Truworths – bad day at the Office

• South Africa
• Brexit, Clothing, Mr Price, Retail, The Foschini Group, Truworths, UK
• August 19, 2020

The Office is a UK comedy starring Ricky Gervais that has brought tears of joy to many, but the UK shoe business that shares a name with the show has brought tears of sadness to Truworths.

It hasn’t been a happy time on mud island for many South African corporates. The 2016 Brexit referendum caused immense pain for the likes of Famous Brands (who acquired Gourmet Burger Kitchen) and lesser-known businesses like Texton Property Fund.

Intu Properties has been the most high-profile corporate failure, entering bankruptcy and taking South African shareholders along with it as the UK’s retail mall industry collapsed financially during lockdown.

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Truworths will feel aggrieved about the timing of their acquisition of Office. Concluded in 2015 before the Brexit nightmares started, R5.5bn of shareholders’ money flowed to the UK and far less will flow back. This is partly thanks to the tough trading conditions in recent times but is especially due to the destruction that lockdown has caused in clothing retailers worldwide.

Woolworths is in serious trouble with David Jones in Australia. Brait has had a complete nightmare with New Look in the UK. This problem really isn’t unique to Truworths.

Nearly R2.8bn in impairments

Yes – half the original purchase price of Office is being impaired by Truworths. Ouch.

It could get worse. They need to save the business with sweeping cost cuts as the UK market gets to grips with its worst economic performance in 41 years. Before you feel a sense of schadenfreude as an ever-suffering South African, it’s worth noting that the UK economy shrank only -2.2% in the last quarter to break that 41-year record.

Our economy will fall more than -7% this year. The candle is burning on both ends for Truworths as the company is heavily reliant on credit sales to South African consumers.

Online is big business in the UK

The UK is a hotbed for online shopping. Online participation (online sales as a % of total retail activity) was estimated at around 18% in 2018 (already high by global standards) and grew to a third of total sales during lockdown.

The trouble with online shopping is that retailers struggle to make a profit from it. The costs of “last-mile” delivery and other logistical challenges quickly offset the benefit of paying cheaper rent for a warehouse vs. a shiny store in a mall. High online participation is only helpful for the largest online retailers that operate at scale. The rest just lose money.

As retailers figure out how to navigate the UK’s economic issues and compete profitably in the online market, Truworths will need to pull a rabbit out of the hat to avoid further pain to shareholders from this European adventure.

Shareholders can only wish for a returns policy

The only returns at Truworths have been at the clothing customer service desk. The Truworths share price is down 65% over 5 years and 35% in 2020.

The Foschini Group (TFG) is down 31% over 5 years and a similar amount in 2020. In other words, TFG’s share price performance has been flat in the build up to lockdown.

TFG’s performance has been well ahead of Truworths but still pretty awful for shareholders. There were obviously peaks and troughs over this time which allowed traders to make (or lose) money depending on how well they timed the market.

Mr Price? Similar story. Down 38% over 5 years and 29% in 2020.

There has simply been no joy for investors in this sector. I’m not sure there are any reasons to believe that the next 5 years might be better. The most interesting one to watch will be The Foschini Group as they try to make something of the acquisition of Jet from Edcon.

Aah yes, Edcon. That needs no further discussion.

To close with an adaptation of the famous line from George Orwell’s Animal Farm:

“All sectors are risky, but some are riskier than others”