Truworths (TRU) – Credit retail pays off

TRU delivered strong results for FY22 as its businesses rebounded after the pandemic. Truworths Africa is showing good credit sales growth and we believe that its continued focus on credit retail, while other competitors have shifted to more cash retail, can be a competitive advantage in this challenging market. The inflationary environment could leave consumers cash-strapped and Truworths’ credit offering could be an enabler for sales. The stability of Truworths’ GPM over time is impressive, with the standard deviation of its GPM over the past ten years considerably lower than its peers. While GPM may be at a peak, the rising interest rates could result in strong growth in interest income on its debtor book in FY23 and FY24, in our view.

Office UK performed well but is structurally much smaller than the business TRU acquired in FY16. Its store base and turnover have almost halved since FY16, and the rationalisation will continue in FY23. We think the high OPM achieved in FY22 may moderate in the period ahead.

TRU’s capex will spike over the next two years, as it builds a new distribution centre in Cape Town. However, with its low gearing, the higher capex and the growth of its debtor book should not put too much pressure on the balance sheet, in our view. There is also the potential to sell its two existing distribution centres.