Truworths International Limited (TRU) Earnings Call Transcript & Summary

Good afternoon, everybody. Welcome to the Truworths results presentation for the 53 weeks ended 3 July or end of June 2022. I'm Michael Mark. With me, I have my colleagues, Sarah Proudfoot and Manny Cristaudo, together with Reon Smit, who will help us answer any questions that you may have during the presentation. We have a webcast, as you know, and you have the ability to ask questions. I'll try and get through the presentation as quickly as possible so that there's more time to respond to questions. Bear in mind, although the presentation is quite detailed, I won't read all the points on all the slides that are necessary, especially the numbers part because I'm sure you'll be able to go through it all in your own time and in more detail. And of course, although you can ask questions, and I'm sure you will during the presentation, you also must feel free to ask questions afterwards. And you all know our method of doing so. You write to and speak to our investment relation -- investor relations department, and we try and respond if we can within a few hours. And if necessary, we'll meet on one-on-ones. So I'll get right to the presentation now. We thought we'd start with a description of how we see our DNA. We see ourselves as a mass-market business. So we do cater for the mass-market and not for an elitist market. But we, on the other hand, offer aspirational brands. So we say to the mass-market that we have aspirational brands. We'd like to be the most aspirational brand, a retail fashion business in the country. And that's how we like to see ourselves. And then we say, for those of you who cannot afford to pay us by credit card or cash, we offer you credit as a facility to enable you to purchase our aspirational brands. We only offer exclusive brands that we either own or manage or control ourselves. Most of the brands in our stores, we own ourselves, and there are a number of them. And they tend to all be high margin because we are a margin-orientated business. So we try to avoid low-margin products. And our Emporium Store concept is quite unique. It's really an interesting concept. Let's say, for those of you who are abroad and have not physically seen a Truworths store, we tend be located -- there's about 850 stores in the main shopping nodes of [ around ] South Africa and, of course, in the U.K. And we -- our big Truworths Africa stores tend to be right in the center of the fashion malls with multiple entrances. They get a central feeling of a department store. On the other hand, all the brands inside the store, we own and we run them separately and with their own unique identity. So as I've said, we have prime real estate. We are completely internally funded. We manage our own credit book, which, I said before, accounts for 70% of our Truworths Africa sales. And we have over 2.6 million active account customers. Active customers just means that they have a debt to us at any point in time. We obviously have many more customers because some people do and do not owe us money at any point in time, but 2.6 million owe us money at this point in time. But we have about 15 million loyalty customers. Those are people who have, in one way or another, transacted with us or attempted to. And of course, we communicate with store and look for opportunities to develop the 15 million customer base. Almost all of our products are designed in-house, and we have probably, as good as you'll find anywhere in the world, fashion intelligence design capability. The Office U.K. business now essentially has taken us a while, quite a few years actually, but now it operates pretty much on very the same methodologies as Truworths. And they have a wide variety of brands in Office U.K. as well as their own developing in-house brands, which are growing nicely and which are a big opportunity. In Office, we tend to over-index on the female customer, the Office business. And in fact, that's our appeal to the brands. They like us because we are an attraction to the fashion conscious female customer. That's why the big sneaker brands and other fashion brands likes being in our stores. I think we also have Offspring, which is a different business altogether. That's female and male. And it's a sneaker head community. That is quite unique in the world, the extent, size and commitment of the community to the Offspring brand. And then as most of you do know, our Office e-commerce business is a fantastic business and really helped us amazingly through COVID. And even now, despite having come out of COVID and the stores trading, our e-commerce business is still very successful and around about 40% of total. So reflecting on the year behind us. In September '21, we shared our strategy with you, which was really during COVID from the beginning to end is to say how do we preserve our business in the COVID era? So we intentionally engaged in a defensive strategy. We decided upfront, right throughout COVID, we are going to keep our balance sheet strong. We're going to look for opportunities in these tough times, which we did. And they were real estate and many others. And we thought we'll keep our business philosophy strongly in mind through COVID, which will enable us to get through it successfully, which we feel we really did well. In February, we told our analysts the story of what we see as resilience with a much more positive front foot perspective instead of being on the back to June over July, the merge with a great strong business. And we went on to the front foot. What does front foot mean? It means we look in for opportunities in the marketplace, where we feel underrepresented in certain categories of products. And those are very easy for us to see. So we decided to be quite aggressive in recapturing some of lost ground we thought we had lost ground. Of course, as customers go back to work and are no longer working from home as much, that is a wonderful opportunity for our smarter business, which we are very strong in. And so that is a wonderful opportunity. Our credit book is so healthy, and we have actuarial analytical skills that have been around for 30 years in our business. So we can take advantage of the strong book and the healthy credit community. And then in the U.K., the London high street returned to higher footfall, revival of tourism. And actually, the London stores are really doing particularly well. The environment, though, I don't want to repeat what you all know, I mean, we've had looting and flooding, power outages in South Africa. Inverters are the name of the game at the moment, households, generators in businesses. So that's not a pleasant way to work. And then the Brexit overhang in the U.K. And we know what's going to happen in Europe with power as they get into their winter. They will be buying inverters from South Africa. The relaxation of the COVID-19 restrictions really made a big difference to the footfall, especially in the U.K. Supply chain started showing quite good signs of improvement in the second half of the year. South Africa, the consumers are resilient. I mean, we read all the bad stuff about economy and companies, and it is. I mean, we know. The steps tell you the answers. But truth be told, the South African consumer has shown over a long, long period of time that she is very resilient. There are challenges, high interest rates, inflation, fuel costs, transport. It's becoming a real problem in the world. And so we are all -- the world is facing headwinds at the moment, and the Ukranian concept -- conflict together with the overhang of COVID makes us all live in a very tough place. But then on the other hand, those who do it well and will prosper in these tough times will be the winners when things get good again, which will happen. It takes time, but they won't always be like this. What we feel we've achieved is we pursued opportunities in merchandise categories that we thought were opportunities, and that's going nicely. I'm not going to disclose what they are as some of you are going to ask me. Well, obviously, we're not going to tell you because they're in-house. We've improved margins through better inventory management and merchandise mix, not just any merchandise of gross margin after [indiscernible]. We expanded our new major retail concepts, the Kid Emporium, the Identity megastore and Context, which is in Truworths. Those -- we've opened quite a few, and they're all doing particularly well. We're very happy with them. We've now completed our design of the new Truworths Emporium sort of the future. And the first one will open in the next few months, and there'll be a couple in the next couple of years. I think we've got about 10 planned in 18 months. Omni channel, we've launched Identity online. We've relaunched Truworths website. Those are going according to plan. We have launched some alternative credit products. We're always busy with that. And we've made, I think, significant progress with our vertical integration and local supply chain strategy. It's complicated because, I mean, it's competitive. And it's complicated being a retailer, being so involved in the manufacturing side of the business. We are very strong on the design side because we now own Truworths design as well, and it's probably 100 people in those 2 businesses designing. And then there's also seamstresses and sample set manufacturing in our head office building in our days. And then we are also very involved in the manufacturing side. We don't own, particularly in manufacturing place, factories. But we are -- let's say, we have a very strong link and involvement in a number of them. And so that side of our business has been growing. It's a challenge, and yet it's an opportunity. We have now completed agreements for our new state-of-the-art distribution center. It's going to be located right near the airport in Cape Town. It's going to be state-of-the-art, and it will take about 3 years. And we were very aggressive in our share buyback program when we saw weakness in the share price while we saw opportunity in the business. So as you know, we've told you many times, we bought back a significant number of shares at what we think is a really good price over the last couple of years. Office continued with its turnaround strategy. Great results, great team, very motivated, very competent people, focused on strengthening the relationship and the collaboration of that business with the key brands that superb the relationship. We closed 6 nonprofitable marginal stores, and we've renegotiated favorable lease terms on many others. So we are closing less stores than we thought we would because the landlords want us there. We want to stay there. We have good relationships with the landlords, and so we are coming to terms with them in many instances. Our made-to-order own in-house Office U.K. brand is starting to grow really nicely. It dropped to 7% of total. It's grown to 10%, which is about a 40% increase. And remembering that high-margin business. Remembering also the brands like us to have a good MTO business. And the reason they want us is because they feel that what we offer to them is the young profession fashion female customer, the London customer. And so a good MTO range of our own brand appeals to that. It brings the young fashion customer into the store. So it's sort of a win-win all the way around. We have -- we are now have started a refurbishment plan for some important stores. And also, we've got some new store opportunities in the U.K., which we've signed up. I don't think I'm yet ready to disclose which ones they are, but they're very exciting. And we used to have 2 distribution centers in the U.K. in Office, 1 in Scotland, 1 in the U.K. We now only have one that's more efficient. And Truworths and Office working hand in hand. It couldn't be a better, more constructive positive relationship. Looking at the group numbers, I really don't want to spend a lot of time on this. I say that because -- not because I don't think it's important, but because I know you've all got your models and you, anyway, can go through our numbers after the presentation because it's on the website. And you'll do what you need to do, and you can ask us some of the questions thereafter. But essentially, we -- all of the medium-term targets that we published in 2021, we either met or beat the range. I mean, above the gross margin range of 49% to 53%, well above operating margin, massively above return on equity and return on assets. Our inventory turn was at the top end as we saw [indiscernible]. So we really had a great year. And as a result of that, Reon and his team and Manny have changed the -- and the Board approved new medium-term targets, which will be published shortly, which are higher, of course, than this. Our sales and merchandise on the 52 to 52-week basis grew by 7%; and headline earnings, 35% growth; and diluted, 42%. The difference between the two, as you know, is related to the share buyback program. We've done a graph here, which helps you understand -- sorry, let me just go back, helps you understand what we see as the sustainable portion of other than one-offs in our numbers. Of course, there's a subjectivity to it, but we did the best we could. And if you look at it, the Truworths profit of ZAR 3.6 billion profit before finance costs and tax translates to ZAR 3.3 billion, if you take out what we consider to be the particularly unusual characteristics of this last financial year. One of which, of course, is the 53rd week at stock, which was about half of that ZAR 300-something million that we've taken off. And then Office, we've done something similar. That was much more unusual. The GBP 40 million profit that we are showing, if you adjust for the 53rd week and if you adjust for business rate holidays, certain IFRS calculations or rent concessions, then profit in Office was GBP 30 million that we see as sustainable. I know all of you want to know that, and so that's why we produced this graph. Nevertheless, GBP 30 million is not as good as GBP 40 million, but it's a superb result for the Office team, and we're very proud of what they've achieved. The dividends per share, diluted HEPS or all-time records, return on equity, return on capital -- I mean, 68% return on capital, return on equity, 47%. I'm using the 52-week numbers are as good as you're going to get. And return on assets and asset turnover are also at all-time high. We've introduced this graph again on the request of some of the analysts. They reminded us, we used to do this in the past, where we show the return on invested capital versus the WACC. The weighted -- this is an indication of wealth creation. Obviously, your return on invested capital should exceed your weighted average cost of capital. Interest rates have gone up. And so our weighted average cost of capital being so equity based because we have some borrowings in our group has now gone to 14%. But our return on invested capital is an amazing 35%. So wealth creation is certainly happened in this last couple of years. And the profits -- the group profits before finance costs and tax and in our history as well as our HEPS is the highest it's ever been. So the ZAR 4.4 billion is higher than 2016 of ZAR 4.1 billion. And the ZAR 7.80 per share is way above the highest we've achieved before. So we're very proud of those numbers. If you look at our financial position, we -- our debtor's book is about 13% up, showing the growth in the book. Our trade and other payables as well as the interest bearing and borrowings have changed a lot. Partially, that's because of about ZAR 580 million paid to creditors because of the move in the month end of June when we introduced the 53rd week, and we pay everyone in the last day of the month. So that changes the numbers on the last day. The share buyback program, everyone's familiar with it. I think we're well known for it. If you take a step back and you look at January 2020, just before COVID, and you look at how much shares we bought back since then, we bought back 12% of the company at an average price of ZAR 47.88, 52 million shares. Over the years, we -- I mean, we've always bought back shares. We buy back shares when we've got excess cash. We don't like to store it. And over the years, we bought back 155 million shares since we started the program 20 years ago at an average price of ZAR 38.72. So the share buyback program has been a wonderful program in our business, and that's really all about that we are such a cash-generative business. And when we don't use it for internal expansion, acquisitions or whatever, we return it that back to shareholders. And we'll continue to do that. The net debt at the period end was ZAR 564 million, and this shows the staggered cash flow of the business. And as you can see, the business really generates a lot of cash there. It generates over ZAR 2 billion worth of cash. We paid dividends out of that. We bought share buybacks. So that is a very cash-generative company. Our cash realization rate is 80%. But if you exclude the timing of those monthly payments I mentioned, it's about 93%. Some years, it's been above 100%. We had some growth this year [indiscernible] makes it slightly below. Truworths results itself, Truworths Africa, very good results. Our gross margin was one of the highest that's ever been at 56.7%. That's really a function of selling our summer and winter stock particularly well and not needing to take as aggressive markdowns as we might have in the past to [ decorative ] the right amount of our stock. Trading margin is now, on a 52-week basis, 20.3%. So obviously, we're very proud of that. And our operating margin was 26.6%, which I don't think many could replicate that. If you look at it by division, pretty similar across the board. Truworths Kids stood out there. You'll notice Other now is larger than Truworths Kids, it's our third largest part of our business at ZAR 1.6 billion. That includes our Office London, South Africa business, our Loads of Living, our Sync stores, I'll tell you back there in a minute. It's our value business, Truworths jewelry, cosmetics, et cetera. We closed a couple of stores, and we opened new ones. We've got 785 left. But remember, most of the time when we close a store, it's a small store that we put into the big Emporium. We don't close stores much without still having that face or that brand in that mall. And our real estate is pretty much even with the year before. Our sales per square meter is the second best that's ever been at ZAR 36,000 a meter. Inflation is in the order of the day and the fact. Since 2017, we've been pretty much -- we had almost no inflation in our product. But look at the dotted line, if you look at what's coming down the track in summer and winter, we're talking about in the mid- to -- above the double-digit teens. I don't think it's going to be 12%, 13%, 14%. But inflation is coming our way, and that's driven by all the factors all of you know about. Historically, Truworths hasn't done, badly by the way, in inflation times. Not to say I wish there was no inflation. Of course, I do because it's got so many benefits for the economy. And inflation is such an unhealthy tax on everybody. But I don't know that the business with our fixed cost base will suffer as much as others in an inflation environment. Gross profit, ZAR 56.8 billion or ZAR 56.7 billion on a 52 or 53-week basis. So it's better than the average of ZAR 55.5 billion. Look, it's not going to always be there. Sometimes it will fall back to the ZAR 55 billion, ZAR 55 billion and up, and it depends very much on how well we trade in the season and our overhead of stock. But this year was a really good one. Trading expenses, I'm not going to go through this in any form of detail. It's all visible for you to see and quite a lot of detail here. So you'll be able to go through these sheets in your own time and have a look at components of it. And if you've got questions, please don't hesitate to send them now or afterwards to our IR department. The one that stand out is that our occupancy actually decreased by 2%, bearing in mind we've come through COVID and we had landlords and us came together well to keep our stores there and also to get through COVID. So the leases have been good. Trade receivable costs have gone up, an 11% increase. Net bad debt actually decreased because of the lower write-offs. But then the books grew. And the provision, therefore, although it's healthy on a higher level book, makes the total go up. And operating costs have been, lastly, competitive. If you look at our profit before finance costs, EBITDA margin, operating margin, they're all at pretty much as close to -- as high as we've ever been. Back in 2019, we sort of really shot the life side, but they're pretty good. 2018 and '19 are also good years. And EBITDA, margin of 35% is a very good one and shows the operating margin. CapEx, going in the past, was normal. Into the future, you'll see the big change is the ZAR 431 million in 2023 commitment, which is a part of the first tranche of payments for the mid DC. The ZAR 42 million is a small deposit. The ZAR 431 million is the first tranche. The whole project, the DC project over the 3 years, will probably cost in the order of a ZAR 1 billion. So the first one is the [ forfeit ]. The rest are kind of normalized. The cash flow of Truworths is very strong. You can look at that in your own time. Office, a quick go-through. Office, a spectacular turnaround in this business. Gross margin from 41.5% to 44%, EBITDA margin from last year's 9.8% to about 20%. So it's a very -- it's great numbers. And then operating margin from the 4.5% to nearly 18%. So as I said before, we're very proud of the Office business. Most of Office is U.K based. We have stores in Germany. They are not profitable, those stores. And once again, I'm not going to go through the trading expenses with Office. That's particularly complicated. Because of that, the amount of -- the GBP 10 million I mentioned earlier on between the GBP 40 million we show and the GBP 30 million, that is, I would say, the sustainable profit. So it's difficult for you to go through these numbers without taking very negative mind. But you can have a look at the schedule, and once again I offer you the opportunity of writing us questions if you need clarification about the individual expenses within the Office. CapEx in Office, we don't just start spending some money. And we spent a bit of money in the computer infrastructure. But next year, that's going to be about GBP 2 million. This is -- and we start our store renovation and development program next year. Office was incredibly cash-generative. They have GBP 27 million in the back period end. So they have repaid all the borrowings to Truworths now. So Office is now similar to Truworths, a cash-generating business. Looking at the credit side. Maybe, Manny, if you wouldn't mind taking us through this quite quickly for a few minutes.

Okay. I can do that. So if you look at -- we continue to grow market share. That's we -- use a company called Principa to do that. We had this year more than 5 million applications of credit, which was a record. And we also opened a record number of accounts, 700,000 accounts. I think last year, it was about 630,000. The credit book is really in a good state. All the KPIs are pre-COVID levels. But I think most of you are familiar with this. If you look at the latest quarter that's come out from TransUnion, you can see that the status of the credit market and the industry has deteriorated. Anything below 50 million talks about some credit deterioration and some pressure. So we've seen that. We've been in this territory before. We don't know how far that will dip down. So we'll know in time what will happen. But certainly, there is some pressure in the credit market and in terms of household cash flows, which look like they're under quite severe pressure. But we'll see what happens. It's a cycle that we go through. We've been through it many times before. If you look at the good standing versus the bad standing, the bad records are records that are 3 months or more in arrears. They're sitting at 38%. And the good standing accounts at 62%. Quite similar to where we were in sort of September 2007 and also around about June 2020. It took take a bit of a dip in 2018, 2019. I think that was part of the financial crisis. And I think that you'll see that this will start to dip, so you'll get a higher contribution of impaired records going forward. We look at what's something called good bad odds, how many goods they are for every bad that we get. Our definition of bad is anyone that is in 30 days or more in arrears. And if -- and what we've done here is we've taken the last 10 years to show you where we are. The higher the bar, the better we -- the situation of the book is. So you have higher goods versus bads. And you can see from -- in May 2022, it's the highest that it's been in the last 10 years. It was quite similar to May '19, but May 2022 slightly better. So from a good-bad balance ratio, we had pre-pandemic levels. And in fact, it's been the best that we've seen in many years. This is in terms of balance on the book. The other measure that we look at is the 4-plus cycle balances, so these are accounts that are quite severely delinquent. And it's very seasonal in our book. It depends on the portfolio that you have. You can see in around about it gets better over Christmas as people prepare to shop, and then it deteriorates and it starts to turn again in June, July. It starts to get better again. So we try to measure essentially year-on-year in terms of the month that we are in. And you can see in May 2022, we had very similar levels to where we were in May '20 and in May '18. And May '18 slightly better, but it doesn't look like there's any cause for concern in this thing. And we would expect an improvement in the next couple of months. You can see the impact of COVID, of course, around about in May '20 where it spiked quite high. This graph talks about the applications that we've got versus the accounts that we've opened. You can see a big growth in the number of applications. Last year, it was about 3.8 million applications. This year, it's 5 million applications. It's really as a result of some additional channels that we've opened to attract accounts into our business. There is a decline in the risk approved percentage and there's a decline in the open percentage, and that is essentially to do with channel mix. This is quite an interesting graph that we track, and so it does show you the applications by age. And you can see here that 48% -- just go back, Michael, thanks. 48% of applications are actually under 30 years old. So the vast majority of applications that are coming through to us are the younger population. There, we'll see there's a summary of the trade receivable statistics. So you'll see that the book has grown and number of active accounts has grown by 2%. And you can see account sales as a percentage of retail sales, 69% versus 68% last year. We kept the qualifying payment at 90%. So that's one of the highest in the industry, if not the highest in the industry. And all the metrics around overdue accounts as a percentage of debtors, net bad debt as a percentage of current sales and so on are looking very good. And then we reduced our credit loss allowance from 23.4 last year to 20.9 this year.

All right. Thanks, Manny. And now we'll go into some of the strategic stuff we're busy with. I mean, obviously, this is just at a very high level. We want to strengthen our position as this aspirational bid in best market retailer for youthful, fashionable South Africans. We especially don't say young, by the way, we say youthful because you can be 50 years old and be youthful. Broad lifestyle mix of products. And we can focus on categories where we're underrepresented. Sarah and her team spend an enormous amount of time looking at those kind of opportunities. We're our kids businesses with those amazing brands, we own Naartjie, Earthchild, LTD, Max & Mia and so on, are really such great brands. Identity Kids they do really well across the border. We really have developed unique expertise there, as we said. We continue to refine our recently launched brands, Fuel and [ Sync ]. Sync is the value business, Fuel is the young men's energy business and expand our Identity megastore, kids emporium and concept, I've told you about that, and introduced the make-to-order or categories and the own in-house brands in Office. Once again, is a very competent team in Office and Sarah Proudfoot routine, especially Sarah herself works really closely with them. That's made an enormous difference. And Primark, just for those of you who want to ask. Truworths and Primark U.K. have reached an amicable settlement about the Primark trademark that will now revert Primark U.K. Both boards are very comfortable with the outcome, and there's no acrimony. There was great respect from both boards to one another. We will not be disclosing details of the settlement, but I think both boards feel very comfortable with it. The first Primark South African store was opened in April '21. And out of interest, the first Sync store was opened in August '21. We did both because we were testing and trying to see how it would work. Truworths in terms of the agreement, Truworths continued to use its own brands, Sync, in its 5 existing 6 stores. A lot of the merchandise in Sync and Primark is the same, and a lot of merchandise is branded on the upside with the label Sick for T-shirts and sweats in the casual product. So there are really off 5 existing -- or 6 stores all doing perfectly well. The remaining 11 Primark stores that Truworths operates now will be converted to Sync in the coming months. And all future Truworths group African stores in the value segment, specifically will be branded Sick. So that business will carry on regardless in the same way it has. Looking at the supply chain. We -- Sarah I think maybe we'll need to spend just a few minutes talking about this because yourself managed this quite closely.

Thank you, Michael. Yes. So one of our areas of focus in the last year and certainly will be a key focus going forward is the further development of our Truworths internal design division, where we really are seeing fantastic ability to support our strategy of a design-led model and being able to generate fashion-appropriate product aligned with our wide variety of products and brands. So we're finding that, that is improving speed and creativity and is an exciting move forward for us, we believe. There is also networks into the actual manufacturing base, where we've been investing time and effort in supporting local manufacturer through our key CMTs and production partners around the country. We've done a lot of work with strategic fabric. This has been linked to supply chain challenges. And we believe we've got some new methodologies in place that are going to better facilitate trading in our in-demand products and improved quick response. And then the initiatives that Michael mentioned was -- is obviously the introduction of the new distribution center, which is going to take us 3 years to complete. But we believe that from a supply chain perspective, the enhancement and improved efficiencies that we're going to derive from that real state-of-the-art distribution center will really complete our supply chain enhancement strategy. And then the combining of the 2 distribution centers in Office, the one that was in England, just outside of London, has now been consolidated into the single big warehouse, which is located in Scotland.

So that's a picture. I mean, it's a [indiscernible] what our new warehouse in airport in Cape Town will look like. Looking at customer initiatives. We do what you would think is obvious. We're improving our predictive capabilities. We keep on adding new account payment options to enhance customers' experience and deal with different types of customers. We're always finding new customers to shop with us. So our channel mix keeps on changing. We don't [indiscernible] channel works best, and we put more effort into some others. And we -- omnichannel is the name of the game. So we're continuously improving our omnichannels capability. Remembering in the U.K., we've got a very strong capability because it's 40% of the business. South Africa, our capability is very good. Although online sales are still only about 3%, I think the growth was in the upper 20s or 30s even in this last year. But it's still relatively small. So there's an amazing cooperation between the U.K. and the South African online teams. Retail presence, we mentioned the store of the future emporium, the rollout of this -- of Sync. I think maybe store on kids and Context will carry on the Office. We're doing a very exciting Office store of the future at the moment. And in fact, it's going to be opened in the next few months, and the Office store portfolio has worked on all the time. This is a feeling for Identity, the new Identity superstore. It's a little bit like Truworths, started with one entrance and then it grew and we made bigger stores years ago. And so we're doing that now with Identity with the men's and ladies entrance separate. Quite a few of them are ready. And there's the big kids area in the new Identity megastores. And as I look at -- I told you the 5 Sync stores, that's 1 of them. That's what it looks like, exciting young energetic value brand with aspiration because we never give up on the aspiration side. Sarah and her team are very involved in running with that. That's our new fuel, [ men's ] young, energetic [ punky ] brand in many of the emporium. And then next Context. Sometimes it's with Loads of Living, and other times Context on its own. This one, you can see the Loads of the Living side of it. Inside the Context, you'll see on the right there. On the top graph. It's much more sophisticated. And what's so nice about it is when it's introduced into the emporium. It's a whole feeling of elegance and sophistication to add to that inspirational appeal of our emporium store. That's our Office London in South Africa, a sneaker store. Doing very nicely, by the way. And this is [indiscernible] street, the Office store of the future. It's a wonderful store. It does incredibly well. Office [ quality streets ] and we are being quite a significant upgrade to that store. I think it's going to happen in the first half of 2023, very exciting. We managed to find a way to increase the space. There's upstairs and downstairs. It's a great store, great position. And then I wasn't -- I thought I wasn't going to tell you, now I had because of the slides here. This is one of the new stores in Office. It's called Office Battersea. We've taken a new site in a wonderful position, and that's a brand new office store that we'll open soon. Of course, the world is now all about environmental, social and governance. We are completely committed to sustainable business practices, and you can read through this in integrated reports and here. Environmental impact is a critical part of our lives. And we do a lot of work, we've got a whole team that focus almost most of the hours in the day on this. All of our shopping bags will be made from 100% recycled materials by January '23. Carbon emission, energy saving, electricity reduction, water consumption are all key focuses of our team. We support our people. We want to be a stable employer. And I think we've shown most of our people that through good and bad times, we are a stable employer. We are a signatory to the master plan, the government's, the South African government closing [indiscernible] master plan. Part of that has been our acquisition of the local design centers, [ Perry Klein ] and [indiscernible]. And there's a lot of other work that's going on, I've mentioned it. Sarah and Manny and the teams are very involved in with the supply chain from a vertical basis. We want to ensure that environment that values diversity -- great environment in our business that values diversity and ensures equal opportunity, while respecting us. Both our charitable functions and our internal value spends a lot of time and effort in that. We put well of 100 million into training and development of staff in the last year, and we are completely committed to gender equality. We support unemployed South Africans in a number of ways. We were very -- tried to assist in the flood relief last year. We support public hospitals and clinics, very poor communities. We've done over the last 10 years. We refurbished and helped to refurbish certain wards and hospitals. The funding equipment in Tshilidzini Hospital in Limpopo. Dream rooms for disadvantaged children. We're busy in Alexandra township in Gauteng with [indiscernible] school. So we do a lot of empowering women, providing support for victims of gender-based violence, which is a new focus of ours. So we're trying to do things that all are good for our communities. In the end, our business philosophy -- I know I appreciated this several time. It's the cornerstone of our governance network -- governance framework. We -- in the FTSE4Good Index, we -- our governance ranking was 5 out of 5. Succession for the CEO and long-standing -- and long serving and non-existence a key focus on important line. New non-executives on the Board. And we continue to be ranked in the top 10 of EY Excellence report. I think we now are well and above the only company that for the last 15 years, since the award has been around, we be ranked in the top 10. We're the only South African company that shows the privilege and honor to continue that. Outlook. Well, outlook, who knows? The outlook, it's a difficult world we live in. The first 8 weeks were good, and you could say that South Africa, if you leave out the civil unrest of last year, our first 9 weeks, 8 weeks, it grew by 9%. So we started off well, but we'll have to see. And office started very well, continues to do well today, 11% growth. So tough times ahead because we all know they are. But I'm hoping that we will continue to do what we have so well in the past. So thank you for the presentation. I'm now going to revert to some questions. I've got a number of them here, and I'm going to try and answer some myself. And where appropriate, I'll address them to Sarah and Manny and if necessary, Reon.

There's a lot of questions about sustainable gross margin. So I'm not going to go through each one. I would say the majority of questions are about gross margin. Look, is it sustainable? I won't answer that because -- and I know there's high inflation. So yes. Are we going to pass it on? This is a strange question. Let me say to address, we're a margin-based company. So we base -- our whole philosophy is to try and offer the customer the perfect product. We don't compromise on that, and at the right value. But it has to be at the right margin. And if the product becomes too expensive, we find alternative products to buy that fit the profile without compromising the margin. The reason the net margin drops is not because the initial margin changes much. It's more because we might get overstocked, and then we have to clear the stock through [ markdown ]. That's the main reason. We don't play around with the gross margin because we kind of dropped the prices. We don't do that. So we must find the right product that could satisfy the customer in terms of price and quality and fashionability, but at the right margin. And we have a track record says that despite the inflation and bad economies and so on, between a range of 55.1% or 55.2% in Truworths Africa and 50 -- nearly 57 this year, we managed to keep it within that range, depending on how well we manage our stock. That is the real thing. So is it sustainable? Yes, within that range. Will it always be at the 57 level? Probably not. We're going to drop to 55% or close to that maybe some time. And a lot depends on how we manage the stuff. In good years, like this one, was we managed it well. Coming to Office, their margin is pretty predictable. Similarly, they're going to manage the stock and we've got much of that purchase. They're just as good as Truworths as now. That margin should improve as we grow the MTO range, the in-house brand, from the current 7% went to 10 in this last year. And it would be great if we can get to 15% and eventually even 20, who knows. But as that grows, then so the margin should pick up. The other obvious question that someone has asked, and it's about succession and a time go to my job to the CEO position. We did announce 2 years ago that towards the end of this year, I would retire. The exact date is not -- the Board will make that decision in the end [indiscernible] any of us. So I can't tell you much about the exact date of my retirement. It might be a bit longer than the end of this year. That hasn't been decided yet. The Board hasn't yet made a final decision on what it wants to do. But I can tell you that Sarah, Manny, and I work incredibly closely together. The 2 of them are involved in every single decision that I make, and we make it together actually. And therefore, the inevitabilities, our succession will be -- will revolve around Sarah, Manny and myself and some way of making sure that the company continues on its course and continues to perform as well as it is. I'm just looking at -- taking the questions the one that I see here. Someone's asked if the IR team address can be given to us. Let me -- the email address is [email protected], and we'll try and publish that on our website. An interesting question on the U.K. [indiscernible] shortly. That's a net direct cost through to you and what magic can work to offset? Well, it's a brilliant question. It's a terrible problem in the U.K. It went into contracts with the service providers. And as you say, it's 1 of 3. That and other costs in the U.K. are a challenge. I don't have any magic other than to try and do the best deal we have. We did close the 1 warehouse specifically for that reason. Similar to South Africa, when we had all this electricity -- other problem with electricity, we'll have to do -- to manage it in the U.K. But I cannot say anything more other than to say it's a hell of a problem, the whole world's fuel cost issue. And we're part of it. Manny, there's a question for you. We think that the impaired credit reports are likely to pick up going forward. Will this mean that you need to increase our provisions in [ bad ] debt. Is the rule of thumb -- what percentage should the paid record increase that will cause you to increase our provision for bad debt? And I don't know if you want to answer that.

Certainly. I can answer that. So that's likely impaired records will increase as we see the macro challenges in the economy. We do run provisioning models that take into account not only the past and present and future predicted roll rates of the book, but also look at macroeconomic indicators. And it looks at something called the lead indicator. And the lead indicator typically looks at the first -- the early part of your book, then it sees if it should apply some additional factors to the rest of the portfolio when you're calculating the provision. So -- at the moment, we're not looking to see that -- we don't think we'll raise provisions right now. But one never knows. And I'm sure that there will be some increased delinquency and perhaps provisions might go up in future. It depends on what the macro indicator says, the lead indicator and the macro model that we use. And the higher interest rates, funny enough, are actually beneficial to us in terms of the cost of credit because we get additional interest income and we've seen in high interest rate environments that our cost of credit actually gets positive. We actually make money from the credit book instead of losing a bit or breaking even. So from a cost of credit perspective, including provisioning, we generally do better in a higher interest rate environment.

Thank you, Manny. And I just want -- there's someone who's writing that they're getting a problem to the website. This one person, I don't want them to say your name. But as I said, if you have a problem, please contact our Investor Relations afterwards and we'll try and respond to you. Sarah, this one, I think is for you. It's strange -- do you choose and make plans, merger and acquisition. There's a thing about merger and acquisition. It's all about capital allocation. We're rolling out stores. We have a new DC plan. We've got excess cash flow. Is there an option to increase dividend payout ratio, just trying to read the question, and be more blissful on buyback. That's on our answer. And what are the biggest growth opportunities for the group or the next 5 years, Sarah, maybe you can talk to that. And are there any M&A opportunities you find in South Africa. Yes, we're always looking at M&A. I mean, you know our competitors has been quite aggressive. Some of them there, we were involved with some of those, but we chose not to participate. There's nothing in the offering at the moment. And look, but we don't have anything in the short term. Sarah, would you want to talk a little bit about couple of next 3, 4 years, growth opportunities, the way you see them internally or whatever in Truworths.

Yes, sure. So in terms of the next sort of 3 or 4 years, we'll definitely be continuing on expanding on some of our new formats. So the Identity mega store, you saw those photographs that Michael showed. We definitely feel there's opportunity to expand that whole format, introduce a broader range of products and really sort of mature that business from a product offering perspective. So we're excited about that. We've got the Sync, the value brand. We will continue to focus on that, but that's still going to continue in an experimental phase, I would imagine, for the next few years, at least, while we sort of learn and adapt our buying methodologies and our approach to achieving great value in that space, which is obviously a new addition to our portfolio as a business as a whole. And then within Office in the U.K. and in South Africa, we're seeing really good growth opportunities. Both businesses are doing well. And there's opportunities in various parts there, but the most obvious one being the own brand in Office U.K. where there's opportunities in both ladies and interestingly, men's and the small children's range that we do have in that business. And then there's still always opportunities within our emporium. I think our business model with a wide range of brands, it interestingly always provides opportunities for expansion, and we have been doing a lot of analysis into key categories where we are, we believe, underrepresented, and we're using that methodology to roll out and expand into that space, which will definitely take us over the next 3 years at least.

Thank you, Sarah. So I'll go through some of these lot of question. It's sort of a statement and then a question. So without going into detail the question is Primark is going back into its Irish parent company, and it's no longer part of Truworths. Sync [ heads over ] from Primark. Yes, I thought I explained that, but yes, that's true. And I can't go in more detail. But as I said, our Board is certainly happy with the outcome. Someone asks if I'm getting the question and because of the effect that I was shown, I'm going to actually find the question. It was about -- sorry, just take a minute. I've got to try to keep some changing as I refresh. So I've lost that one. Are we going to carry on buying back shares at current levels? Yes, look, we're more aggressive on -- we've sort of -- the Board gives us every quarter we look at the future cash flow, solvency ratios and so on. And then the Board gives us kind of a limit as to the share buyback, and we already have a policy. So that will carry on. Of course, you buy back more shares if the price is low, and we try and be more aggressive when we see there to be unusual value, but the program is a long-term one. It's not a short-term one, and it continues. I'm not going to talk about there's certainly more one about gross margin. There's another interesting one here, but medium-term targets are being reviewed. Can you give us some guidance on any changes to the gross operating margin to guide us at the sustainable we think the current earnings are. And they appreciate Slide 12, which provides some help. Look, I'd rather just say to you that -- we do plan to change many of the -- I think I've dealt with the gross margin one. When it comes to the other targets, we are going to revise many of them upwards. Especially return on equity, return on assets, those are at a new level. We -- I don't think really we have disclosed that at this point in time. Am I correct?

No, Michael, we typically revise the targets and we published them in our integrated report. So the revised targets will be published when our report comes out towards the end of September.

So as we discussed that yesterday, and the new targets that were proposed, the ranges, in principle, have been approved. But let's -- we have to wait for the integrated report at the end of September. I kind of think that I hope I've addressed all the main questions. Oh, this is an interesting one. Knowing what to do about Office in the U.K. retail market, would you -- have you made the decision to buy office. This is someone who's happy to know, is very cynical about Office. Yes, gentlemen. We would have -- yes, we've had some shaky times. That's called business. You have bad times, you have good times. When we bought it, we had a vision. We realized, as we went through the process over the 5 or 6 years since whatever it is that our vision was not wrong, but perhaps our understanding of the market was naive. But we've grown and learned -- and we now actually feel even more confident that we did the right thing because as we got to understand the toughness of the industry that we're in and the nuances, we've got to understand better than ever before how strong that Office and Offspring brand is in that marketplace. So overwhelmingly, yes. We are so committed to that brand, even though acknowledged, we went through some really tough times, that have been good for us. So yes, I would brought it. And I couldn't find anything else here. Yes. One question. I think this is a particular good one. And actually, this is the one that the guy said is not getting through. So I'm pleased to find it now. He says this alternative credit product for a specific market segment, please give me more insight into that. And is it the right time to be opening up to [ test ]? But I think that, that question, I won't mention your name, I think it shows you don't really understand our company and how we work on the credit side. Because we never opened up the [ test ]. That's not Truworths, opening and then closing the [ test ]. We are a perpetual innovative business, always trying in bad and good times to new products to deal with customers when it's clothing or credit. And that's our business, it's what we have for. That's why you are clear invested in this. So yes, we do that. We develop new credit products. That's not hooking up the test because how we do it is, firstly, they're new products that we think are appropriate for the marketplace. Then we test. We don't just launch it. We might do it in 5% of the book, and we might test for a year to 18 months. And then we'll experiment and innovate and go through a process and definitely are not opening up the test. I would never think now is a good time to open up the test. But then, to be frank, we never have opened the [ test ]. We've never closed the [ test ] , we never opened them. We just run it in a very, very consistent way, which is actuarially determined and with a very clear perspective on risk, so -- and experimentation. So I think your question is a great one. Yes, we're not going to open up the [ test ]. I've tried to refresh and I'm sorry if I'm missing some questions. They are literally a few -- a lot of questions there. I think that's catered for everything. And if I haven't, I really apologize, things like what's the Office sustainable margin over the next 3 to 5 years? I don't know, I mean, it's such a good year. I'm hoping that it will at least maintain where we are, which will improve over the next couple of years. Who knows what the future will bring, it's just exciting. And that's our lives at the moment with challenges, with opportunity and excitement. Why is our real estate office planned 4% reduction when we say we're making headway with landlords? Very good question. It's because continue where and how , but some of our real estate, which is loss-making, there are opportunities and we will close those. So that is all. I want to thank all of you very much for participating. We are now just passed 2:00 in South Africa. I'll say that address again, [email protected]. It's our contact for IR, you can ask us anything you want, and we will do our best to answer and respond as quickly as we can. And if that's still inadequate, we'll meet you all one-on-one. Thank you so much. I am going to hand over first to Sarah and then Manny for some concluding comments.

Thank you. Thank you, Michael, and thanks to everybody for attending today. I think the year ahead, despite all the challenges, which unquestionably are there in the macro environment, we really are going to focus again on our model and the uniqueness of our business, which we showed you in that opening slide. And our belief is that if we continue to focus on what makes us different and makes us unique in the marketplace in the way we approach so many areas of our business, we believe that, that is our best protection against economic and environmental headwinds. And we really hope that, that will see us into another successful year in the coming year. Thank you.

Well, thanks, guys. Yes, so I mean, we've had a fantastic year, as you know. And we had a really fantastic winter season in particular. So we start again now. We've had a good start. First 8 weeks looked quite good. But as we've seen now in this presentation and as you all know, there's macroeconomic challenges that we're going to face in the future and we're going to have to deal with those. If you look at the track record that we have, even through COVID times, we've managed to deal with them. And I have no doubt that we will get through this year, and we will be successful. I mean, there was this question on opportunities. And we have so many opportunities in our business that we -- I mean, we have to push some away. There's so many of them. And I have no doubt that many of them will come to fruition this next year. So it's going to be an exciting year. I'm really looking forward to it. And we'll chat you guys again at the interims and then at year-end, and hopefully, it will be positive for everyone. But thank you for attending. I appreciate it. And have a wonderful weekend. It's Friday, so that's good.

Thank you, everybody. Bye-bye.

Thanks.