The answer lies in focus

What makes a shopper step into one store and not the other? More important, what is it about a particular store that encourages shoppers to spend more? Of all the apparel retailers - which have released disappointing post-Christmas updates - Truworths is evidently closest to getting it right.

Sales increased by 7% (15%, if you include newly opened stores) for the first 26 weeks of the financial year to end-December. By comparison, sales at Foschini grew 0,4% (4,3% including new stores) between October and December. At Mr Price, the same three months delivered growth of 5,2% (14,6%). And Woolworths' half-year results show sales of clothing and general merchandise up by 4,7% (7,3%).

"It is very simple," says Nedcor Securities analyst Syd Vianello. "Truworths reads fashion better than anyone else. Its closest competitor, Foschini, has misread the fashions. And Woolworths seems to be going up-market again, which I'm not sure is the correct route."

Sanlam retail analyst Andrew Kingston notes, "Truworths is also smaller, more nimble and better targeted. Foschini is broader, with sporting goods and homeware in the mix, but is not as good at execution as Truworths."

For Truworths CEO Michael Mark the answer lies in focus. "We have hundreds of buyers and all of them are buying for one customer - the youthful (but not necessarily young) woman who wants high-quality fashion at good prices. I know it sounds trite - but everyone here is very clear on what we stand for."

Getting the business fundamentals right has never been more important. Overall retail sales have slowed from 11% year-on-year growth to zero in a few months, says Stats SA. "We all knew the market was going to slow down," says Kingston, "but I think many retailers were caught when it came so quickly."

Price inflation is now creeping into the clothing sector, which for the past three to four years has experienced deflation. Inflation ranges from 3% (Foschini) to 9% (Woolworths). Says RMB Asset Management's Evan Walker, "If you factor in these figures, you will find that sales volumes did not increase. Instead, price increases drove revenue gains."

Mark denies that the inflation is self-induced. "The market is too competitive for that." Instead, he says, the days of cheap clothes from China are ending. "Inflation is creeping into the Chinese economy, there are labour shortages in the textile industry and the Chinese government's tax subsidies are declining."

Managing price increases against the need to maintain sales volumes will be a delicate balancing act this year.

However, the high interest-rate environment is on the side of the retailers. Because debt levels on in-store cards have increased and repayments slowed, interest income from these cards has increased, partially offsetting slowing sales.

Last year Truworths and Foschini increased their lending rate to 23,5%/year from 20%, while Woolworths increased its rate to 25,5%. "That's an immediate gain of 3,5%," says Vianello. "So even if bad debt has increased by 1% to 1,5%, there will still be an interest yield."

It's not certain this will flow to the income statement. "If [retailers] are funding the books internally with equity - as Truworths, Foschini and Mr Price are - then there is no cost attached to extra income," says Vianello. Woolworths funds with debt, and higher borrowings could offset the interest-rate gains, he says.

Truworths has followed the example of Edgars four years ago by inviting its 2m account holders to convert from six-month interest-free payment plans to 12-month interest-bearing plans. "Allowing people to extend their credit helps you get sales upfront," says Walker. "But it's an artificial lift, difficult to maintain."

Truworths expects a difficult year. "We have to be speedy adapting to trends, bold when it comes to new concepts, but still run the business along conservative lines," says Mark.

Article via I-Net-Bridge