Truworths' in-store card boosts sales

Published: 05 March 2014

Truworths' in-store card which was launched in October 2013 has boosted the group's sales and contributed to cash generation, CE Themba Ndebele told an analysts briefing yesterday.

Retail sales and gross profit were little changed at $13.2 million and $6.8 million respectively, with margins of 51.7% vs 52.2%

"Without that contribution we would have recorded a negative sales growth," he said.

Over the period the in store credit card was in place - October to December 2013 it contributed 38.52% for Truworths and 32.14% for Topics in merchandise sales.

Ndebele said over the 3 months the average spent on the card per month was $220 which compared favourably to the usually average of $176 adding that "the spent on the card is driving sales in our business."

Trade and other receivables went down by 15.5% after 4 371 customers were moved to the in-store card and those accounts are now on the books of Truworths' banking partners, CABS.

The movement has also resulted in positive cash flows generated by operations of $2 million.

Ndebele added that "the cash flow statement shows the release of cash is now coming from the release of the debtors. We believe that is the model for the future in this country because internationally no retailer runs their own book in-house."

The credit card sales were 21.2% of total in Truworths and 18.5% in Topics.

An additional 5 000 customers will be moved to the card system for another $5 million and by end of June management expects to have utilised a total of $10 million.

Commenting on the operating environment Ndebele underlined the depressed consumer spending arising from the lack of liquidity. That has caused inconsistent debt servicing with negative impact on sales, "because if you don't service your account we just stop selling to you."

The business had to reschedule some accounts and that had negative impact on sales.

However the debt restructuring saw the company recording growth in interest received.

He said the most reliable payer in this economy is government while companies in the private sector have not been paying salaries consistently and that trend is also noticeable in sales and repayment of credit facilities.

Slowdown in sales, he added, resulted in more clearance sales thereby negatively impacting on gross margins.

"We had an improved buying margin of 3.5% but it was eaten up by mark down costs of 3.3%," said Ndebele.

There were markdowns in December something which the business had not done before but it was done so that the operations would not be caught up with stock as we move into winter

Trade expenses increased by 6.1% but reduced to only 2.5% excluding depreciation and trade receivable costs

Occupancy costs grew 8.6% but also went down to only 1.8% excluding non-comparable store costs.

"We have been waiting to see that stabilization in that cost," he said.

Normal rent growth averaged 5.2%, and there was a significant reduction in electricity costs since because of the installation of prepaid meters on some store sites.

Employment costs recorded a 1% reduction but excluding non-comparable store costs and bonuses, comparable costs increased by 8.3%.

"There was a 6% increase in basic salaries due to provision for the increase of 7.87% pending finalisation of the award."

Trading margin was 8.1% down from 11.3% while EBITDA margin went down to 17.5% from 18.1%.

In a depressed environment mark downs tend to increase and Ndebele warned that GP margins in forthcoming periods are expected to be lower than current unless the environment dramatically improves.

Inventory increased by 31.9% because the business stocked up in school uniform and it proved to be the right strategy for Topics and Number 1 stores as they saw sales volumes grow.

"While the uniform market has not increased, there was a shift away from traditional cash purchases to credit as the liquidity situation worsened."

Another inventory growth driver was introduction of new cosmetic ranges, he added.

There was a slowdown in sales in November and December "because we didn't sell according to plan."

"Our merchandise cycle is 12 months and if things go wrong you don't just wake up and cancel."

On traded payables Ndebele admitted that they were not efficient but also "we are now so reliant on imports."

With the instability of the Rand a lot of suppliers in South Africa are reducing credit terms to avoid carrying the exchange risk while the local supply base is very limited, he said.

On sales participation he said the 6 months scheme contributed 59.9% (H1:13 79.5%) in Truworths and 71.1% in Topics (H1:13 90.6%).

Lay bye sales increased in Number 1 Stores to 33.6% from 23.8%.

Overall sales participation saw Topics contributing 50.6% down from 52.6% while Truworths and Number 1 Stores weighed in with 34.8% and 14.6% from 34.4% and 13% respectively.

Credit to total sales was 73.6% vs 75% last year and this includes the 4 731 clients who are now on the card.

Overdue amount to sales was 30.4% vs 15.3% but goes down to 22.1% on a like for like basis as it includes the benefit of accrued interest.

Net bad debts written of was $173 000 vs $15 000 and the provision increased to $561 000 in line with anticipated worsening credit quality.

"We are disappointed about the decline in EPS of 7% to 0.26 cents but we had to make necessary provisions so that we don't have to make write offs in forthcoming periods," said Ndebele.

Going forward the focus is to manage the balance sheet for cash flow generation.

Giving a trading update he said January 2014 was a fairly reasonable trading month while February was the most difficult month since dollarization.

"If we achieve the same turnover we achieved last year in the next half we will pat ourselves on the back because we can't claw back lost volumes by hiking prices in this environment," he said in conclusion.
- zfn

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