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    Truworths update hits shares

    Investors discarded Truworths stock on Thursday, sending the share price down more than 8% in intraday trade, after the clothing retailer released a business update that drove home the severity of the constraint on consumer spending.
    Picture:
    Picture: Sunday Times

    Truworths, led by Michael Mark, said sales in its first 18 trading weeks declined by 1% to R4.4bn compared with the year earlier. This excluded its acquisition of UK shoe chain Office. Including Office, sales increased by 39% to R6.2bn.

    Truworths’ share price closed 5.54% lower at R66.97.

    Barclays Africa Group investment analyst Chris Gilmour said the update was well below expectation.

    "I haven’t been that bullish on Truworths. Discretionary spending has come under immense pressure. Food inflation has a lot to do with that. The more you have to spend on food, the less you have to spend elsewhere," said Gilmour.

    Gilmour described the update as incredibly poor. He said while Truworths was a quality and not expensive company, the economic challenges in SA and the UK were unlikely to improve anytime soon.

    "I find it difficult to get enthusiastic about the company other than in the longer term. Almost without exception, apparel retailers — other than Foschini — have been struggling. They find themselves navigating in an extremely tight position.

    "If you believe the drought will abate then you could argue that there could be more money for consumers to spend. But I find it unlikely," said Gilmour.

    A series of forecasts predict rising inflation to contribute to a sharp slowdown in the UK economy in 2017. The rise in inflation, the forecasts say, will put a squeeze on household spending. At home, Statistics SA data showed that retail sales in August grew at 0.2%, the slowest pace since June 2014.

    Local economists expect the stagnation in retail sales to persist into the new year.

    Sasfin Wealth senior equity analyst Alec Abraham said he expected retailers in general to release unimpressive data in terms of sales volumes.

    "We’ve been saying for quite some time that consumers are under strain but it appears as though that strain is intensifying. People are spending on what they need to and cutting from everything else".

    Abraham said apparel retailer Edcon, for example, had reported a slowdown in full-year sales volumes. The slow down had accelerated significantly in the company’s first-quarter update.

    "The declines in sales volumes for retailers are likely to pick up with inflation. People don’t have money. I was expecting a bad number from Truworths but, to be brutally honest, I didn’t expect it to be that bad. The decline they reported is really ugly," said Abraham.

    Truworths brands include Truworths, Truworths Man, Daniel Hechter, Inwear, Identity and LTD.

    Combined with Office, the retailer showed strong progress in moving from credit to cash sales. Its overall credit sales fell to 49% from 69% while cash sales jumped 130%.

    But excluding its UK acquisition, credit sales remained at about 70%, causing the group’s trade receivables book to increase by 6% to R5.7bn. Production inflation in the period averaged 16%, higher than rivals Woolworths and TFG.

    With Robert Laing

    Source: Business Day

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