Truworths International Limited (TRU) Earnings Call Transcript & Summary

Good day, everybody. Nice to be with all of you. Excuse the fact that I've got quite a bad cold, so I might sound coldish. With me virtually is Sarah Proudfoot and Manny Cristaudo, our 2 joint Deputy CEOs; and Reon Smit, Divisional Financial Director. I'm going to go through the presentation pretty quickly because I'm banking on the reality that you guys have all studied it and will do so. You've studied the numbers, and you'd to see the presentation online. So you won't need me to go through all the detail now. We're going to go through as quickly as we can, try and get it done in half an hour to 35 minutes, so that there's at least 25 minutes for questions. And then Manny, Sarah and Reon will help me through the questions. So we're talking about the half year results till the end of December. The first slide relates to our business philosophy. We always put this in the presentation to remind you that we follow this very diligently, and it's a real document to us. I'm going to give you some examples how we use it in a second. I suppose the key elements of it that I want to emphasize now is the fact that on our Truworths purpose, we talk about how Truworths entices customers into our visually appealing aspirational. That word is key, real and virtual environments. And then we talk about a tasteful fashion. That's what we offer the customer of superb quality and intrinsic value. The word intrinsic value is key here, and I'll tell you why in a minute. And then the next one is at the bottom right, you see the vision for shareholders, which is we want them to say if we're doing everything right. In other words, if we're living by values, and we are fulfilling our purpose in Truworths and in Office, then we are hoping shareholders will say we are long-term investors, not short-term investors and because the shareholders trust our capacity to execute innovative strategies so we can deliver value over time. I'll talk to that in a second, so you'll understand how we use it in real life. And in fact, the next slide goes into that. So what have we done? So one of the things was when we bought Office 6, 7 years ago, it was very much because we had taken a view that diversification globally is critical for the long term, and I stress that word long term of our business philosophy again, for the long-term viability of our business. It's a big business. It is pretty much in every single shopping mode of importance in South Africa. So room for geographical expansion within South Africa is limited. Maybe there's new line extensions and new concepts, which we do, do. But still, given the high base of physical locations around the country, it felt very important to diversify internationally for that concept of long-term shareholder investment and focus. And then we looked at Africa. We've got some stores in and around South Africa, not quite in South Africa, but they're small, and we did find over the many years that we couldn't imagine that being an adequate protection for our need to diversify. So that's why we diversified into the U.K. And it is also why it's such a pleasure for us to be able to say that it's worked so well and that it has turned out to be a great edge for our business because it's now growing soon to 40% of group profits. And you'll see that our focus on global in terms of our capital utilization and our hope for expansion, both in Office itself because there's lots of opportunity there, but also perhaps with an acquisition in the U.K. which could, over time, move into Europe would be an emphasis for us. So I'm sort of showing you how we tie our business philosophy into our strategy. Our strategy in order to deliver on our business philosophy was diversification, and it is working. The second thing, we know that if we are going to diversify internationally and also survive the obvious tough times that we envisaged in South Africa years back and still do. South Africa has a tough economy. Everyone knows that. The GDP growth has been negligible for years, everyone's talking about hoped for 2% in the next year or 2. But I mean, one never knows with what's going on internationally, politically, economically at the moment, if that's even going to happen. And then, of course, again, there's risks by being completely focused and dependent on South Africa. So that's why having a strong balance sheet with cash available, especially if we want to make acquisitions and ideally abroad and especially in the U.K. and possibly extending to Europe, that would be a key element of our capital utilization in the future. On the other hand, we understand that having a strong cash position needs consistent dividends to make shareholders feel that our stock is at very least reliable from a dividend flow point of view. And with the lower share price over the last few weeks, months, the dividend yield is exceptionally good. We have a broad portfolio of market-leading and again, that word aspirational fashion clothing brands that are loved in South Africa. And obviously, in the U.K., they're all the big sneaker and fashion brands in the stores. Office is strategically positioned with probably as good as one of the world's top leading international footwear brands through its unique offering and a strong customer and brand loyalty. Just as an example, one of -- I'm not going to say whom, but one of the biggest suppliers worldwide or one of the biggest brands just at a conference in -- and I don't want to say which country because it gives the game away, but in an international place, not in the U.K. And we were the only U.K. retailer invited to that. We have a healthy credit portfolio in Truworths Africa with more than 2.8 million active customers, but over 3 million customers have shopped in credit in Truworths Africa in the last 12 months. Remember, that's about 70% of our business. The other 30% is cash. And the average cash customer buys less per basket by quite a significant amount, which probably means about 5 million customers shopped in our stores in the last 12 months. There's a very high demand for credit. Despite the toughness of the economy and the strain of the South African economy and the strain that the consumers are under, the demand seems to be unabated for credit. But of course, they have to be creditworthy. So that is a challenge. And because, again, I'm going to go back to the business philosophy. So because we've taken a long-term view, and we are not short-term orientated, we -- over about a year ago, we decided that if things are going to improve in late 2025, but more likely '26 and '27, then we must -- as we always do, make sure our stock is clean that we always do, always make sure end of the season stock is as clean as it needs to be. But from a book point of view, we took a view that we must pull in our credit, be a little bit tougher on our credit, especially the more risky areas of credit so that in anticipation of hopefully better times, our book is as clean and as healthy as our merchandise. And that's been working well because it's taken quite a while and it has constricted our sales a bit. But the reality is its profitable constriction. And if the economy does pick up to the hopeful 2%, 1.5% in the next year or 2, Truworths tends to do much better as all of our shareholders know in the space of a slightly better economy because we are more expensive with our aspirational product. We have -- we focus on the best retail locations in Office and in South Africa. We won't take a store unless it's in the A+ position. We'd rather wait and be patient even if it takes 5 years. Both our online capabilities in South Africa and the U.K. are world-class. You all know that the Office one is 40% of total sales is online nowadays. And never mind, good or bad times, we always manage the business frugally with frugal expenses control, frugal cost control, even in good times because you never know what's coming next. So over the last couple of years, we've been positioning ourselves. And Sarah will talk to it later. I'm sure there are going to be questions about it. But there's been an enormous focus on our existing brands, DNA, my brand. You know the big brands, UZZI, Daniel Hechter, of course, Truworths, Truworths Man, but we have about 50 operating brands in our stores. And we've been focusing enormously on those brands, making sure that they are elevated, they are differentiated, and they are aspirational. But we are particularly focused on the value proposition. Given the poor economy, the tough economic situation of most of our customers, we still need to differentiate ourselves. We still need to make sure that our product is elevated compared to our competitors. But on the other hand, we have to get the value proposition right in South Africa to take account of the tough economy. And so there's been an enormous amount of work going on in our merchandise departments with getting the balance between the value, but also with the DNA focus and the elevation focus all intact. And Sarah maybe will talk to that in a few minutes when we get to questions. Then we also have launched new brands. We already have Identity, which is a cheaper brand than Truworths. And now our Sync, which is even further discount in the value space, and so we're working on that because we still want to remain within the confines of our business philosophy. So even in a business like Sync, we would want to have an elevation and aspirational element to it. But the suppliers, perhaps the fabric and some of the quality won't be anywhere near the Truworths standard. So there's work going on in that space as well besides what I said about Truworths. And then, of course, if we are going to get clearer about our existing brands DNA and the value aspect of the aspiration, and those are 2 -- they are -- they could be conflicting points. So one has to bring them together. In other words, they're still aspirational. We're still high quality. We still meet the customers' expectation, but the value proposition gets more appealing for customers who are in trouble. We developed and spent well over ZAR 1 billion on our new distribution center, which is now in a start-up phase. It's working, but not fully functional yet. And that led back down the supply chain together with our design centers that are now in-house to enable the merchandise departments to offer a much greater range of replenishment and part allocation product, which is, firstly, high quality, but secondly, because of the volumes it drives over time, will drive better prices. So there's a sort of link between the new distribution center, the DNA focus of the product and the business philosophy, which says you've got to meet your customers' needs which says value, even though they want a better product in these difficult times. And then, of course, we've got to think long term because that's our philosophy. So all of these things come together in terms of the strategy that we implemented in order to fulfill what we say we're trying to fulfill in our business philosophy or our constitution, if you want to call it that. We have initiated various other collection capability and payment channels, really letting the customer pay us however they want, whether it's -- there's no limitation how they want to pay and shop with us. And we have enhanced our point-of-sale system into a very upmarket new branded one. In the Office business, there's -- we've spent GBP 12 million. So when you think of capital allocation, the returns on the office marginal investment is significantly higher than Truworths because of the scale and size. So we're putting enormous effort into -- and money into the Office expansion. Expansion is new stores. There were 11, but remodeled stores, there were 10. So it's like a 50-50. And that's all to do with new stores, better trading space, better exposure in the U.K. In Office, as you know, 40% sales at least in e-commerce means investment in e-commerce is a critical aspect of the business. Office is now pretty much totally aligned with Truworths in its retail methodologies, processes and even becoming more so on its systems. And at least some of, if not the majority of its success, has been due to that. And there's lots going on with technology and warehouse development in the U.K. as well. Getting into the financial results. As I said, I'm going to go very quickly through because you're all familiar with it, and you'll be able to look at this afterwards. A big drop in our margin to, unfortunately, one of the lowest it's been for a long time. Now think about why that happens. So when you think about how we run the business, I've told every analyst that I've seen for the last 5 years, the same story. We have 2 budgets in sales terms. One is the sales, which is expense orientated, remembering the strategy frugality, good or bad times. So we have a low sales budget. so that if, for example, we budget sales at 4% because we think expenses are going to go up by 3.8%, then so we can slightly increase profits. So that's the sort of way we do sales budgets. But when we plan the merchandise sales, we are much more optimistic and aggressive. So they're not aligned. The financial sales budget and the merchandise sales budget aren't aligned. But sometimes that goes wrong. We're good at managing our stock in season. But when we do as badly as Truworths has done in the last 6 months and as difficult as it has been with as optimistic as sales forecast, then despite our desire to manage it in season, which we did do, we still end up with too much stock at the end of season. And so that requires because, again, remembering, I said at the beginning, we want to have a clean merchandise range at the end of February each year, end of August each year, and we want to have a clean debtors book. So from a merchandise point of view, that means it required extra promotional activity in late after Black Friday, which is December and January and February. We still get to our clearance targets. So our terminal stock is perfect, but it cost us this year. Expenses were very well contained in the group, but the net result was still disappointing in profits. When I look at the group -- sorry, I'm skipping a bit there. The return on assets, return on equity, that has been declining, but still to a very acceptable level of a return on equity of 36%. Return on assets down to 27% and return on equity, we kind of feel that now there's been such a growth in retained earnings, and we reversed impairments, which caused the drop since 2022. But we kind of feel now we're at a level playing field. There will still be increase in retained earnings each year, but we feel we can still retain and ensure return on equity is sort of normalized at around the mid-30s, and we plan and hope to retain that percentage. And similarly, return on assets, there has been a decline because of the new stores in the DC in Truworths. But there's also been some other stuff with the charitable trust. But again, we think that we can keep return on assets at well above the late 20s. And similarly, stock turn and asset turn has to be above 1.1, 1.2. If you look at our group balance sheet, property, plant and equipment, up by 20%. Some of that at least is the DC and the new distribution center in South Africa as well as the stores in Office. And inventory is up 13%. That's a lot to do with the expansion in Office. When it comes to share buybacks, there's been some questions about now that our cash flow is looking so much better, what are we going to do about share buybacks? Well, the reality is we will probably retain the cash and probably in the U.K., there are target businesses we would love to buy in South Africa, and we continuously look at them and think about them and focus on them, but they're currently not available for whatever reason. But in the U.K., we would really find it appealing to make an acquisition in the U.K. that aligns with Office. And so the cash at the moment will remain in Office, but also for the expansion in Office. There's a lot going on there. If at the end of each quarter, when we meet with the Board, we decide that because in the next 6 months, there's not likely to be an acquisition, and we've got adequate capital for our store expansion, then yes, we will probably start a share buyback program again. As you know, we spent since 2020. So it's the fifth year now, ZAR 2.5 billion, and we had a share price of ZAR 48, and we spent ZAR 6 billion since 2002. Dividends have been consistent. The group has generated tons of cash in the last period. Admittedly, we did pay creditors a day after the year-end, the way the dates fell. But we still would have generated ZAR 600 million or so of cash after that. That's despite paying for the DC, a big part of it or an annual part of it. Truworths battled. Truworths sales were down 1%, trading profit down 17%, but it's primarily because sales were not good and gross margin dropped. Those are the 2 reasons. Expenses were very well controlled. But because of the denominator effect, the implications for trading profits and profit before tax are significant. Hopefully, we're going to reverse that in the next 6 months or partially anyway. Looking at the Truworths Africa balance sheet and income statement, profit before tax dropped by 15%. Divisional sales across the board. So what I'm saying to you, just to give impetus to the argument that we really faced a tough economic situation in South Africa with our existing Truworths Africa business, whether it was menswear, ladies wear, whether it was kids, whether it's other, which includes Office, Jewellery, Sync, Identity, even YDE, all of the businesses battled in the 6-month period, which we thought was going to be better than it was. We knew that the anticipation of the 2 part and the sort of speed of recovery of the South African economy could be exaggerated in the marketplace, and it might take longer. And of course, we anticipate and plan for that. But nevertheless, it was across the board tough in this half year. In Truworths Africa, we closed 15 stores, but we opened 23. The trading density, bear in mind is inflation has been dropping since December '22, but the sales perimeter is still at least very acceptable by South African standards. Merchandise inflation, if you ignore some of our sort of vendor product, inflation in the last 6 months was about 2%. And if you ignore it, it's actually closer to 1%. And I think the next 6 months in others to June will also be about 1%. And that shows you how the margin suffered because of what I said earlier on, the gross margin because of the promotional activity. Trading expenses very well controlled that frugality coming through and helping us a lot there. Depreciation went up by 2% in South Africa, occupancy costs by 1%. Rental pays actually went up by 4%, but there's an IFRS issue, which makes -- which compensates a bit. If you exclude foreign exchange losses and you make it like-for-like, then other operating costs increased by 1%. Trade receivable costs, Manny can talk later on about the ECL allowance and the charged-off book, that new way of looking at it. But essentially, we decreased our ECL allowance by ZAR 91 million, but we increased our ECL allowance when it comes to costs relative to prior period by ZAR 92 million. So they sort of compensated each other. Manny can talk to that a bit later on. You know about the profit in Truworths has declined. And the distribution facilities, we spent ZAR 150 million in 2024, and there's another ZAR 100 million or maybe a little bit more committed for the 2025, which will mean essentially that we will have spent close to ZAR 1 billion, and we will be finished the DC by June, finished paying for it. It is operating, by the way, but it's still in test mode. Office, brilliant numbers, growth by over 11%, EBITDA 10%. The EBITDA margin, 27%, so Office has been outstanding investment, generating tons of cash. It's doing really well. We also show an adjusted figure, so you can see the net IFRS 16 impairment reversal and the impact of that. But whichever way you look at it, the numbers of Office are really appealing, and we'll try and answer some of the questions about the future with Office during question-and-answer time. But there's the Office income statement where profit before tax essentially grew by 21% on an adjusted prior period. Office mainly is in the U.K. and Ireland. If you look at the sales growth in Office U.K. compared to the national statistics in the U.K. of retail sales, you can see that pretty much for -- since July '22, Office outperforms the market and especially has done so since June '24. Office closed 4 stores, opened 6. Gross profit in Office has gone from 42%, which was already a good gross profit in a percentage in the sneaker and branded business to 48% now. A lot of that is to do with stock management. And then Office trading expenses have been well managed at 7% growth. There's a lot of depreciation, and that's for obvious reasons, the stores, employment cost because there is an issue with minimum wages in the U.K. going forward and in the past, but we also are expanding stores. Sales are up. So all of that causes extra employment costs and occupancy costs are really under good control. So Office expenses are well managed. Depreciation, we've explained there why it's gone up so much and employment costs, I've explained there and then the operating costs, about online marketing. This shows the Office U.K. EBITDA margin, operating margin, profit before tax. It's a lovely graph to look at. We obviously hope it carries on. I note here the store renovation and development, GBP 2.7 million, the year before, GBP 1.7 million. Go back 3, 4 years, it was almost 0. And next year or this year we're in, it looks like GBP 4.7 million. So we are really being much more aggressive on real estate in the U.K., and we are spending money on the computers infrastructure and software and some money on the distribution center. When it comes to South Africa and the credit or account management, the TransUnion Consumer Index was above 50%, which is a positive thing. You all know that above 50% means it's healthier than it was. Below 50%, it's less healthy. So it's the first time it's been that since around about '21, which is a good sign. I'm not sure to what extent the 2 part helped that. So I'm really hoping that the next time this comes out in the next quarter, it's still above 50%. If this was caused by the 2 part, it might not be so. But there is hope that the economy is improving and expectations are hopefully better about the future in South Africa despite the international risks that have recently emerged. We've tried to highlight those points in the TransUnion report that are particularly interesting to us, which says the rate of new defaults has cooled significantly relative to highs before, but they are still rising, single-digit territory. So it means we're kind of not out of the woods, they are still rising, but it's definitely improved. Distressed borrowing. It's the first time the indicator has fallen since '21, I said it early on because the balance sheets of our customers are looking better. And you all know that with a better economic growth and a better book, which our sales is really looking like, if those things all happen in the next 12 months to 2 years, that will be a very good thing. We do think Truworths reacts very well to a better economy and suffers more in a tough economy. We try and mitigate that, but that is our reality. And then also CCI data does suggest that household cash flow has started to improve and that household debt serviceability, the debt service costs has been stabilized as the SARB, the Reserve Bank has reduced interest rates. So again, it's all about what happens internationally. Hopefully, nothing dramatic happens badly because of geopolitics and international factors, then we are hedged with Office. But if they don't happen and the rand doesn't suddenly go negative, which we're hoping it won't and the economy does improve, so that the credit market and health improves. That all augers well for Truworths in the next 12 to 18 or 24 months. Credit sales, 0.9% reduction. Bear in mind, we did pull back on credits in the idea of cleaning up the book in anticipation for a healthy economy in the future. New account applications were up at 2%, but there was a lower conversion, which, again, that's part of being a bit more tough and stringent on new credits. Total accounts were up -- they were down by 0.8% and -- but active account holders who are able to purchase, in other words, they're not in arrears also remained at the 83% of the total. Royalty membership is now over 19 million. That means people -- the 19 million basically, the difference there is the 3 million is that these are all people over the years who've applied for credit, we don't give them credit, but we retain them on book and continue to market to them. And that works. It keeps the cash sales up, the laybys up, the 3-month payment plan up and all the things we can try and do to work with the customers who do not have credit, but which they did. Collections did improve. The ECL allowance, the active book is now 20.9% versus 19.7%. It's higher partially due to the decline in the active book size, the denominator effect. And there's lots going on with our predictive models as usual. But this graph is particularly interesting. We're not giving you the scores because it's intellectual capital. But the point is what this is showing is that the high-risk balances over the last 3 years are reducing and the low-risk balances are increasing. And that's the strategy. That's what I mentioned right at the beginning of this idea of cleaning up the book in anticipation of better times. Nevertheless, things are still tough. And so the approval rate versus open rate is still a big gap. This is an odd thing that customers apply and a lot of them don't get approved. So only 23% get approved, but then only 15% actually go and open. So obviously, that's a gap we try and deal with all the time, but it all speaks to tough economic situation. And what is interesting, and it always is that 42% of our new account applications are under 30. And in fact, 24% are under 24. So we -- young people want to shop at Truworths, and they want to get credit from Truworths. This one is a bit more stats about the credit, but it says the risk approved declined a bit, and I've told you why a few times now. The overdue accounts and those ratios are pretty much in line with the past, but the change in number of active accounts and gross receivables is down. That's of course sales are down and because we are restricting credit a little bit. Aspirational fashion, looking at our strategy going forward, wider in Truworths Africa, a wider merchandise offering of core replenishment styles. That talks to that strategy to align ourselves with current economic circumstances in terms of the value offering and yet retaining our aspirational feel of our merchandise. So there's a big project and exercise underway currently in the merchandise areas has been running like that for about 3, 4 months to try and broaden the merchandise offering. And that, of course, plays into the new DC where we are now much more able and will especially be from about May, June onwards to deal with significantly greater portions of our merchandise in replenishment product, which were always constrained with in the past and much of that on part allocation as well. There's a new brand expansion, the Fuel and Sync. Fuel is going very well. It's in Truworths. A lot of it Sync is a new business. There's -- I don't know how many stores, I think it's 20 something. But that is one that's going to be a long-term brand in the value space. We're trying to create a new type of value offering, which is aspirational and yet valued, and it will take time. But we are positive about it and quite excited because it's bringing in a new way of replenishing and ordering merchandise from new types of suppliers, from new countries that Truworths has not traditionally dealt with. And interestingly, that will have a spin-off to both Identity and Truworths. In Office, you know about the store expansion and modernization. MTO has started to do much better, and that's higher-margin product. So that's taken long. Again, it's a marathon, not a sprint, but it is improving. And associated merchandise, we are doing much more than we used to. The new DC is complete and ready, and it's in a phased go live. That will be complete by around May, that it's completely go live. And I've mentioned about the part allocation. There's much work going on. Again, it's all on this theme of aspirational value business philosophy. The local design and manufacturing in-house division is working beautifully now. And offshore vendor base is expanding. And in the U.K., we are working on the DC. We're doing some upgrading there. This is a new ZAR 1 billion Truworths distribution center near the International Airport in Cape Town. You'll see that the -- we have the shuttles. There you have the conveyors. There you have the storage. Coming to customers and omnichannel, strong growth in online sales, both businesses, Office and Truworths. Office, a bit less because they've had less markdown activity. And probably you all know this already that e-commerce works better with markdown and with scarcity. So in the Office case, scarcity causes the high percentage of sales, but the markdown has been less because it's been better managed and so that e-commerce is battling compared to store growth, which is fine. Store growth is excellent. Omnichannel CRM, cost reduction in Office and South Africa, mobile apps, both in South Africa and the U.K. are high priority, especially in the U.K., Office and Offspring mobile apps are being upgraded, and they're going live in the next few weeks. Credit more of what I was saying, improved data models, improved conversion. We are aggressively looking at how artificial intelligence can help us synthesize our book to achieve our objectives, which is long-term customer health, selling to customers who can afford it and that want our aspirational fashion, but finding a way to appeal to and attract and give the right credit to the right customers. Retail presence. So there's new concepts in Truworths, Identity, Context, Loads of Living, Office, U.K. and in South Africa Office and in our stand-alone kids. A lot of work going on with our stores. In Truworths, there's the reimagined concept we call it, which is state-of-the-art. There's only 5 stores opened and 6 modernized during the period in the reimagined concept. There are 1 or 2 that we'll do that are even more extreme in terms of the upmarket nature of them in the top malls of South Africa. We won't roll many of those out. But the reimagined concept is working well. Those stores are doing better than the non-reimagined ones. But of course, we have to make sure every restore, reimagined remodeled store or if it's not reimagined, it's just a typical Truworths store remodeling. It has to exceed our weighted average cost of capital in terms of the marginal returns. So we are quite strict with that. And Office, you know about a lots going on with Office. This is a picture of some of the new reimagined stores. This one in i'langa Mall. This is Irene in Gauteng Mall, The Grove. And this is the new Identity mega store in Gateway doing nicely. This is in the U.K., Office, Milton Keynes, all these new stores. The returns are way above our weighted average cost of capital, and they've all been significantly much better than they used to be in the old store context. I'm not going to talk a lot about the environmental and sustainable program because you can look at it yourself, but we follow the following 7 United Nations Sustainable Development Goals. We focus on these 7. There are many more, but these are the ones we feel are most relevant to us. And so we've got quite a large fund for charitable work and for sustainability work, both inside our business and external. Inside, of course, carbon disclosure, climate change, et cetera, and external charitable support. So there's big funds for that. In governance terms, we've appointed a new independent non-exec director from 1st of October. We are looking -- we continuously refresh our main board, and we're still busy doing that, and we'll continue to do that. We try and keep the experienced non-execs involved in our business because of their knowledge, experience of the business. I know there's a debate then as to their independence, but we feel their contribution is significant. But then there are -- there's a lot of new non-execs we bring in to learn from and replace them over time. Of course, there's the same discussion about my own succession and that of Sarah, Manny and the executives throughout the business. A lot of work goes into that, and we think we've made good progress there. Our B-BBEE score has improved significantly. I think we are on level 4 now, and we used to be Level 8, not even a few years ago. New auditors in place. It was a difficult transition as these things really are, but now it's running smoothly. And once again, we ranked in the top 10 of the EY Excellence in Integrated Reporting awards. It's been the 17th consecutive year, and we are by far the only JSE-listed company to achieve this acknowledgment because we've been ranked in the Excellent category before they had a top 10 and in the top 10 since 2003, every single year. Outlook, well, sales were up by 6.3% group, 4.6% in Truworths, 13.5% in Office. I do caution that it was not driven specifically by markdown or anything in this -- to the 7-week period. But still, it is the sale time when all of our competitors on sale and we're on sale. So we're not yet sure in South Africa what the winter will be like. We now end of February, it starts getting colder in South Africa from March, April, May. And then you finish the season very short in South Africa, June. In the U.K., it's other way around, as you know. And again, they're also full of not just Office. I mean, the whole of U.K., there's promotional activity in the first 2 months. So we'll have to see what happens in the next 4 months for the year and thereafter. and growth in trading space up by 1%. Office U.K. significantly more. I don't want to go into this. Truworths Africa, you know the story. I've sort of spoken to it all throughout the presentation. And similarly, I've spoken about Office, but you can read it in your own time. And I'm going to now end the presentation and revert to questions.

And I'm going to refresh. Sarah and Manny and Reon also have the questions on their screens. So the first one is, I won't say the name of it is, what was the internal inflation in H1? And what do you see inflation for the full year in South Africa -- about 1% or the past and future. Is that right, Sarah?

Yes, that's right.

Okay. What drove the recovery in revenue growth in South Africa in the first 7 weeks -- the second half? Was it promotion driven? What is the outlook for gross margin in the second half? So that I've really just mentioned that it's -- I don't know. I mean, the first -- you've got to know January, February, I say it to the analysts all the time, July, August, you can't tell well. You've got your own promotional activity, but then you've got competitive. And also, July, August is transitional time. It's freezing cold in South Africa. January, February, although we call it winter 1, it's actually boiling hot. So you can't really tell properly for the first 7 weeks. But yes, it was more positive, and we're pleased about that. Gross margin, it's all going to be about whether or not sales are reasonable. I mean, in the next couple of months or reasonable, let's just say, better than it's been in the last 6 months in Truworths and Office hopefully retains its growth plans. And then the gross margin, we managed stock well. It should be -- it should improve again. Will you open credit taps going forward? I think I've told you we sort of cleaned up the book, and it's really looking good. That means you don't have to open up the credit taps because what happens in practice is the scores are better because the book is healthier. And therefore, the customers as they get better, they are entitled to more credit based on the scorecards. So we won't open it up in the literal sense, but it will improve because of what we are saying about the economy if it's that. Are you doing share buybacks? I've answered that. The new potential benefits of the new DC in the Western Cape, I think I'm going to quickly give Sarah a few seconds just to talk about that in terms of the work she's doing on replenishment, the value equation and the aspiration and how the DC fits into that.

Yes. Thanks, Michael. So the DC, obviously, one of the key reasons why we felt the DC was such a critical investment for us for the future was the fact that it gave increased replenishment opportunities, many more volumes of replenishment lines and of course, being able to part allocate the merchandise. So in -- obviously, coming off the back of a more difficult trading season, the merchant teams have been really looking at detail of where there are opportunities for us to improve our ranges. So we've been looking at a different way of product tiering within each of our brands, which plays into more volume product that then utilizes the replenishment and part allocation capabilities of the DC. So we are hoping that this is going to really assist with driving sales. Obviously, the DC is still in a go-live test phase. So the full potential of this will only really emerge going through the year ahead. We're not sure exactly when, but it is definitely an opportunity.

So the next question is interesting because it talks about the markdown. But I've told you that there won't be -- well, there was more markdown. That's why the margin is lower, but the stock will be clean. So there isn't really an issue with that. The stock levels are fine and will be fine by the end of March. It's already fine. Office U.K. continues to be a star performer. Please explain how it is possible to achieve operating margins more than double that of your competitors. It reminds me of the question when I first listed, God knows how long ago, 30-something years ago, in 1998, the analysts said to me then, and I don't think they've ever stopped saying it, your margin is too high, how do you manage it? Well, in Office, it's the same thing. The margin is high because we manage stock well. We manage expenses frugally, and we are extremely concerned with capital expenditure and working capital management, and we do that well. So the formula when it works, works well. So I don't know if what the others do. And remembering because of the way we work, Office works extremely closely with Truworths. So although they're in different continents, the sharing of infrastructure of Truworths predominantly is significant in Office. It leans a lot on the Truworths infrastructure. So there's -- if you think about it, it's a diversification. It's sort of a head office and there is extra expenses in Office because of where it is and how it works and the brands and the product. But nevertheless, there's also a lot of similarities and sharing of expenses. Cost savings from the new DC be reinvested in price to use to safeguard improve gross margins. I think we are trying -- I don't think we're trying to improve gross margin. We want it to be stabilized at the standard that it was. We would like to see the one that's just dropped now as a blip and not a long-term trend. But I don't think the DC is necessarily going to improve gross margins as much as improved sales. I've tried to explain the Truworths South African underperformance in the clothing market by talking about the sales of attractive products, aspirational product in tough times. I'm trying to see here. The next question is possible acquisitions in the U.K. in line with Office, which has been a strong performer, but we're also looking in South Africa. Could you elaborate a bit on this? And what would you be looking at specifically locally? I also wanted to clarify that you'd want to be more share buybacks if you can't find suitable acquisitions. So that -- yes, that's what I said. Look, locally, there are businesses that are aligned with the purpose in our business philosophy in South Africa. but they've got to be for sale, and they've got to be ones that is at a price. And so that is attractive to us. So at the moment, there's nothing in the short term that we are imagining is going to happen, even though there are targets we would be keen to become involved in. We're not looking to diversify outside our purpose. So we are a fashion business, and we want to remain that way. In the U.K., you can imagine it's focused on sneakers and shoes. So obviously, in the U.K., if we could get into a clothing business that was a good brand that had the same customers that buy our sneakers, then the back part of the operation would be very -- it would be a very appealing thing for us. So again, there are targets, but nothing imminent. And yes, you are correct. If we carry on generating cash and nothing imminent happens, and we've got enough money to pay for the CapEx in Office, particularly and the requirements of Truworths, then sure, we would do share buybacks and be more aggressive in a low share price like we were before. The next question, I'm going to give to Manny. It's about the -- when I spoke about South Africa consumer credit Index, which is improving that whole thing about TransUnion, does this mean your credit approval rates should be going up over the next few quarters? Manny, can I let you handle that?

Yes. Thank you, Michael. Yes, I think as consumers' credit health improves in South Africa, naturally, we would tend to open more accounts if we targeted those account holders. So if credit health improves, I would think that our approval rates in credit would go up.

Thank you, Manny. Then the next question is that one that I have spoken about, but it's about the credit sales of 70%. So it says peers have shown increased appetite to grow credit sales. TransUnion says things are improving as we've just heard. Yet our credit sales have been tapered. Why is this? Why have you not been more aggressive growing credit sales to support revenue growth? That's a good question. It's a strategic thing. It's like do we -- how far do we want to go? We took a decision right or wrong, I'm not sure. We feel it's correct that if we look at the long term, and we ensure that we get ready for what we hope will be an upturn, the best position would be to have the healthiest possible book and take out the relative risk that we have taken -- that we've been prepared to take in the past. So we've sort of reduced our credit risk, have tightened in anticipation of having a clean book, hoping the credit environment improves. So that does mean that if in the next 2 years, that TransUnion Index is above 50%, if I translate it as literally as that and the economy grows, let's say, 1%, 1.5%, 2%, it does mean that our credit book should perform particularly well over the next 2 years. And is anything else I can refer here to other people. Sarah, do you want to -- or Manny or Reon, do you want to -- you've also got access to these questions. Are there any you're looking at that are not repeat that you think you would like to answer? There is one while you're looking, so you too can concentrate the review, but just try and find them. But I see there's one here. Where do you think Office could succeed if you opt to expand into Europe? That is a very difficult question because the truth is that in Office per se, and I'm living at Ireland, expanding into Europe means the brands would have to support us in that endeavor. And at the moment, we are low exposed and we only had some stores in Germany, which were closed. So I don't think there's easy access into Europe with Office. But if we had an acquisition of a U.K. business in clothing, let's say, that was allied to Office. And it was possible to expand that into Europe, maybe into department stores or whatever, then that is an opportunity. So that's how I think it might happen. Sarah, Reon, Manny, do you want to comment on any questions?

Michael, there was one here about the risks of -- to the new DC of go-live and really, is it a systems risk or something else? And we've been testing the new DC since, I would say, late November. all the way through to now. And we've started to go live quite slowly. We initially just shoes initially, and we have some merchandise going through it. But the existing DC remains operational. And so should something happen to this new DC, we switch back to the original. So we will have a backup DC going forward, which is great. We've never had that before. But we are quite cautious in our approach to bringing on new merchandise that gets distributed via the new DC. And we are ramping up slowly week by week. And at some stage in the near future, I think we'll have 100% on, but the old DC stays operational.

The next one, there's a question about kids. That performed particularly badly. And I think that, that is an issue. We had a bad run in some parts of our kids. It's not emporium, by the way. It's just the kids department. Some of them are the kids-specific emporium. Some are in Kids Emporiums within Truworths and some are stand-alone kids, mainly Kids Emporiums. But Sarah can talk to that in a second. There were some product problems that she can talk to in some areas, which I know they're dealing with. But Sarah, I'll let you talk to it.

Thanks, Michael. Yes, we were obviously disappointed by the performance of the kids area. This has been an area of such growth for Truworths over a number of years. And we've spent a lot of time reviewing any issues that we might have had because there definitely were some product issues in certain brands. And I think here, we feel there's opportunity for the price tiering and product tiering that I spoke to earlier with looking at really improving some of the value for money offering within the kids. The range is incredibly broad when you add the brands together within the emporium. And we think within that, there's an opportunity for us to focus on maintaining excellent quality, but by focusing a little bit on driving some volume of key best-selling products, we can improve the value offering and the price -- entry price points in the Kids Emporium, which we think is going to make a difference, we hope. Thank you.

And just to add to that, there's a question about the last quarter of summer or October, November, December, particularly in November, December. And why did we do so badly in that quarter because it was a tough quarter. Well, look, at least part of it, quite an important one is the case because it's so big over that period of time, especially late November, December. So a portion of that is that. The rest is many of the other reasons I've spoken about. There was another question here that I thought was interesting that this big one, Manny, I don't know if you or Reon want to talk to this, the credit -- it talks about the credit markets, the cash sales under-indexing credit sales in South Africa over the past period in trade and despite the clearance activity. Do you want to try and talk to that?

I can do that, Michael, and Reon can chip in. Is this the question around the 70% sales in credit and in relation to other retailers opening up? And has that affected.

No, this person says, can we speak to cash sales under-indexing credit sales in South Africa over the past -- over the post period end trade. I don't even know if that's true. So I'm not sure but -- and this despite the clearance activity. So I mean, Reon or you or Manny, I'm not sure if we can answer that question because I'm not -- it sounds news to me.

Michael, I mean, I can give it a bash. I guess. I mean when you do -- we have the ability to communicate with our account holders and of course, our loyalty base, but there are many cash customers that we don't communicate to because we don't have the details. And so when there's promotional activity, you communicate, of course, to your credit base and you communicate to the loyalty customers that you feel are likely to shop. But there's a big chunk of people you don't communicate to. So that can cause an under-indexing in cash sales relative to credit sales.

Thanks, Manny. And then it's just past 2. So I am going to end, but there's one more question I want to answer. How much is MTO of Office sales currently? MTO is our own brand in Office. So remember, I think, Sarah, you can correct me, but in fact, I don't necessarily want to even disclose it. But years ago, it was much higher when we bought the business. And over the years, it declined to a very low percentage. I don't think we've disclosed what it is. Reon would know better, so they're shaking their heads saying we didn't. But let me just say this. It's a low percentage. It's under 10%, but it is increasing. And it is a marathon, not a sprint, which is, as you know, our underlying philosophy of everything we do in our business. But I do believe over the next 5 years, it will continue because it has in the last 12 to 18 months, steadily been improving from a low base. And I do believe it will continue to grow. Sarah is very involved in it with the teams there. They're an excellent team, the MTO team. And I do believe cautiously and steadily, it will continue to improve, but I'm not disclosing the percentage. I'm going to end off now because it's 2 minutes past 2, and we said we'd end by 2. But again, you all know the Investor Relations, Reon, just tell me the e-mail address, I always forget.

Yes, it is [email protected].

If you want to send us an e-mail, we'll try and answer within 12 to 24 hours at most, sometimes quicker than that. So if you have any questions we haven't adequately answered, please send those questions to us, and we'll respond quickly. And then if there's still a need, we will meet you virtually or physically in person. So thank you, everybody, for attending our half year results presentation. Hopefully, we'll have more positive things to talk about in August, September. But we -- our belief is it's a marathon, not a sprint, stick to our business philosophy, yet have strategies that are innovative and hell a flexible to take into account current and future circumstances. Thank you very much, and I thank my colleagues, Manny, Sarah and Reon.