TRU delivered strong HEPS growth in 1H22, aided by high GP margins and low expense growth. Truworths Africa’s GPM margin improvement was impressive, and we calculate that, adjusted for the civil unrest stock losses, its GPM would be a record high 57.3%. We think the GPM may have been aided by the supply chain shortages, which reduced the base for markdowns.
We think the demand for TRU credit is encouraging as it affirms the quality of its product offering. Also, TRU’s credit provides a defensive moat against the threat of international online retailers such as Shein. Its trade receivable costs remain low, and our analysis sheds light on the components driving this expense line and the profitability of the book. Although management maintains TRU credit is an enabler of sales as opposed to a profit centre, we believe persistent shortfalls would require higher gross margins to subsidise the book.
Office reported strong sales growth in 1H22, but the turnover is structurally lower than pre-pandemic levels due to its stores rationalisation program. Our analysis shows that there have been minimal sales transfers to remaining stores following store closures, which suggests that an expansion of the Office store base will be required to meaningfully grow the business beyond a niche operator.