Truworths’ (TRU) weak 1H25 results were mostly due to an uncharacteristically sharp drop in TRU SA gross margins. In the past, management was adept at responding to market conditions and maintaining GPM even if turnover growth slowed dramatically (for example, during the COVID-19 pandemic). We think that with a clean stock base, Truworths should be able to restore its GPMs.
Our analysis of TRU’s debtors book reveals that average debtor balances remain well controlled, reducing its credit risk. The low growth in the book should also reduce the risk of higher write-offs in the period ahead. We are concerned, though, that the decline in young adults’ share of employment may weigh on the growth of the book.
Office continues to excel, and we think top-line growth will be supported by its rapid store growth. The increased store sales contribution could enhance its GPM, but we think its exceptional OPM may moderate over time as its infrastructure expands.
We highlight TRU’s excellent record of cash returns to shareholders. Over the past six years, TRU paid dividends of R10.3bn (on par with WHL and MRP), and conducted share buybacks worth R3.2bn (on par with WHL). Despite being considerably smaller than its peers in terms of turnover, TRU’s total payments to shareholders were the highest in the sector.