, those 3 elements, which is the cosmetics and then this better-end aspirational site, which is Context and Loads of Living. Those brands together work nicely. So and Emporium was sort of being reconfigured to be shaped in this way. And here are some inspirational pictures of what it could look like. As we launch it later on this year and over the next 3 years, we start rolling these out. As I said, maybe a few 2 or so years because they're really big stores. But the trickle down means that the next 100, 150 emporiums all are inspired by these [ buildings ]. There's a men's office, the turnaround there, we restored it to profitability. We do think the business is now long-term sustainable. We won't get such great growth next year because of what I said earlier on. In fact, the business is doing nicely. And I think we will be able to maintain our stock turns, our [ brand-safe ] management, our spends control. There won't be the government subsidies. And the entry base -- so the first phase will go up. I think on that end, there will be sales benefit. [ Schools ] won't be closed and Truworths are coming back. So it will be tougher, but we are hoping to improve the EBIT in [ turn ]. There's a lot going on there. There's an enormous amount of collaboration happening between Truworths and Office. They're almost becoming -- work so well together, and it's really fantastic. And there's benefits both ways. And then Office, the higher potential margin MTO, our own brand product, which is growing the [ rest ] -- strong into a very small part of the business as a new team in place. They've been here for about 6 months. And John and his team, together with the help from some of the Truworths people and [indiscernible] are really making headway there. And I think over the next 3 or 4 years, we should see MTO making quite a meaningful dividends. Bearing in mind that the big brands want MTO to be successful. That's what attracts the [indiscernible] to the store, the fashionability together with the fashion seekers. So it's important for everybody that we [ build ] MTO, which, as I said, [ higher ] margin. We are renovating some stores. This one is . It's one of our most important stores -- just 6 months of this year. Just some slides to give you a view of it. Again, there's collaboration. The design of the stores is a strong collaboration between the Truworths design department and Office team. There's a men's side and the lady's side. It's going to be a one state of the art . There will be a statement in the U.K. in London. Of course, one does never forget about social CSI governance, environmental issues. We are very proud that we put increasing emphasis in this area [ of ] late. We achieved the B in December the CDP result. Last year achieved the C. It's a big part of our business, we [indiscernible]. We've got lots of initiatives underway. You can see some listed there, LED lighting, [indiscernible], recycling, [ handle ] bags and stores like [indiscernible]. work going on together and work on sustainability. We're [indiscernible] supporting our people. So our business for [ loss ], which improves our values and how we [ live ] and how we treat our people and may treat our company is very part of our lives. And then we are very well invested. We have a charitable trust assets worth ZAR 230 million, almost GBP 12 million. And we've used this for great [ detail ]. Over quite a long period of time, we influenced hospitals, education, primarily focused on health, education, social development. And of late, we've put another pillar there, which is empowering women, which is a broad benefit that we want to focus on and [ serial ] is driving that one. From a governance point of view, I think generally always been proud of our transparency. On the FTSE4Good Index, we achieved a rating of 3.8 out of 5. And governance, we were 5 out of 5. We've improved our racial diversity on our main board. And even in our top management, it's not perfect yet, but we are getting there. Succession at senior level, but then at the next level, executive and senior management, is really [ going ] nicely [indiscernible]. So a lot of people coming up to the ranks to make us feel great. And then the main theme of transparency to analysts and shareholders is we say that in [ great ] [ quarter ]. We've been in the top 10. In the EY Excellence Report, for the 14th consecutive year, and we are the only company, not retailer. We're the only company that can make that [ plan ]. And we've been ranked in the excellent category every single time since 2003. We're very proud of that achievement. As to the outlook, normalizing. This team is normalizing. Get back to normal. [ Has ] increased vaccination levels. We have over 90% vaccination level in our head office in Cape Town. And I think our stores and [ everyone ] [ includes ] are aware of 80% now. We monitor that and we encourage it and drive it . We expect growth to be supported by this market share in some categories that we feel underrepresented. And I've spoken about all the others. But for the first 7 weeks, we reported increased sales by 5%. But bear in mind, that's in a period where we hedge much less [indiscernible] stock and not as much as we'd like new stock because of supply chain challenges. We're quite happy with that number. Trading space remains unchanged for the year. Office had a 41% growth in sterling terms. But again, you have to be careful there because some of the stores were closed and they were closed for some the period because of COVID during severe period last year. So -- but I'm just kidding you. 41%. All right. You're fine. Don't worry about that. But the numbers in Office are performing quite steadily well and we're quite happy with them. And training space should still reduce by another 11% in Office. And with that, I'm going to end it and I'm going to stop sharing the presentation, which is going to be available on our website. And I will answer questions with my colleagues. I'm going to report to them now.

So I've' got a lot of questions here. So I'm going to try and be random about it. One of these questions is, what is the outlook for gross margin so that for second half? What is causing positive momentum or will it normalize it, but given inventory perhaps your high [ market ] ? Yes. I told you, I think that 55.5% sort of after markdown norm that we established over a long time is going to be the norm, but the year will be better than that because of the first half year. Did we experience any stock shortages due to supply chain? The answer is yes. Would this [ have ] contribute [ to ] inflation that there hasn't been inflation so. The answer is no. Want to talk about inflation, [ but ] Sarah, what your views on that, into the product going forward?

Thank you, Michael. Yes, I can. I think the thing with the inflation is we obviously look constantly at the market and focus on a different sort of approach to inflation in the different areas. So where we feel we need to be more competitive then we are -- we drive the inflation, keep the inflation contained. But really it's driven by a merchandise mix. So we try and rather get an ideal merchandise mix and then the inflation sort of rolls up as a result of that. And the inflation, as Michael mentioned earlier, that we've seen going into the second half of the year is really largely driven by a mix change and a shift towards more formal, glamorous and tailored product that has been largely absent from the ranges over the last 2 years of COVID. But on a like-for-like basis, the inflation is quite contained.

The next question I want to refer to here is the 5% growth in the first 7 weeks? Of course, that's Truworths, sustainable in the second half. But a similar question to Office folks. I mean I think I've answered that. Office's 41% is not sustainable. I mean that is ridiculous to -- we could never do that because the stores were closed the year before. But is Office going to have a -- [ these ] number sales growth? We are certainly hoping so in the next 6 months. Is the Truworths 5% sustainable? Yes, I hope so. I told you that the 5% actually is pretty good given the stock circumstance, lowest sale activity by a significant [ amount ] and not adequate new stock. So I mean, it's good. Can we beat it? I hope so. I mean one never knows. Do you think Truworths ladies and men's needs a refresh? Or will sales just improve [ at ] the economy recovers? Sarah?

I think that's a good question, and I think it's a bit of both. So unquestionably, we focus on trying to refresh any areas where we feel there's opportunities. And we're open-minded, and try to be very honest with ourselves about areas where we can do better, and certainly focusing on creativity and innovation in our product expanding, product ranges where there might be opportunities. But yes, I do think that obviously supported by the economy, the business actually needs a bit of economic growth to really, really drive to its full potential. So -- but that we can't control. So we focus on what we can control and on being as innovative at addressing our ranges, either where they're weak or where there's a fantastic opportunity to just capitalize on what's going well.

And of course, we're renovating the stores and so on. What is the expectation? Manny, this is for you. On the outlook for credit acceptance rates over the medium term, would you say that the quality of new account applications is improving? Or is it the same? And if it was improving, it would drive debt [ to ] book [ growth ]?

Thanks for that question, Michael. So the application growth, let me just start there, has largely been driven by a change of channel mix. And as one gets to new channels and new opportunities to get applications coming through our doors, each of the channels behave slightly differently. So if I look at it, the quality of the application that's coming through the door is slightly worse off than it has been, but it's around the difference that each of the channels make. If I look at our policy and what we have done in the past and through the COVID period in terms of how we've controlled the risk in our portfolio, we haven't made that many changes in terms of our risk criteria. We have tightened up slightly on affordability. But we feel that what we have in place now is good. The book is performing very well. The new accounts that are coming through the door are performing as normal and including those that come through the different channels. So I don't think that there's a [ quality ] issue at all in terms of new accounts. In terms of actually, are we going to grow the new accounts relative to previous periods? Well, that really depends on how well each of the channels performs. And of course, we always try to grow as much as we can, but we do not reduce or take on more risk in terms of growth. So we keep our risk consistent. Our strategies consistent and what -- and of course, we try find as many accounts as possible. They will pass our risk criteria, but we don't change our risk profile.

I love this question, it's really good. I mean Manny trying to think about the answer. And -- so [ 2 ] really. One is how is the stock [ people ] looking heading into winter, would you say understock? I think I want that, it kind of comes right in March I hope. So we'll have to see. So that should be okay. Is there a one of the [indiscernible] management are talking to experiment?

Yes, we do have an athleisure range within our OBR back [ rigged ], which is our Jeanswear brand, and that's a sort of long-standing and quite large and pretty successful part of our business. But I think probably the question is targeting the more sort of performance athleisure component, which is a space that we haven't really played in. Interestingly enough, we are launching a small range very soon, and we'll monitor. It's one of our experimental ranges and we will see how we go with that. So yes, is the answer.

So now I've got 2 questions that I'm going to try and answer, but then Manny, you need to think about this as well because it's an interesting question. And it's all about our cash flow. It's about -- there are 2 questions. One is talking about what do you mean by excess cash? And what do you see as an optimal since optional? That means optimal balance sheet? And what do you see sustainable share buybacks annually? So I understand that question. It's a trick question actually. It's a clever one. And the other one is your whole capital allocation priority to stack given that you've got 1 billion coming and manage 4 years of the DC, how is it going to mean? What is it going to be to the buyback? And then maintaining dividends? And then organic growth and M&A opportunities? So they're really good questions. Why are there such good questions as to -- is because we spend quite a bit of time in our Board meeting yesterday that but they're [ non-execs ] because obviously, that's a big issue. So we've got some pulling factors here. And I'm just going to tell it to you as it is. Manny, you can come in afterwards if you want. But look, it starts by saying that as we said during COVID before and pretty much our [ whole ] history, we will try our utmost to keep on paying dividends at a dividend cover of about 1.5x as kind of sacrosanct in a sense as much as we possibly can. So [ started ]. The second thing is our buyback program, [ teams ] and it's historically always been like this and I'm sure it will continue. As the share price is lower and the sentiment is negative to our industry or our company. And as we generate all the cash, so we aggressively and assertively buyback shares because we really believe in the business. To tell you the truth, if the market wants to [ downgrade ] us, it doesn't mean we buy [ into ] tools buyback more shares. On that end, it does reverse. If the share price starts to go up and it starts to get more optimistic, then we decelerate. We still keep on the share buyback program, but we have an adjustment process, which we have authority each 3 months from our Board to manage. We're always looking for opportunities, for merger acquisition. We would never stop it. If one comes about and we happen to not have enough cash, then we will [ go ] the market and borrow it or either borrow it, which would be the first preference, which we did with Office. We didn't issue any shares, we borrowed the money. We had ZAR 2 billion of own cash, and we borrowed the other ZAR 3 billion. And then we paid that back in 2.5 years. So that would be the case. We're borrowing to make an acquisition. There is no way we just strain ourselves from [ repeating ] acquisition, and we're always looking at some look at some . But whether they come from [ frution ], I don't know. And overriding all of that. What I've said is that the fact that [indiscernible], and I know our [ sports ] is we like to be what you sometimes call a lazy balance sheet. We -- I don't like debt. So we're getting to debt, and we are unlikely to let the debt grow much further above 20% debt equity, I don't think. And with a view that we can crawl back within 2, 3 years to back in square again. So those are the kind of broad parameters under which we operate and manage our cash. And I don't see any of that changing because in the next few years, as I think will accelerate growth. The book will soak up some more money, but it's profitable usually. So there might be a bit of investment into the book. But the stock churn is good and the margins are good. So all in all, I don't think we've got any cash challenges. And I think we will continue share buyback, but slowly -- back slower than we have. So that is the best answer I think I can give. Manny, do you want to add anything to that or Reon for that matter, or Sarah? Do you want to say anything?

Michael, I'll just add. The DC, the distribution facility spend is around about 1 billion, as Michael mentioned. But that's over 3 years. Maybe it could even be 4 years. So for a business like ours that generates the cash that we do, it's not a major hit in terms of the expenditure. And as Michael has mentioned, we tend to be conservative. We like to have some cash. If we do look at acquisition opportunities or the opportunities to spend the cash, we try to make sure we get back into sort of neutral territory within 2 years or so. But other than that, Michael, I think you've covered it.

[ So ] I'm going to stand up because I've got a question from our good friend, Daniel. It's not a question, it's actually a comment. Yes, Daniel, you see -- look here I am wearing joggers. I don't know if you can see? Truworths' joggers. And thanks for commenting on my T-shirt, which is, as you know, Truworths [ comment ]. I'm not going to tell you about the risk, but I can tell you that there isn't a piece of textile on my body right now, and I'm including my socks and shoes and everything else that is not bought in Truworths or Office. So thank you for that observation. I know Sarah is wearing her jacket [indiscernible] It's a Truworths jacket. I don't know about Manny? Maybe he is still too conservative for us. So Manny is quite a fashionable guy. Reon, I hope you're wearing one of our shirts? I don't think you are, but maybe [indiscernible]. I haven't got so many other questions. I don't know what going on. Is it affecting [indiscernible] Getting bored? Do you maintain OPM medium-term targets of 16% to 21%? I'm sorry I don't know what OPM is. I'm a real [ beginner ]. Operating profit maybe? OPM medium-term target 16% to 21%. What is our medium term target? 16% to 21%. I'm sorry, I can't answer that question. I don't know what OPM medium term.

Is it not operating margin?

Maybe. 16% to 21%, that sounds right. Reon, you're on mute?

Yes. Michael, I think that is our operating profit margin [ that ] he is referring.

Okay. And do you maintain it at the medium target of 16% to 21%? I don't know what we published as our targets. You would know better than me Reon.

Yes. That is correct. We published those targets annually, Michael. So we will update those in due course for the medium term.

At the moment, we're pushing boundaries on the [ upside ], as you can see. So I mean Office keeps on gaining markets [ going ] -- and Truworths and all the plans we have got come together. Margins just go up. I mean they just do. We run the business like that. So I can't see any other questions. There's 5% growth [ here ]. I think that's all really. We need to refresh one last time. Yes. No I think that's all. I think I have answered all the questions. [indiscernible] Basically quantify the benefit from [indiscernible] holidays in Office? And where do you think Office will settle in its operating margin on a normalized basis? So that is a good question. Reon, [indiscernible] that we disclose it? Or Manny, would you mind telling how much we benefited from government in the last year in Office?

Michael, we didn't disclose the benefits this year. We did disclose some numbers in last year. And this year's number is probably above half of what we had last year in terms of rates.

So what was the last year value that we disclosed?

Last year's rate benefits was around GBP 4 million, GBP 4.5 million.

So yes, so that is the benefit. There are benefits. But as I say look , I do think that Office is in really in a good space. It's quite a great team. Everything is going well. MTO is small, very small. I think 8% [indiscernible] but it could go to 15%, 16% in the next 3 years or so and better margin. There's a great, great new team there. And then it's run by a superb, top management team in the whole business. So I don't see why delivered 10% terminal sales are really on a pretty consistent [ difference ]. 10% to 15%, if it really goes well. Margins are getting better and so on. So Office should carry on doing really nicely. It's always about the risk because we don't control its destiny completely because we're so dependent on the brands. Fortunately, the relationships of [indiscernible]. So that's very solid. In terms of the is to Truworths which, basically, we own all our brands, all the [ important ] ones anyway [ than ] the cosmetics. So I do think the margins in Office and our returns in our business are sustainable in Truworths and Office [indiscernible]. So with that, I think I'm going to end. We're nearly at 2:00 anyway. I'll do my last refresh. And I don't think -- yes, there's no more questions. So thank you, everybody. As I say to you all the time, I personally thank my colleagues. The relationship between Manny, Sarah and I, we work -- sort of the best period of my career, having colleagues there up and work with them in the way we work together as a team. We [ really ] love working together. We share information. We've got superb support from another 17 directors and divisional directors, all being with Truworths 15, 20 years and yet many of them are 40s. Reon is one of them. So we have a really good team at Truworths, and it's the most enjoyable experience working with [ them ]. So I thank our colleagues, and I thank all of you for your support, please don't hesitate to make -- reach out to our Investor Relations department. I think you all of you know how to do that. And then we have a committee and a process where we respond to every single written queries, we insist on written queries because it makes it clear to us. We have committee, and we reach out wherever we need to, and we try to respond within hours at very most in 24 hours. So you can always depend on us. So thanks, everybody, and we are looking forward to see you in .