Truworths (TRU) – Resilient credit retail

We think Truworths SA’s market-leading topline growth despite high inflation demonstrates the low price elasticity of its credit offering. While the spike in TRU’s debtor book in 1H23 may be concerning, we show that it represents only a 1.5% CAGR since the pre-Covid 1H20 period. TRU has become the market leader in credit apparel and homeware sales in South Africa, where we calculate its market share as one of the five largest retailers in this category increased to 33.3% over the past five years. TRU’s credit sales of R9.3bn surpass TFG SA (R8.7bn) and far outstrip those of WHL, MRP and PPH (around R3.5bn each). The rise in debtor costs is a function of the growth of the book, and we believe the higher interest yield on the book should offset most of these increases. We also think that TRU’s ECL provisioning since the implementation of IFRS 9 may be conservative, as it tended to be much higher than actual bad debt incidences in subsequent periods. Although TRU’s cash holdings decreased and gross debt increased due to higher working capital requirements, its gearing is still low. Management’s strategy to rationalise Office space in the UK has resulted in improved trading densities, with average store sales of GBP1.8m, compared to GBP1.5m pre-pandemic. TRU’s loadshedding risk exposure will be mostly to topline growth, as consumers could shift spending away from discretionary retail to backup power products. It should face limited cost pressures, as its stores are not energy intensive and can be run off inverters and batteries.