Truworths Africa’s main categories achieved low growth over the past five years, with ladieswear losing 130bps of market share, while menswear shed 300bps. We are concerned about the higher inventory levels at Truworths Africa, which could lead to higher markdowns in FY25.
While its credit policies are prudent, with a low approval rate of 24%, the high volume of applications meant a record number of new accounts were opened in FY24, resulting in 31% of the debtor base being new accounts (this averaged 20-24% previously). This increases the risk of its book, in our view.
While management may have sound operational reasons for splitting the credit portfolio, we think the “side-pocketing” of some delinquent accounts distorts TRU’s debtor metrics in FY24. Our analysis shows that, on a comparable basis, the gross book grew by 5.7% y-y and debtor days may have risen from 228 to 249. The combined ECL provision rose to 24.5% (compared to the disclosed 20.3%). Our analysis suggests a worsening in its credit over the past year.
The rationalisation of Office resulted in a smaller, more profitable business. The improvement led to a R1bn impairment reversal, and we estimate it could still reverse a further R2bn in trademark impairments. We are concerned that management’s planned expansion of this chain may result in sales cannibalisation and lower trading densities. Benchmarking against a leading competitor suggests that Office’s OPM may trend down as it builds scale.