GROUP INTERIM RESULTS FOR THE 26 WEEKS ENDED 30 DECEMBER 2018

Transcription

1 GROUP INTERIM RESULTS FOR THE 26 WEEKS ENDED 30 DECEMBER 2018

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4 SOUTH AFRICA ECONOMIC ENVIRONMENT Continued challenging trading environment GDP growth remained subdued Disposable income growth under pressure due to relatively higher fuel and energy prices and VAT rate increase Relatively weaker and highly volatile Rand Continued high levels of unemployment Political and consumer uncertainty ahead of 2019 general elections Power outages to further impact retail sales and consumer confidence 4

5 UNITED KINGDOM ECONOMIC ENVIRONMENT Extremely tough retail environment Company Voluntary Arrangements in 2018 increased by more than 50% 125 retail companies went into administration Over fashion retail stores closed Retail footfall down 2.6% Growth in sales contributed mainly by online, now accounting for 20% of all UK retail sales Uncertainty remains ahead of 29 March 2019 EU exit Source: Deloitte Retail Trends 5

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7 GROUP TRADING OVERVIEW Weak top-line growth owing to deteriorating economic conditions Gross margin steady at 52.3% Well managed costs across the Group Headline earnings per share down 5% Dividend cover maintained at 1.5 times Strong balance sheet reflected in 9% growth in net asset value per share Continued strong cash generation Group in net cash position at Dec 2018 due to timing of creditors and tax payments IFRS 9 adoption resulted in an increase in the doubtful debt provision 7

8 GROUP PERFORMANCE AGAINST TARGETS Dec 2018 Actual Jun 2019 Targets Gross margin (%) Operating margin (%) Return on equity* (%) Return on assets* (%) Inventory turn* (times) Asset turnover* (times) *Annualised and impacted by seasonality between the first and second half of the financial period 8

9 GROUP FINANCIAL PERFORMANCE Dec 2018 Dec 2017 Change on prior period % Retail sales (Rm) Gross margin (%) Trading profit (Rm) (4) Trading margin (%) Diluted HEPS (cents) (5) Dividend per share (DPS) (cents) (5) Cash generated from operations* (Rm) Net asset value per share (cents) * Dec 2018 positively impacted by timing of creditors and tax payments 9

10 GROUP SUMMARISED INCOME STATEMENT Dec 2018 Rm Dec 2017 Rm Change on prior period % Sale of merchandise Cost of sales (4 857) (4 783) 2 Gross profit Other income (3) Trading expenses (3 830) (3 713) 3 Trading profit (4) Interest and dividends received (21) Operating profit (9) Finance costs (40) (133) (70) Profit before tax (5) Tax expense (599) (627) (4) Profit for the period (5) Decrease mainly due to: Restructuring of Group s South African funding arrangements Growth in accounts opened post the November 2015 amendments to the maximum prescribed interest rates under the NCA Adoption of IFRS 9 Decrease due to restructuring of Group s South African funding arrangements in June

11 GROUP DPS AND DILUTED HEPS (cents) Compound growth rates: DHEPS: Dec: 5-year 1%, 3-year (4%) Compound growth rates: DPS: Dec: 5-year 3%, 3-year (3%) Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 DPS DHEPS 11

12 GROUP RETURN ON EQUITY (ROE) AND RETURN ON CAPITAL (ROC) (%) Average: ROE: Dec: 5-year 36.4%, 3-year 33.3% Average: ROC: Dec: 5-year 51.6%, 3-year 47.7% Dec 2014* Dec 2015* Dec 2016* Dec 2017* Dec 2018* * Annualised ROE ROC 12

13 GROUP RETURN ON ASSETS AND ASSET TURNOVER Return on assets (%) Average: Return on assets: Dec: 5-year 30.6%, 3-year 28.0% Average: Asset turnover: Dec: 5-year 1.2 times, 3-year 1.2 times Asset turnover (times) Dec 2014* Dec 2015* Dec 2016* Dec 2017* Dec 2018* 0.5 * Annualised Return on assets Asset turnover 13

14 GROUP STATEMENTS OF FINANCIAL POSITION Dec 2018 Rm 14 Dec 2017 Rm Change on prior period % Property, plant and equipment Goodwill Intangible assets Other non-current assets Cash and cash equivalents Trade and other receivables (6) Inventories Other current assets Total assets Total equity Non-current liabilities (37) Current liabilities Total equity and liabilities

15 GROUP CAPITAL MANAGEMENT Net (cash) / debt Dec 2018 Dec 2017 Net (cash) / debt to equity % Net debt Net debt to equity % Group Rm (1 076) (10) Group, normalised* Rm Truworths Rm (1 117) (10) Office m * Creditors and tax payments were made after the current period-end compared to December 2017 when payments were made before the prior period-end 15

16 GROUP CAPITAL MANAGEMENT (CONTINUED) Dividends Interim dividend per share decreased 5% to 249 cents Financial position Financial position remains strong with net asset value per share up 9% to cents Since the inception of the share buy-back programme in 2002, 96 million shares have been repurchased at a total cost of R3 billion at an average price of R31 per share 16

17 GROUP TRADING SPACE Dec m 2 Dec m 2 Change on prior period % Truworths Office (2.7) Total

18 GROUP DIVERSIFICATION RETAIL SALES TRUWORTHS OFFICE GROUP R7 620 m R2 871 m R m CASH:ACCOUNT SALES (%) South Africa 97% Rest of Africa 3% United Kingdom 93% Rest of Europe 7% South Africa 71% UK and Europe 27% Rest of Africa 2% TRUWORTHS OFFICE GROUP R7 620 m R2 871 m R m Account 70% Cash 30% Cash 100% Account 51% Cash 49% 18

19 GROUP DIVERSIFICATION (CONTINUED) PRODUCT MIX TRUWORTHS OFFICE GROUP R7 620 m R2 871 m R m Clothing and accessories 89% Footwear 10% Homeware 1% Footwear 100% Clothing and accessories 65% Footwear 35% STORE LOCATIONS TRUWORTHS OFFICE GROUP 814 stores 153 stores 967 stores South Africa 95% Rest of Africa 5% United Kingdom 88% Rest of Europe 12% South Africa 80% UK and Europe 16% Rest of Africa 4% 19

20 GROUP CASH FLOW ANALYSIS (Rm) # Impacted by timing of creditors and tax payments. If creditors and tax were paid before the period-end, the net cash increase for the period would have been approx. R400 million. (37) (157) (49) (688) (212) 18 (360) # Cash EBITDA* Working capital movements Interest and dividends received Finance costs Tax paid Capex maintenance Free cash flow Dividends paid Capex expansion Other Net cash increase before loan repayments Loans repaid Net cash increase for the period * Earnings before interest, tax, depreciation and amortisation 20

21 GROUP E-COMMERCE 9% of Group retail sales New truworths.co.za e-commerce website launched in February 2018 Delivery to store (Click & Collect) or to chosen address 99%+ order fulfilment rate achieved to date truworths.co.za is generating the turnover of a medium-sized Truworths store Website profitable within first year Constant evolution and improvement to the website Brands available online include: Online sales increased 7% Comprising nearly 33% of retail sales 101 stores are able to fulfil online orders through the direct despatch channel (December 2017: 82 stores), improving the availability of stock that can be ordered for next day delivery Latest enhancements includes additions of new wish list, personalised product recommendations and home pages, geolocation technology and increased availability of inventory Sales improved by addition of multi-currency pricing to office.co.uk Further integration of the store and online channels through launch of in store look up functionality on the website 21

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23 TRUWORTHS TRADING OVERVIEW Retail sales increased 2% Gross margin improved marginally to 55.6% (Dec 2017: 55.5%) Profit before tax decreased 3% Continued strong cash generation Inventory turn of 5.8 times (Dec 2017: 5.7 times) More efficient funding structure implemented in June 2018 Active account growth benefiting from outcome of affordability court case Lay-bys and e-commerce sales contributing positively 23

24 TRUWORTHS FINANCIAL PERFORMANCE Dec 2018 Dec 2017 Change on prior period % Sale of merchandise (Rm) Gross margin (%) Trading profit (Rm) (1) Trading margin (%)

25 TRUWORTHS RETAIL SALES GROWTH ANALYSIS Retail sales Rm Retail sales growth % LFL store growth % Product inflation/ (deflation) % Unit growth: Comp stores % Unit growth: Non-comp stores % Dec (2) 2 2 Dec-17 * (3) (2) (1) 4 Dec (3) 16 (19) 3 Dec Dec (1) 6 (7) 6 * Compared to weeks 2 to 27 (4 July 2016 to 1 January 2017) of the 2017 financial period 25

26 TRUWORTHS MERCHANDISE INFLATION TREND Merchandise inflation (%) ( 2) ( 4) 2012 Summer 2013 Winter 2013 Summer 2014 Winter 2014 Summer 2015 Winter 2015 Summer 2016 Winter 2016 Summer 2017 Winter 2017 Summer 2018 Winter 2018 Summer 2019 Winter 26

27 TRUWORTHS DIVISIONAL RETAIL SALES Dec 2018 Rm 27 Dec 2017 Rm Change on prior period % Truworths ladieswear (1) Truworths designer emporium * (1) Truworths ladieswear emporium (1) Truworths menswear # Truworths kids Other^ Truworths emporium Identity Truworths retail sales YDE agency sales (4) * Daniel Hechter Ladies, Ginger Mary, Glamour, LTD Ladies and Earthaddict # Truworths Man, Uzzi, Daniel Hechter Mens and LTD LTD Kids, Earthchild and Naartjie ^ Cosmetics, Cellular, Truworths Jewellery, Office London (South Africa) and Loads of Living

28 TRUWORTHS TRADING SPACE Dec m 2 Dec m 2 Truworths Identity Uzzi Loads of Living Earthchild and Earthaddict Naartjie Office London Kids emporium (standalone) Naartjie and Earthchild Total excluding YDE YDE Total % Change on prior period

29 TRUWORTHS NUMBER OF RETAIL LOCATIONS Dec 2018 Dec 2017 Stores Departments within stores Total locations Stores Departments within stores Total locations Truworths Identity Uzzi Earthchild Earthaddict Truworths Man Naartjie YDE Loads of Living Office London Daniel Hechter LTD* Ginger Mary * Includes LTD Kids 145 (Dec 2017: 122) departments 29

30 TRUWORTHS CHANGE IN NUMBER OF STORES Stores Dec 17 New stores opened Stores closed Stores Dec 18 Truworths (5) 347 Identity (3) 258 Uzzi 50 1 (4) 47 Earthchild and Earthaddict 42 1 (4) 39 Truworths Man 37 - (2) 35 Naartjie 27 - (4) 23 YDE Office London Loads of Living Naartjie and Earthchild Kids Emporium (standalone) Daniel Hechter LTD Ginger Mary Total (22)

31 TRUWORTHS REST OF AFRICA CORPORATE STORES Retail sales Dec 2018 Rm Retail sales Dec 2017 Rm Change on prior period % Retail sales Dec 2018 LC'm Retail sales Dec 2017 LC'm Change on prior period % Number of stores Dec 2018 Number of stores Dec 2017 Namibia (11) N$101 N$114 (11) Botswana (3) P42 P44 (5) 8 8 Swaziland E53 E Mauritius Rs33 Rs Lesotho M13 M Zambia (35) ZMW 9 ZMW12 (25) 3 7 Kenya KSh38 KSh42 (10) 2 2 Ghana # - 7 (100) GHȻ - GHȻ3 (100) - - Total # The Ghana stores ceased trading on 3 December

32 TRUWORTHS SALES DENSITIES TREND (R/m 2 ) Compound growth rates: Sales density: Dec: 10-year 1%, 5-year (1%), 3-year (3%) Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec

33 TRUWORTHS GROSS PROFIT TREND Gross profit (Rbn) 5.5 Compound growth rates: Gross profit: Dec: 5-year 5%, 3-year 0% Average: Gross margin: Dec: 5-year 55.3%, 3-year 55.4% Gross margin (%) Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 Gross profit Gross margin 10-33

34 TRUWORTHS TRADING EXPENSES Dec 2018 Rm Dec 2017 Rm Change on prior period % Depreciation and amortisation Employment costs Occupancy costs Trade receivable costs Other operating costs (12) Trading expenses * * Excluding foreign exchange losses of R0 million in 2018 and R76 million in 2017, trading expenses grew 6%. 34

35 TRUWORTHS ANALYSIS OF TRADING EXPENSES Depreciation and amortisation Capital expenditure of R241 million (Dec 2017: R195 million) in the period Excluding non-comparable stores, depreciation and amortisation increased 4% 10% increase Employment costs Excluding non-comparable store and other costs, employment costs increased 4% 9% increase Occupancy costs Trading space increased 1% Excluding non-comparable store and other costs, occupancy costs increased 5% Comparable store rentals (excluding turnover rent) increased 4% 6% increase 35

36 TRUWORTHS ANALYSIS OF TRADING EXPENSES (CONTINUED) Trade receivable costs Excluding the IFRS 9 stage 3 interest reclassification (R52 million), trade receivable costs increased 9% Net bad debt decreased 5% Gross bad debts decreased 3% and bad debt recoveries increased 6% Doubtful debt allowance decreased from 19.0% * at Jun 2018 to 18.8% (Dec 2017: decreased from 12.7% at Jun 2017 to 12.4%) of gross trade receivables IFRS 9 and growth in book resulted in a R110 million charge to the income statement (Dec 2017: R33 million) Collection and other trade receivable costs increased 4% Net cost of the book showed a deficit of R170 million (Dec 2017: R79 million). The increase on Dec 2017 is due to lower interest received and the higher doubtful debt allowance charge in the current period 1% increase Other operating costs Excluding foreign exchange losses in the prior period (R76 million) other operating costs increased 5% Management remains focused on cost containment 12% decrease * IFRS 9 adopted with effect from commencement of the current period 36

37 TRUWORTHS TRADING PROFIT PERFORMANCE Trading profit (Rbn) Compound growth rates: Trading profit: Dec: 5-year (1%), 3-year (6%) Average: EBITDA margin: Dec: 5-year 32.0%, 3-year 31.0% Average: Trading margin: Dec: 5-year 21.2%, 3-year 19.7% Margins (%) Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 Trading profit EBITDA margin Trading margin 5-37

38 TRUWORTHS CAPITAL EXPENDITURE Store renovations and development Computer infrastructure and software Land, buildings and refurbishment Actual Dec 2018 Rm Actual Dec 2017 Rm Planned Jun 2019 Rm Actual Jun 2018 Rm Motor vehicles Distribution facilities Total

39 TRUWORTHS CASH FLOW ANALYSIS (Rm) # Impacted by timing of creditors and tax payments. If creditors and tax were paid before the period-end, the net cash increase for the period would have been approx. R250 million. (26) (129) (46) (688) (195) (302) # Cash EBITDA* Working capital movements * Earnings before interest, tax, depreciation and amortisation Interest and dividends received Finance costs Tax paid Capex maintenance Free cash flow Dividends paid Capex expansion Other Net cash increase before loan repayments Loans repaid Net cash increase for the period 39

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41 OFFICE LEADERSHIP CHANGES Lorenzo Moretti (48) CEO Appointed CEO October 2018 More than 25 years experience across all aspects of global retail Held various roles within Nike for 5 years Previous experience includes Gap, Tesco and M&S Kerry van der Merwe (42) CFO Appointed CFO October 2018 More than 18 years retail experience 15 years of Truworths Group experience Joined Office in June 2016 Responsible for Finance, Human Resources, Information Technology, Properties Lorenzo s contribution to Office to date includes: Entrenching the Office Business Philosophy and Values Renewed focus and energy to the business New initiatives as a result of a deep understanding of brands 41

42 OFFICE TRADING OVERVIEW Retail sales decreased by 3% to 157 million Like-for-like retail sales decreased 3% on the prior period, with declining standalone store LFL retail sales being partially offset by growths in concession store and e-commerce retail sales Decrease in gross margin to 44.0% (Dec 2017: 44.7%) primarily due to a shift in the full price/markdown mix E-commerce sales increased 7% to 51 million (Dec 2017: 48 million), comprising 33% (Dec 2017: 30%) of retail sales Inventory turn of 3.0 times (Dec 2017: 3.2 times) Strong cash generation with cash generated from operations at 21 million * Net debt to equity reduced to 1% * (Dec 2017: 10%) * Impacted by timing of creditors payments 42

43 OFFICE FINANCIAL PERFORMANCE Dec 2018 Dec 2017 Change on prior period % Retail sales ( m) (3) Gross margin (%) Trading expenses ( m) EBITDA ( m) (21) Operating profit ( m) (22) Operating margin (%)

44 OFFICE RETAIL SALES AND STORES BY COUNTRY Retail sales Dec 2018 m Retail sales Dec 2017 m Change on prior period % Number of stores Dec 2018 Number of stores Dec 2017 United Kingdom (3) Germany (13) 8 8 Republic of Ireland United States of America Total (3) 153 * 159 * * Including 37 concession stores (2017: 39 concession stores) 44

45 OFFICE TRADING EXPENSES Dec 2018 m Dec 2017 m Change on prior period % Depreciation and amortisation (17) Employment costs Occupancy costs House of Fraser write-off Other operating costs (1) Trading expenses Excluding the House of Fraser write-off, trading expenses were unchanged 45

46 OFFICE ANALYSIS OF TRADING EXPENSES Depreciation and amortisation Capital expenditure of 1.1 million (Dec 2017: 1.9 million) in the period Decrease due to assets becoming fully depreciated and lower capital expenditure during the period 17% decrease Employment costs (unchanged) Excluding once-off costs, employment costs decreased 3% Occupancy costs Comparable occupancy costs remained unchanged 4% increase 46

47 OFFICE ANALYSIS OF TRADING EXPENSES (CONTINUED) House of Fraser write-off 0.7 million write-off due to House of Fraser entering administration Other operating costs Comparable other operating costs increased by 7% due to increased e-commerce spending to grow sales 1% decrease 47

48 OFFICE CASH FLOW ANALYSIS ( 000) # Impacted by timing of creditors payments. If creditors were paid before the period-end, the net cash increase for the period would have been approx. 8 million (613) (1 529) (156) (938) (3 174) # Cash EBITDA* Working capital movements Interest received Finance costs Tax paid Capex maintenance Free cash flow Capex expansion Net cash increase before loan repayments Loans repaid Net cash increase for the period * Earnings before interest, tax, depreciation and amortisation 48

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50 TRUWORTHS ACCOUNTS OVERVIEW South African credit market growing across all sectors (NCR report Q2 2018) Overall credit health under pressure with industry early defaults growing, which has driven the TransUnion Consumer Credit Index down to below 50, indicating deteriorating credit health Truworths in a different cycle with Good/Bad odds and 4+ cycle balance improving year-on-year and relative to our retail credit competitors (Principa data) Truworths accounts continue to appeal to the market with record application volumes, with the majority from applicants under the age of 30 With the increased volume of applications, predominantly from people under the age of 30, the overall credit risk approval rate decreased This was in-line with expectations as our strict credit granting criteria were maintained The net effect was a strong growth in the number of accounts opened and strong sales growth from new accounts Sustained improvement in collections operations and credit strategy have driven down the overdue percentage and reduced the net provision 50

51 TRANSUNION SA CONSUMER CREDIT INDEX Source: TransUnion, ETM, Macrobond Q CCI: Key facts and figures TransUnion SA Consumer Credit Index The index measures consumer credit health where 50 is the break-even level between improvement and deterioration. Data weighting in the TransUnion CCI Defaults and distressed borrowing 50% Household cash flow 35% Debt servicing cost 15% The TransUnion SA Consumer Credit Index (CCI) fell sharply from 50 in Q to 45 in Q The key driver of the decline is rising loan defaults. The proportion of total consumer accounts 3 months in arrears has been rising steadily since Q and in Q was around 13% higher than the 2017 lows. This trend has not been matched by a rise in distressed borrowing signals, however poor employment conditions, high fuel prices in Q4, weak income growth, and higher interest rates all appear to have taken their toll on consumer credit health. Accounts in early default (3 months in arrears) increased 10% year-on-year in Q4. There continues to be a lack of evidence of worsening. Household cash flow remained unchanged. Household debt servicing costs increased slightly during the quarter. The Reserve Bank hiked the repo rate by 25bps during Q Distressed borrowing (revolving credit utilisation) with revolving credit utilisation falling 1.3% y/y in Q3. Overall TransUnion consumer credit behaviour data nonetheless shows rising consumer stress. 55 Q Q Q

52 TRUWORTHS ACCOUNTS NEW ACCOUNT APPLICATIONS Age distribution (%) 30 Truworths appeals to the young market as ± 50% of account applicants are under 30 and ± 25% are under

53 TRUWORTHS ACCOUNTS NEW APPLICATIONS VS. ACCEPTANCE RATE No. of new account applications ('000) (%) Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 No. of new account applications ('000) Risk approved % Opened applications %

54 TRUWORTHS ACCOUNTS NEW ACCOUNT OPENINGS Opened accounts Strong growth in opened accounts Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

55 TRUWORTHS ACCOUNT SALES GROWTHS Accounts sales growth year-on-year Months on book 2015 % 2016 % 2017 % 2018 % 1 12 months 25 (17) months 2 20 (19) (5) months 1 (1) 13 (20) 36+months Positive for the future 55

56 TRUWORTHS ACCOUNTS SHOPPABLE ACCOUNTS No. of accounts Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

57 Good/Bad Ratio Year-on-Year Change TRUWORTHS TOTAL GOOD(0-1)/TOTAL BAD (2+) BALANCE RATIO Total Good(0-1)/Total Bad (2+) balance ratio for Truworths has improved, while the Industry deteriorated compared to same period last year % % Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 10% 5% 0% -5% -10% -15% IMPROVING DETERIORATING - -20% Y-on-Y % Change Industry Excl. Truworths Industry Excl. Truworths Y-on-Y % Change Truworths GROUP Truworths GROUP Source: Principa Excludes Edcon 57

58 4+ Cycle Balances % Year-on-Year change TRUWORTHS % OF BOOK BALANCE 4+ CYCLES DELINQUENT Truworths Total 4+ Balances improved while industry remained the same 18% 10% 16% 14% 12% 10% 8% 6% 4% 2% 8% 6% 4% 2% 0% -2% -4% -6% -8% DETERIORATING IMPROVING 0% -10% Source: Principa Excludes Edcon Industry Excl. Truworths Y-on-Y % Change Industry Excl. Truworths Truworths GROUP Y-on-Y % Change Truworths GROUP 58

59 TRUWORTHS ACCOUNTS STATISTICS Dec 2018 Dec 2017 Number of active accounts (000's) Change in number of active accounts (%) 4 (1) Gross trade receivables (before doubtful debt allowance) (Rm) Change in gross trade receivables (before doubtful debt allowance) (%) 1 - Account sales as a % of retail sales (%) Qualifying payment (%) Accounts opened to applications ratio (%) Active account holders able to purchase (%) Overdue values as a % of gross trade receivables (%)

60 TRUWORTHS ACCOUNTS STATISTICS (CONTINUED) Note Dec 2018 Dec 2017 Net bad debt as a % of account sales (%) Net bad debt as a % of account revenue 1 (%) Net bad debt as a % of gross trade receivables 2 (%) Doubtful debt allowance as a % of gross trade receivables 3 (%) Trade receivable interest as a % of gross trade receivables 4 (%) Notes 1. Account revenue includes account sales, trade receivables interest and annual account administration fee 2. Annualised Non-comparable information 3. Increase in doubtful debt allowance relative to prior period due to adoption of IFRS 9 4. Annualised and impacted by adoption of IFRS 9. Excluding the IFRS 9 interest reclassification, trade receivable interest as a % of gross trade receivables would have been

61 TRUWORTHS ACCOUNTS REGULATIONS National Credit Amendment Bill The Bill proposes, inter alia, debt relief for over-indebted consumers who earn less than R7 500 per month and have unsecured debt of less than R Eligible consumers will be able to apply for debt intervention and if their application is successful they could be granted anything from rearrangement of the debts to suspension of the credit agreements in part or in full for 12 months (which may be extended by a further 12 months) or even in certain instances the extinguishment of the debt after a period of time The Bill has met broad opposition and Truworths is using all available avenues to respond and comment on, both via the National Clothing Retail Federation of South Africa and individually Scenarios on the potential impact of the Bill have been considered in our forward-looking doubtful debt allowance 61

62 TRUWORTHS ACCOUNTS ACCOUNTING STANDARDS IFRS 9 Financial Instruments Effective from the 2019 financial period Significant changes include: Provision for lifetime expected credit losses in respect of stage 2 and 3 trade receivables Interest revenue on stage 3 accounts are reclassified from Interest Income to Trade Receivable Costs Transition date Transition date provision increased to 19% - increase in provision attributable to:» Provision for lifetime expected losses (stage 2 and 3)» Forward-looking information, taking into account economic and legislative outlook Increase in provision on transition date was processed through retained earnings Full transition disclosure will be included in June 2019 results 62

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64 STRATEGIC FOCUS AREAS Truworths focus areas New store concepts Merchandise E-commerce Lay-bys Supply chain Data-driven decision-making Brand marketing Group focus areas Truworths and Office continue to collaborate Investigate strategic acquisitions Office focus areas New store concept Marketing, customer engagement and loyalty Expansion and growth of e-commerce Supply chain 64

65 TRUWORTHS STRATEGIC FOCUS AREAS NEW STORE CONCEPTS Context: One of a kind EXPERIENTIAL concept store by TRUWORTHS An upmarket brand offering a collection of fashion, beauty and homeware Create a modern retail experience for the discerning female customer Elevate the Truworths offering and brand identity Aimed at capturing market share in the better-end segment by offering our higher LSM customer a range of products with unique appeal Create a space that is customisable by region and can be rolled out into better-end malls or more exclusive smaller retail environments Allows for easy experimentation with both products and mix First store to open in April 2019 in the V&A Waterfront, Cape Town 65

66 TRUWORTHS STRATEGIC FOCUS AREAS NEW STORE CONCEPTS (CONTINUED) ID Kids: Successfully piloted ID Kids range in 26 Identity stores in summer 2018 Rolling out to a large number of stores for summer 2019 Range is focused on the 2-8 year age group and covers both Girls and Boys collections Utilise the extensive in-house childrenswear experience; look and feel aligned with the DNA of Identity and is cool and fun New emporium concept: Launched refreshed emporium store concept Tygervalley store includes Loads of Living Enhancements to existing Ladies and Men s concept Other New Concept/s 66

67 TRUWORTHS STRATEGIC FOCUS AREAS MERCHANDISE Product life-cycle management (PLM) system Benefits include: Increased visibility for stakeholders, including management, across all stages of the range development process Focus on the customer by improving product quality Improve merchandising performance through improved margins and sourcing Support range growth by decreasing time-to-market Increase efficiency through better reporting, visibility and reduced redundancy Improved inter-departmental communication Maintain simplicity in terms of process and system integration as well as limiting disruption to the business 67

68 TRUWORTHS STRATEGIC FOCUS AREAS MERCHANDISE (CONTINUED) Merchandise management system Upgrade core merchandise operations management system New system provides flexible application with high functionality for future growth Leverage new features and improve omni-channel capabilities Improved integration with other systems (including point-of-sale, inventory management, e-commerce, pricing and finance) Replace legacy code customisations with best practice Facilitate future upgrades of point-of-sale and planning systems 68

69 TRUWORTHS STRATEGIC FOCUS AREAS MERCHANDISE (CONTINUED) Ladieswear range building review project Consider consolidation of certain sub departments within the Ladieswear portfolio Maintain the identity of our brands while enabling us to show clearly what Truworths stands for in terms of volume and promotional items Drive improved margins and value offerings through volume consolidation and bulk negotiations Buying process review Buying process reviewed to allow merchants to spend more time with product and maximise trade opportunities 69

70 TRUWORTHS STRATEGIC FOCUS AREAS E-COMMERCE New platform positions Truworths for e-commerce growth in South Africa Continue to add brands and enhance functionality and customer experience Omni-channel commerce allows customers to transact with Truworths in the manner they choose E-commerce model profitable from day 1, trading margin already exceeding that of stores Positive brand interactions reinforcing long-term relationship with customers Fashion delivery sub-project to go live in April 2019 Customer orders in store Fulfilment through e-commerce order management engine Currently evaluating best architecture for launch of Loads of Living and Identity websites in late 2019/early

71 TRUWORTHS STRATEGIC FOCUS AREAS LAY-BYS Lay-bys rolled out across the store portfolio in last quarter of calendar 2018 Lay-by payment option well received by customers Allows customer to select merchandise and pay off over three months Non-account customers who are unable to pay upfront can still buy Truworths merchandise Processed over lay-bys for more than customers since launch Lay-bys contribute approximately 1% of retail sales Average of 80% of lay-bys are fulfilled All lay-by customers are loyalty members and form part of a customer management strategy to encourage repeat purchases and cross-selling of accounts 71

72 TRUWORTHS STRATEGIC FOCUS AREAS SUPPLY CHAIN New distribution centre Aimed at meeting distribution requirements for the next 15 to 20 years Create capacity for all future unit processing, inventory capacity and storage requirements, including business growth, changes in allocation strategies, maximising replenishment opportunities, facilitating e- commerce growth and the ability to absorb new acquisitions Project commenced and estimated to run over three years at an estimated cost of R400 million R500 million Being built adjacent to current DC in Epping, Cape Town 72

73 TRUWORTHS STRATEGIC FOCUS AREAS DATA-DRIVEN DECISION MAKING Credit New account optimisation project complete and new credit strategies are live Credit authorisation and limit increase optimisation projects underway Merchandise Extensive engagement with specialist providers of artificial intelligence and machine-learning solutions to assist with various aspects of the merchandise process 73

74 TRUWORTHS STRATEGIC FOCUS AREAS BRAND MARKETING Integrated brand marketing Develop a consistent brand image for the emporium and constituent brands Determine a process and structure to communicate the brand image to entice customers with an aspirational and authentic portrayal of our brand DNA across all channels and customer touch points 74

75 OFFICE STRATEGIC FOCUS AREAS New store concept Store of the future concept to be launched in March 2019 in Office (Oxford Street) and June 2019 in Offspring (Selfridges) Marketing, customer engagement and loyalty Customer research and analysis exercise well under way Enhanced understanding of customer will be used to adapt customer approach Expansion and growth of e-commerce Ongoing enhancement of customer experience and transactional touch points, including new omni-channel payment options, improved click & collect and website redesign Supply chain Review of the current warehousing and distribution model to extract efficiencies 75

76 OFFICE HIGH IMPACT NEW CEO INITIATIVES Team motivated and re-energised by new CEO Offspring outperforming the marketplace and growing our position within our Offspring, making us a strategic global account with key partners Deep market research in progress to understand our Office muse and most profitable customers already redirecting our channel marketing and gaining traction Office and Offspring new websites launching in summer Refocusing of our own-brand buying and sourcing to improve sell through, differentiation and positioning within the marketplace Office to become an exciting and differentiated place for our customer to shop while managing tighter inventory positions New omni-channel capabilities landing throughout the year, improving service, multichannel conversion and productivity for both Office and Offspring 76

77 OFFICE HIGH IMPACT NEW CEO INITIATIVES (CONTINUED) Converting Greenford Warehouse to become a faster response digital hub for London and mainland Europe Continued closure of non-profitable and off-strategy retail, freeing up working capital to redirect to onstrategy locations and growth drivers Introduction of accessories to both Office and Offspring to drive basket size of associated products e.g. back to school/college bags Trial bigger, better and digitally-enabled store strategy in partnership with our key suppliers 77

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79 TRUWORTHS OUTLOOK Continued pressure on consumers Ongoing low economic growth, together with a weak labour market and high unemployment Retail spending expected to come under renewed strain in the months ahead from rising utility costs and uncertainty ahead of the country s general election in May Sales revenue expected to benefit from new e-commerce platform and layby offering in South Africa Positive factors for the medium term include: Continued improvement in health of the account portfolio Ongoing growth in both new and total accounts in good standing Strong cash flow and balance sheet Implementation of various strategic initiatives Trading space expected to grow 2% for full 2019 financial period Retail sales for the first 7 weeks of the second half of the 2019 financial period increased relative to the corresponding period in % increase 79

80 OFFICE OUTLOOK Fragile retail economy in UK will remain under extreme pressure amidst rising concerns over the faltering negotiations ahead of the end-march Brexit deadline Staff morale is high in the business despite the challenging environment Key strategic initiatives in the coming months that will drive future growth include: Store of the Future concepts in Office (Oxford Street) and in Offspring (Selfridges) Significant new developments in the highly successful e-commerce platform Trading space expected to decrease 5% for full 2019 financial period Retail sales for the first 7 weeks of the second half of the 2019 financial period increased in Sterling relative to the corresponding period in % increase 80

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82 DISCLAIMER This announcement contains certain forward-looking statements with respect to the financial condition and results of operations of Truworths International Limited and its group companies, which by their nature involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: global and national economic conditions; growth in trading space; interest rates; credit and the associated risks of lending; merchandise clearance rates; inventory levels and stock turn; gross and operating margins achieved; and competitive and regulatory factors. The Group does not undertake to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or otherwise. 82

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