Truworths (TRU) – Credit retail in an era of low interest rates

We are more concerned about the impact that a period of long-term low interest rates may have on Truworths’s credit business. We assess the long-term cost of accounts and conclude that TRU would need a repo rate of at least 5.5% for its credit business to breakeven. A sustained period of low interest rates may compel the company to be more discerning in credit granting, which could hamper sales growth. Alternatively, it may cross-subsidise the credit business which would require higher GP margins. The repo rate is currently at historic lows, and with the National Credit Act’s prescribed limits linked to the repo rate, we believe this may be the first time credit providers will face a situation where the cost of running a credit business could be higher than the interest income for an indefinite period. In our view, the dramatic scaling down of Office in concerning and could impact its future prospects. Office’s online business needs the support of physical stores to promote its presence and brand in the marketplace, and the reduction in the store footprint will also diminish the appeal of the “Click and Collect” option for customers.