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Unaudited Group interim report for the 26 weeks ended 27 December 2015
TRUWORTHS INTERNATIONAL LTD
REGISTRATION NUMBER: 1944/017491/06
JSE CODE: TRU
NSX CODE: TRW
ISIN: ZAE000028296
UNAUDITED GROUP INTERIM REPORT
FOR THE 26 WEEKS ENDED 27 DECEMBER 2015
Group Group
HIGHLIGHTS including Office excluding Office*
Sale of merchandise up 37% up 19%
Gross margin at 54.2% up at 55.3%
Operating margin at 29.3% up at 32.0%
Headline and diluted headline earnings per share up 21% up 16%
Adjusted headline earnings per share up 30%
Proposed interim cash dividend per share up 14%
* Prior to consolidating the results and financial position of Office, but including
the Group's investment in Office.
GROUP PROFILE
Truworths International Ltd (the company) is an investment holding and management
company listed on the JSE and the Namibian Stock Exchange. Its principal trading
entities, Truworths Ltd, Office Holdings Ltd and Young Designers Emporium (Pty) Ltd,
are engaged either directly or through subsidiaries, concessions, agencies or franchises,
in the retailing of fashion clothing and footwear apparel and related merchandise.
The company and its subsidiaries (the Group) operate primarily in South Africa,
the United Kingdom and the Republic of Ireland, and have an emerging presence in other
sub-Saharan African countries and Germany.
TRADING AND FINANCIAL PERFORMANCE
Group retail sales for the 26-week period ended 27 December 2015 (the period) increased
by 36% to R8.5 billion compared to the corresponding prior 26-week period ended
28 December 2014 (the prior period), with cash sales growth of 85% and credit sales
growth of 16%. Credit sales accounted for 60% of retail sales during the period.
Excluding the retail sales reported by the recently acquired Office Retail Group Limited
(Office), Earthchild and Naartjie businesses (the acquisitions), Group retail sales
increased by 15% to R7.2 billion, with cash sales growth of 16% and credit sales growth
of 15%. Comparable store retail sales for the period, which, by definition, exclude
those attributable to the acquisitions, increased by 10.2% (2014: decreased by 0.8%)
while product inflation averaged 9% (2014: 6%). Excluding the acquisitions, credit sales
accounted for 71% (2014: 71%) of retail sales.
Group sale of merchandise, which comprises Group retail sales and franchise sales less
accounting adjustments, grew 37% to R8.3 billion (2014: R6.1 billion).
Since the prior period-end, a net 46 stores were opened across all brands while the
retail footprint was boosted by the acquisitions, which added 224 stores (including
52 concessions operated by Office), resulting in an overall increase in trading space
of 11% (5% excluding the space attributable to the acquisitions). At the end of the
period the Group had 932 stores (including 52 concessions) (2014: 662).
Divisional sales 27 Dec 28 Dec % change
2015 2014 on prior
Rm Rm period
Truworths ladieswear 2 611 2 306 13
Truworths menswear 1 499 1 304 15
Identity 1 252 1 047 20
Office footwear 1 082 - N/A
Truworths designer emporium* 938 785 19
Truworths kids emporium** 517 262 97
Other*** 576 528 9
Retail sales 8 475 6 232 36
Franchise sales 5 5 -
Accounting adjustments (208) (187) 11
Sale of merchandise 8 272 6 050 37
YDE agency sales 163 165 (1)
* Daniel Hechter, LTD and Earthaddict.
** LTD Kids, Earthchild and Naartjie.
*** Cellular, Truworths Jewellery and Cosmetics divisions.
The Group's gross margin decreased to 54.2% (2014: 55.3%), principally due to the
acquisition of Office, which operates at a lower gross margin. The gross margin is,
however, still within the Group's current target range of 54% to 57% which range was
determined before the acquisition of Office. Excluding Office, the Group's gross margin
was level at 55.3%.
Trading expenses increased 36% to R2.8 billion (2014: R2.1 billion) and constituted
34.0% of sale of merchandise (2014: 34.2%). Excluding Office, once-off fees relating
to its acquisition as well as foreign exchange gains in both periods, trading
expenses increased 21%, mainly as a result of increases in employment costs of 30%
and depreciation and amortisation cost increases of 28%. The increase in employment
costs is primarily the result of the acquisition of Earthchild and Naartjie and the
additional costs of equalising flexi-staff benefits following ther amendment to the Labour
Relations Act. Excluding these items and non-comparable stores, employment costs increased
by 19%. Excluding non-comparable stores, depreciation and amortisation increased by 7%.
Included in other operating costs is R110 million (2014: R26 million) of foreign
exchange gains resulting from mark-to-market adjustments on forward exchange contracts as
well as the revaluation of inter-company loans to certain non-South African subsidiaries.
Interest received increased 19% to R604 million (2014: R508 million) due to the growth
in the book and two interest rate increases during the period. Operating profit increased
26% to R2.4 billion and the operating margin decreased to 29.3% (2014: 31.8%).
Excluding Office the operating margin increased to 32.0%.
Headline earnings per share (HEPS) and diluted HEPS increased 21% to 405.0 cents and
403.8 cents respectively. Adjusted HEPS, being HEPS adjusted to exclude the impact of
the once-off transaction costs related to the acquisition of Office increased 30% to 433.9 cents.
FINANCIAL POSITION
The Group's financial position remains strong, with net asset value per share increasing
by 16% to 2 037 cents (2014: 1 762 cents) since the prior period-end.
As a result of the acquisitions, goodwill and intangible assets increased to
R5.3 billion, subject to the finalisation of the Office purchase price allocation
(refer to notes 6 and 9 below).
Inventories increased to R2.7 billion at the end of the period. Excluding the inventory
of Office, Earthchild and Naartjie, and goods in transit, gross inventory increased 15%.
Excluding Office, inventory turn reduced to 5.4 times from 5.7 times in the prior period.
During the period the Group raised interest-bearing borrowings of R4.6 billion
(R4.3 billion in term loans and R300 million in revolving credit facilities) to fund
its operating activities and expensed R51 million in finance costs mostly relating to
these loans. The term loans are repayable over three, four and five years.
Included in non-current liabilities is a liability of R604 million in relation to the
put and call options over Office management's non-controlling shareholding in Office.
Excluding Office, the annualised return on equity was 41% (2014: 40%), the annualised
return on assets was 41% (2014: 40%) and asset turnover was at 1.3 times (2014: 1.3 times).
CAPITAL MANAGEMENT
During the period the Group raised interest-bearing borrowings of R4.6 billion to
fund its operating activities while using the cash generated from operations to fund,
inter alia, the Office acquisition and transaction costs (R3.5 billion) and dividend
payments (R713 million). Cash and cash equivalents increased by 3% to R2.5 billion at the
end of the period. The Group's net debt to equity ratio at the end of the period was 25%.
The targeted net debt to equity ratio is 45% to 50% for June 2016, excluding the impact
of a scrip dividend.
In order to provide for the possibility of another acquisition in 2017/2018 the Group's
medium-term targeted net debt to equity ratio is 25%. It is estimated that this ratio
could be achieved by the end of the 2017 reporting period through the offering of scrip
dividends (with a cash dividend alternative).
Capital expenditure of R503 million has been committed for the remainder of the
2016 financial period.
ACQUISITIONS
On 4 December 2015 the Group acquired an effective 88.9% stake in Office via a UK
resident and managed subsidiary of the Group at an enterprise value of £256 million
(on a 100% basis). The purchase consideration and acquisition costs were funded
through approximately R3.5 billion in cash from South Africa, while £86 million
in term loans and revolving credit facilities were incurred in the UK to refinance
Office's net debt at acquisition date. Refer to note 9 below.
CREDIT MANAGEMENT
Gross trade receivables in respect of the debtors book (Truworths, Identity and YDE)
grew by 15% to R6.1 billion. The growth in the book is attributable to Group credit
sales growing by 15.8% relative to the prior period. Excluding the retail sales
attributable to the acquisitions, credit sales contributed 71% (2014: 71%) to Group
retail sales for the period. At period-end 86% (2014: 86%) of the Group's active
account holders were able to purchase.
The Group's active account base has grown by 5% to 2.8 million accounts, despite a
decline in new account acceptance rates from 32% in the prior period to 29%.
The doubtful debt allowance as a percentage of gross trade receivables reduced to
12.8% (2014: 13.0%). Net bad debt as a percentage of gross trade receivables
decreased to 12.1% (2014: 13.3%) as a result of improved collections. The increase
in the monetary value of the doubtful debt allowance, together with an increase in
collection costs, contributed to trade receivable costs increasing by 15% to
R663 million (2014: R578 million).
The national credit regulator published regulations which came into effect during 2015
on the assessment mechanisms and procedures to be followed when opening new accounts
and increasing credit limits. Compliance with the regulations was dependent on
three key factors: store assessment and collection of physical documentation,
a sophisticated document management solution and extensive credit system changes
primarily to enable significant changes to affordability calculations and regulations.
The impact thus far has been a reduction in the new account acceptance rate from 32% in
the prior period to 29% in the current period. Given the current trend the Group expects
the rate to reduce further.
Prior to the new affordability regulations, cash sales grew by 26% and credit sales
by 18%. Subsequently cash sales grew by 28% while credit sales grew by 13%.
DIRECTORATE
As announced on SENS on 4 December 2015, Mr J-C Garbino resigned as a director of the
company with effect from that date.
OUTLOOK
The South African trading environment is expected to remain challenging during the
remainder of the 2016 financial period as consumers come under further pressure
from rising inflation, slow economic growth and interest rate increases. The Group
is well equipped to deal with the environmental challenges through its extensive
experience in managing the risk of its mainstream better-end fashion through its
proven merchandise design and buying processes, and managing the risk of credit
through the ongoing application of strategies and best of breed systems to ensure the
health of the debtors book.
Truworths retail sales (excluding Office) for the six weeks of trading since the
interim period-end increased by 16.8% over those for the comparable period in 2015
(excluding Earthchild and Naartjie, the retail sales growth was 13.1%). During the
six-week period cash sales increased by 30.9% and credit sales by 10.9%.
Office retail sales for the six-week period increased by 17.9% (in pounds) over those
for the comparable period in 2015 and 16.8% on a like-for-like basis with some
margin reduction.
Office is a highly attractive business with strong prospects which, under Truworths'
ownership, will be further enhanced. The business is well positioned in the fashion
footwear market with potential to expand into new stores in the UK and Germany in the
short to medium term and into other European countries in the medium to longer term.
Office's well-established e-commerce business will be a platform for category and range
extension. Ownership of Office enables the Group to further expand its operations
internationally, extend its product offering, benefit from currency diversification
and balance its future revenue streams between cash and credit sales.
The board remains committed to investing appropriately for longer-term growth, with
trading space planned to increase by approximately 4% for the 2016 financial period
(Truworths 4% and Office 5%), and by approximately 3% in the 2017 financial period
(Truworths 3% and Office 6%).
H Saven MS Mark
Chairman Chief Executive Officer
PROPOSED SCRIP DIVIDEND WITH CASH DIVIDEND ALTERNATIVE
The board of the company is proposing to declare an award in respect of the 26-week
period ended 27 December 2015 in the form of the issue of fully paid capitalisation
shares in the company, such award to be made from the share premium account, and to
the extent necessary the retained income of the company, to ordinary shareholders
reflected in the company's register on the record date (scrip dividend).
As an alternative to receiving the scrip dividend, the board is proposing that
ordinary shareholders of the company will be entitled, in respect of all or part of
their shareholding, to elect to receive a cash dividend of 270 (2015: 236) cents
per share, which cash dividend will be paid only to those ordinary shareholders who
elect it on or before the record date (the cash dividend alternative).
The number of ordinary shares in the company to which shareholders participating in
the scrip dividend will become entitled will be in the ratio that 270 cents
multiplied by a factor of 1.04 bears to the volume-weighted average price ('VWAP')
of the ordinary shares of the company on the JSE during the 3-day trading period
ending on a future date to be announced.
Full details of the proposed scrip dividend and cash dividend alternative,
the scrip dividend ratio and the record date, will be published in due course after
the required JSE and exchange control approvals have been obtained and the board
has formally declared the dividends.
By order of the board
C Durham
Company Secretary
Cape Town
18 February 2016
CONDENSED GROUP STATEMENTS OF FINANCIAL POSITION
Note at 27 Dec at 28 Dec at 28 Jun
2015 2014 2015
Unaudited Unaudited Audited
Rm Rm Rm
ASSETS
Non-current assets 7 108 1 427 1 876
Property, plant and equipment 1 542 1 001 1 053
Goodwill 6 5 008 90 346
Intangible assets 267 116 217
Available-for-sale assets 16 11 19
Loans and receivables 80 93 82
Deferred tax 195 116 159
Current assets 11 020 8 075 7 281
Inventories 2 679 954 1 074
Trade and other receivables 5 568 4 657 4 637
Derivative financial assets 73 26 13
Prepayments 205 15 95
Cash and cash equivalents 2 495 2 423 1 462
Total assets 18 128 9 502 9 157
EQUITY AND LIABILITIES
Total equity 8 536 7 382 7 504
Share capital and premium 570 453 551
Treasury shares 7 (782) (699) (770)
Retained earnings 8 503 7 451 7 533
Non-distributable reserves 245 177 190
Non-current liabilities 5 067 88 192
Interest-bearing borrowings 8 4 290 - -
Put option liability 10 604 - -
Post-retirement medical benefit obligation 60 54 57
Leave pay obligation 21 3 4
Straight-line operating lease obligation 36 31 36
Contingent consideration obligation 56 - 95
Current liabilities 4 525 2 032 1 461
Trade and other payables 3 374 1 457 1 302
Interest-bearing borrowings 8 346 - -
Provisions 153 38 54
Tax payable 652 537 105
Total liabilities 9 592 2 120 1 653
Total equity and liabilities 18 128 9 502 9 157
Number of shares in issue
(net of treasury shares) (millions) 419.1 419.0 419.0
Net asset value per share (cents) 2 036.7 1 761.8 1 790.9
Key ratios (excluding Office)
Return on equity* (%) 41 40 35
Return on capital* (%) 58 55 49
Return on assets* (%) 41 40 38
Inventory turn* (times) 5.4 5.7 4.7
Asset turnover* (times) 1.3 1.3 1.2
* Ratios at December have been annualised, and are presented based on the results
and financial position of the Group, prior to consolidating the results and financial
position of Office and excluding the Group's investment in Office.
CONDENSED GROUP STATEMENTS OF COMPREHENSIVE INCOME
Note 26 weeks 26 weeks 52 weeks
to 27 Dec to 28 Dec to 28 Jun
2015 2014 2015
Unaudited Unaudited % Audited
Rm Rm change Rm
Revenue 4 9 021 6 697 35 12 619
Sale of merchandise 8 272 6 050 37 11 290
Cost of sales (3 786) (2 706) (5 060)
Gross profit 4 486 3 344 34 6 230
Other income 140 136 259
Trading expenses (2 812) (2 068) 36 (4 116)
Depreciation and amortisation (141) (99) (221)
Employment costs (828) (566) (1 186)
Occupancy costs (726) (530) (1 102)
Trade receivable costs (663) (578) (960)
Other operating costs (454) (295) (647)
Trading profit 1 814 1 412 28 2 373
Interest received 604 508 19 1 063
Dividends received 5 3 7
Operating profit 2 423 1 923 26 3 443
Finance costs (51) - (6)
Profit before tax 2 372 1 923 3 437
Tax expense (681) (538) (977)
Profit for the period 1 691 1 385 22 2 460
Attributable to:
Equity holders of the company 1 683 1 385 2 460
Holders of the
non-controlling interest 8 - -
Profit for the period 1 691 1 385 2 460
Other comprehensive income/(losses)
to be reclassified to profit or loss
in subsequent periods 187 3 10
Fair value adjustment on
available-for-sale financial instruments - - 1
Movement in effective cash flow hedge (54) 1 1
Movement in foreign currency
translation reserve 241 2 8
Other comprehensive income/(losses)
not to be reclassified to profit or
loss in subsequent periods - - (1)
Re-measurement losses on defined
benefit plans - - (1)
Other comprehensive income
for the period, net of tax 187 3 9
Attributable to:
Equity holders of the company 159 3 9
Holders of the
non-controlling interest 28 - -
Other comprehensive income for the
period, net of tax 187 3 9
Total comprehensive income
for the period 1 878 1 388 2 469
Attributable to:
Equity holders of the company 1 842 1 388 2 469
Holders of the
non-controlling interest 36 - -
Total comprehensive income for
the period 1 878 1 388 2 469
Basic earnings
per share (cents) 401.7 334.5 20 591.2
Headline earnings
per share (cents) 405.0 334.5 21 593.8
Diluted basic
earnings per share (cents) 400.4 333.4 20 589.5
Diluted headline
earnings per share (cents) 403.8 333.4 21 592.1
Weighted average
number of shares (millions) 419.0 414.1 416.1
Diluted weighted
average number
of shares (millions) 420.3 415.4 417.3
Key ratios
Gross margin (%) 54.2 55.3 55.2
Trading expenses
to sale of merchandise (%) 34.0 34.2 36.5
Trading margin (%) 21.9 23.3 21.0
Operating margin (%) 29.3 31.8 30.5
CONDENSED GROUP STATEMENTS OF CHANGES IN EQUITY
Holders
Share Non- Equity of the
capital distribut- holders non-con-
and Treasury Retained able of the trolling Total
premium shares earnings reserves company interest equity
Rm Rm Rm Rm Rm Rm Rm
2015
Balance at the beginning
of the period 551 (770) 7 533 190 7 504 - 7 504
Total comprehensive income
for the period - - 1 683 159 1 842 36 1 878
Profit for the period - - 1 683 - 1 683 8 1 691
Other comprehensive income
for the period - - - 159 159 28 187
Dividends - - (713) - (713) - (713)
Premium on shares issued 7 - - - 7 - 7
Shares issued in terms
of the restricted
share scheme 12 (12) - - - - -
Share-based payments - - - 32 32 - 32
Acquisition of subsidiary - - - - - 432 432
Recognition of put
option liability - - - (136) (136) (468) (604)
Balance at
27 December 2015 570 (782) 8 503 245 8 536 - 8 536
2014
Balance at the beginning
of the period 368 (652) 6 774 152 6 642 - 6 642
Total comprehensive income
for the period - - 1 385 3 1 388 - 1 388
Profit for the period - - 1 385 - 1 385 - 1 385
Other comprehensive income
for the period - - - 3 3 - 3
Dividends - - (708) - (708) - (708)
Premium on shares issued 38 - - - 38 - 38
Shares issued in terms of
the restricted share scheme 47 (47) - - - - -
Share-based payments - - - 22 22 - 22
Balance at
28 December 2014 453 (699) 7 451 177 7 382 - 7 382
Cents per share: 2015 2014
Cash dividend proposed (2014: declared) in respect of the period 270 236
CONDENSED GROUP STATEMENTS OF CASH FLOWS
Note 26 weeks 26 weeks 52 weeks
to 27 Dec to 28 Dec to 28 Jun
2015 2014 2015
Unaudited Unaudited Audited
Rm Rm Rm
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flow from trading and cash EBITDA* 1 918 1 521 2 654
Working capital movements 146 (186) (476)
Cash generated from operations 2 064 1 335 2 178
Interest received 604 508 1 063
Dividends received 5 3 7
Finance costs - - (4)
Tax paid (112) (158) (1 099)
Cash inflow from operations 2 561 1 688 2 145
Dividends paid (713) (708) (1 698)
Net cash from operating activities 1 848 980 447
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment
to expand operations (187) (138) (266)
Acquisition of plant and equipment to
maintain operations (51) (35) (61)
Acquisition of computer software (24) (16) (53)
Proceeds on disposal of property,
plant and equipment 13 - 1
Net acquisition of businesses 9 (2 495) - (270)
Premiums paid to insurance cell - - (12)
Amounts received from insurance cell 4 - -
Loans repaid 2 6 19
Acquisition of mutual fund units - - (2)
Net cash used in investing activities (2 738) (183) (644)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on shares issued 7 38 65
Loans repaid (2 780) - -
Loans received 4 636 - -
Contributions to post-retirement medical
benefit plan asset - - (2)
Net cash from financing activities 1 863 38 63
Net increase/(decrease) in cash and
cash equivalents 973 835 (134)
Cash and cash equivalents at the beginning
of the period 1 462 1 588 1 588
Net foreign exchange difference 60 - 8
CASH AND CASH EQUIVALENTS AT THE REPORTING DATE 2 495 2 423 1 462
Key ratios
Cash flow per share (cents) 611.2 407.6 515.5
Cash equivalent earnings per share (cents) 439.9 360.8 642.9
Cash realisation rate (%) 139 113 80
* Earnings before interest received, finance costs, tax, depreciation and amortisation.
SELECTED EXPLANATORY NOTES
1 STATEMENT OF COMPLIANCE
The condensed Group interim financial statements for the 26-week period ended
27 December 2015 (interim report) have been prepared in compliance with
International Financial Reporting Standards (IFRS), the SAICA Financial Reporting
Guides as issued by the Accounting Practices Committee, IAS 34: Interim Financial
Reporting, the Companies Act (71 of 2008, as amended) of South Africa and the
Listings Requirements of the JSE.
The interim report does not include all the information and disclosures required
in the annual financial statements, and should be read in conjunction with the
Group's annual financial statements as at 28 June 2015.
The information contained in the interim report has neither been audited nor reviewed
by the Group's external auditors. The interim report has been prepared under the
supervision of DB Pfaff CA(SA), the Chief Financial Officer of the Group.
2 BASIS OF PREPARATION
The interim report has been prepared in accordance with the going concern and
historical cost bases, unless otherwise indicated. The accounting policies are
applied consistently throughout the Group. The presentation and functional currency
used in the preparation of the interim report is the South African Rand (ZAR)
(Rand) and all amounts are rounded to the nearest million, unless otherwise indicated.
3 ACCOUNTING POLICIES AND METHODS OF COMPUTATION
3.1 The accounting policies and methods of computation applied in the preparation
of the interim report are consistent with those applied in the preparation of
the Group's annual financial statements for the period ended 28 June 2015.
IFRS, amendments and International Financial Reporting Interpretations Committee
(IFRIC) interpretations not applicable to Group activities
Various new and amended IFRS and IFRIC interpretations have been issued and
are effective, however, they are not applicable to the Group's activities.
3.2 Basis of consolidation of financial results
The condensed Group interim financial statements comprise the interim financial
statements of the company and its subsidiaries and are prepared using uniform
accounting policies for like transactions and other events in similar circumstances.
Business combinations: Non-controlling interests
A non-controlling interest arising from a business combination, which is a
present ownership interest entitling its holders, in the event of liquidation,
to a proportionate share of the net assets of the entity in which they are
interested, are measured either at the present ownership interest's proportionate
share in the recognised amounts of that entity's identifiable net assets or at
fair value. The treatment is an accounting policy choice, is selected for each
individual business combination and is disclosed in the note for business
combinations.
26 weeks 26 weeks 52 weeks
to 27 Dec to 28 Dec to 28 Jun
2015 2014 2015
Unaudited Unaudited % Audited
Rm Rm change Rm
4 REVENUE
Sale of merchandise 8 272 6 050 37 11 290
Retail sales 8 475 6 232 11 644
Accounting adjustments* (208) (187) (363)
Franchise sales 5 5 9
Interest received 604 508 19 1 063
Trade receivables interest 542 459 969
Investment interest 62 49 94
Other income 140 136 3 259
Commission 65 65 119
Financial services income 34 31 61
Display fees 31 29 61
Lease rental income 7 4 7
Royalties 1 1 2
Insurance recoveries 1 2 6
Other 1 4 3
Dividends received 5 3 7
Total revenue 9 021 6 697 35 12 619
* Accounting adjustments made in terms of IFRS and generally accepted accounting
practice relating to promotional vouchers, staff discounts on merchandise purchased,
cellular retail sales, notional interest on non-interest-bearing trade receivables
and the sales returns provision.
26 weeks 26 weeks 52 weeks
to 27 Dec to 28 Dec to 28 Jun
2015 2014 2015
Unaudited Unaudited Audited
Rm Rm Rm
5 RECONCILIATION OF PROFIT FOR THE PERIOD
TO HEADLINE EARNINGS
Profit for the period, attributable
to equity holders of the company 1 683 1 385 2 460
Adjusted for:
(Profit)/loss on disposal of property,
plant and equipment (8) - 6
Impairment of financial assets 14 - 5
Other impairments 8 - -
Headline earnings 1 697 1 385 2 471
6 GOODWILL
Opening balance 346 90 90
Goodwill arising on acquisitions 4 382 - 256
Office 4 382 - -
Earthchild - - 243
Naartjie - - 13
Foreign exchange movements 280 - -
Closing balance 5 008 90 346
Goodwill acquired through business combinations is allocated to individual
cash-generating units and tested for impairment annually.
Goodwill arising on the acquisition of Office is based on the provisional allocation of
the purchase consideration to the identifiable assets and liabilities of Office, based
on the externally reviewed statement of financial position at the acquisition date
(refer to note 9 below). Finalisation of the purchase price allocation and the
process of asset and liability valuation will result in the recognition of additional
identifiable assets (including trademarks) and liabilities not currently recognised,
with a corresponding reduction or increase in goodwill arising on acquisition.
26 weeks 26 weeks 52 weeks
to 27 Dec to 28 Dec to 28 Jun
2015 2014 2015
Unaudited Unaudited Audited
Rm Rm Rm
7 TREASURY SHARES
Opening balance 770 652 652
Shares issued and held under the restricted
share scheme 12 47 118
Closing balance 782 699 770
8 INTEREST-BEARING BORROWINGS
Non-current liabilities 4 290 - -
Unsecured variable-rate long-term bank loans 2 600 - -
Secured variable-rate long-term bank loans 1 690 - -
Current liabilities 346 - -
Secured variable-rate revolving credit
banking facility 252 - -
Current portion of secured variable-rate
long-term bank loans 94 - -
Total interest-bearing borrowings 4 636 - -
Unsecured variable-rate long-term bank loans comprise R2.6 billion South African
Rand-based debt in the form of three separate unsecured facilities advanced to the
Group's main operating subsidiary, Truworths Ltd. These loans are repayable three
(R520 million), four (R780 million) and five years (R1 300 million) after inception
and bear variable interest at a margin of 1.85%, 2.05% and 2.25% respectively above
the three-month Johannesburg Interbank Agreed Rate (JIBAR). Three-month JIBAR at
the reporting date was 6.625% pa.
The secured variable-rate long-term bank loan comprises R1.7 billion UK Pound
Sterling-based debt in the form of a single facility of £80 million, advanced to the
Group's UK resident and managed subsidiary, Truworths UK Holdco 3 Ltd and secured
by a notarial bond over the assets of that company and its subsidiaries
(constituting the Office business). This loan is repayable over five years and bears
variable interest at a margin of 2.15% above the three-month London Interbank
Offered Rate (LIBOR). Interest on all long-term bank loans is paid quarterly in
arrears. Three-month LIBOR at the reporting date was 0.5% pa.
The secured variable-rate revolving credit facility comprises current drawdowns of
£11 million (against a total available facility of £20 million), has a five-year
tenor, requires drawdowns to be repaid at the end of each quarterly interest period,
and bears variable interest at a margin of 2.15% above LIBOR.
In terms of the company's memorandum of incorporation, its borrowing powers are
unlimited. The borrowing powers of the Group's main operating subsidiaries may be
limited by the company.
The Group has minimal risk of illiquidity as reflected by its substantial surplus
cash and unutilised gearing capacity. The Group utilises cash reserves and borrowings
to fund working capital and capital investment requirements. The Group also has a
South African based overdraft facility of R600 million and a revolving credit facility
of R350 million available in addition to the facilities set out above.
9 BUSINESS COMBINATIONS
Acquisition of Office Retail Group Ltd
With effect from 4 December 2015 the company acquired an effective 88.9% of the share
capital of Office via its UK resident and managed subsidiary, Truworths UK Holdco 1 Ltd,
thereby gaining control over Office and its subsidiaries. Office is the leading young
fashion footwear retailer in the UK and Republic of Ireland, with an emerging presence
in Germany. The remaining 11.1% non-controlling interest is owned by management of Office.
The Group (via Truworths UK Holdco 1 Ltd) has granted put options to Office management,
which holds this non-controlling interest. These options give the holders the right
to sell their shares in Truworths UK Holdco 2 Ltd in tranches at the end of the 2019,
2020 and 2021 financial years upon approval of the audited consolidated accounts of that
company for the respective years. The Group has determined that these put options
do not transfer a present ownership interest of those shares to the Group.
In addition, the Group has call options giving the Group the right to purchase those
shares on the same terms applicable to the put options.
In accordance with IAS 32: Financial Instruments - Presentation, when the holders of
a non-controlling interest have put options enabling them to sell their investment
in the Group, a financial liability is recognised in an amount corresponding to the
present value of the selling price (redemption amount). The counterpart of the
liability arising from these obligations is:
- on the one hand, the reclassification (reduction) of the carrying amount of the
corresponding non-controlling interest; and
- on the other, a reduction in the Group's share of equity by the difference between
the present value of the redemption amount and the carrying amount of the
non-controlling interest. This item is adjusted at the end of each reporting period
to reflect changes in the fair value of the put options and the carrying amount
of the non-controlling interest.
Office was acquired at an enterprise value of £256 million, which translated into an
equity value of £174.2 million after taking into account Office's net debt and other
adjustments. The purchase consideration of £174.2 million (on a 100% basis) was settled
through a combination of the Group's South African surplus cash and Office management
reinvesting a portion of the proceeds arising on the sale of their existing shares
in Office. The existing Office debt was refinanced through a UK-based term loan and
revolving credit facility. Acquisition costs of R129 million have been recognised
in profit or loss.
The cash portion of the purchase consideration settled from South Africa was fully
hedged by way of a forward exchange contract at a rate of R:£ of R21.77 and was
accounted for as a cash flow hedge. The hedging loss has been deferred in other
comprehensive income.
The purchase consideration was provisionally allocated to the identifiable assets
and liabilities of Office based on the externally reviewed statement of financial
position at the acquisition date as presented below. Due to the short period between
the acquisition date and reporting date, the Group has applied provisional accounting
in respect of all Office assets acquired and liabilities assumed. The purchase price
allocation is subject to further review for a period of up to one year from the
acquisition date. Additional identifiable assets (including trademarks) and liabilities
will be recognised upon completion of the purchase price allocation and the process
of valuing these assets and liabilities, with a corresponding reduction or increase
in goodwill. The balances at acquisition date were translated to South African Rand
at an exchange rate of R:£ of R21.44. A qualitative description of the factors
comprising goodwill will be disclosed once the purchase price allocation is complete.
The Group has elected to measure the non-controlling interest in Office at fair
value. The fair value of the non-controlling interest was determined based on a
discounted earnings technique using the same inputs as were used in calculating
the enterprise value.
Rm £'000
Non-current assets 437 20 355
Property, plant and equipment 405 18 882
Deferred tax 32 1 473
Current assets 2 761 128 778
Inventories 1 596 74 463
Trade and other receivables 157 7 313
Derivative financial assets 1 46
Prepayments 145 6 767
Cash and cash equivalents 862 40 189
Non-current liabilities 276 12 846
Landlord contributions 163 7 584
Provisions 113 5 262
Current liabilities 3 569 166 504
Trade and other payables 954 44 522
Interest-bearing debt 2 613 121 884
Derivative financial liabilities 2 98
Total identifiable net liabilities at provisional fair value (647) (30 217)
Purchase consideration transferred 3 303 154 065
Non-controlling interest at fair value 432 20 155
Total purchase consideration (equity value of Office) 3 735 174 220
Provisional fair value of identifiable net
liabilities assumed (647) (30 217)
Goodwill arising on acquisition 4 382 204 437
Purchase consideration settled in cash 3 357 154 065
Purchase consideration transferred 3 303 154 065
Hedged foreign exchange loss 54
Cash and cash equivalents acquired 862 40 189
Net cash outflow on acquisition 2 495 113 876
From the date of acquisition Office contributed R1.1 billion of revenue and
R114 million to profit before tax of the Group. It is not practicable to provide a
reliable determination of the revenue and profit before tax that would have been
derived from Office had it been acquired at the beginning of the reporting period,
given, inter alia, the short period since its acquisition, the adjustments that
would be required to convert preacquisition results reported in terms of UK GAAP to
results in terms of IFRS and changes to certain operating procedures in Office that
would give rise to further adjustments to these results.
10 PUT OPTION LIABILITY
The Group (via Truworths UK Holdco 1 Ltd) has granted put options to management in
respect of their non-controlling interest in Office. These options give the holders
the right to sell their shares in Truworths UK Holdco 2 Ltd in tranches at the end
of the 2019, 2020 and 2021 financial years upon approval of the audited consolidated
accounts of that company for the respective years. The Group has determined that
these put options do not transfer a present ownership interest of those shares to
the Group. The exercise price of these options is designed to approximate the fair
value of the shares on the exercise date, being a multiple of that company's
consolidated EBITDA (Office EBITDA) adjusted for net debt. The discount rate
applied in determining the present value of the liability is the 12-month LIBOR
plus 2.15 percentage points.
26 weeks 26 weeks 52 weeks
to 27 Dec to 28 Dec to 28 Jun
2015 2014 2015
Unaudited Unaudited Audited
Rm Rm Rm
Opening balance - - -
Additions through business combination 432 - -
Movements in non-controlling interest 36 - -
Profit for the period attributed to
non-controlling interest 8 - -
Changes in foreign exchange rates 28 - -
Change in fair value recognised in equity 136 - -
Closing balance 604 - -
The fair value of the put option liability is classified as a level three fair value
measurement, as certain inputs which could have a significant impact on the fair value
of the liability are not based on observable market data. These inputs include the
Office financial performance and the market valuation and positioning of fashion
footwear retail businesses in the UK. The interrelationship between these inputs are
likely to magnify the impact on the valuation.
Any changes in the fair value of the put option liability is recognised directly
in equity. Accordingly, changes in the valuation assumptions will not have any
impact on profit or loss.
A 10% increase or decrease in the acquiree's EBITDA over the estimates applied in
the current valuation will result in a £2.9 million (R66 million) increase or decrease
in the fair value of the liability. A one point increase or decrease in the EBITDA
multiple over the multiple applied in the current valuation will result in a
£4.5 million (R103 million) increase or decrease in the fair value of the liability.
11 SEGMENT REPORTING
The Group's reportable segments have been identified as the Truworths, Office and
Young Designers Emporium (YDE) business units. The Truworths business unit comprises
all the retailing activities conducted by the Group in Africa, through which the Group
retails fashion apparel comprising clothing, footwear and other fashion products,
other than by the YDE business unit. The Office business unit comprises the footwear
retail activities conducted by the Group through stores and concessions in the
United Kingdom, Republic of Ireland and Germany. The YDE business unit comprises
the agency activities through which the Group retails clothing, footwear and
related products on behalf of emerging South African designers.
Management monitors the operating results of the business segments separately for
the purpose of making decisions about resources to be allocated and of assessing
performance. Segment performance is reported on an IFRS basis and evaluated based
on revenue and profit before tax.
Consolidation
Truworths Office YDE entries Group
Rm Rm Rm Rm Rm
2015
Total third party
revenue 7 989 1 080 70 (118) 9 021
Third party 7 871 1 080 70 - 9 021
Inter-segment 118 - - (118) -
Depreciation
and amortisation 125 14 2 - 141
Employment costs 727 93 8 - 828
Occupancy costs 604 101 21 - 726
Trade receivable costs 663 - - - 663
Other operating costs 378 184 10 (118) 454
Interest received 602 - 2 - 604
Finance costs 45 6 - - 51
Profit for the period 1 595 74 22 - 1 691
Profit before tax 2 228 114 30 - 2 372
Tax expense (633) (40) (8) - (681)
Segment assets 13 736 7 704 258 (3 570) 18 128
Segment liabilities 5 556 4 092 54 (110) 9 592
Capital expenditure 252 8 2 - 262
Gross margin (%) 55.3 47.3 - 54.2
Trading margin (%) 23.2 11.2 40.7 - 21.9
Operating margin (%) 31.0 11.2 43.5 - 29.3
Inventory turn (times) 5.4* 2.4* - 5.4**
Credit:cash sales
mix (%) 71:29 0:100 28:72 - 60:40
2014
Total third party
revenue 6 655 - 67 (25) 6 697
Third party 6 639 - 67 (9) 6 697
Inter-segment 16 - - (16) -
Depreciation and
amortisation 97 - 2 - 99
Employment costs 559 - 7 - 566
Occupancy costs 510 - 20 - 530
Trade receivable costs 578 - - - 578
Other operating costs 290 - 9 (4) 295
Interest received 507 - 1 - 508
Profit for the period 1 363 - 22 - 1 385
Profit before tax 1 893 - 30 - 1 923
Tax expense (530) - (8) - (538)
Segment assets 9 371 - 244 (113) 9 502
Segment liabilities 2 202 - 31 (113) 2 120
Capital expenditure 186 - 3 - 189
Gross margin (%) 55.3 - - 55.3
Trading margin (%) 22.9 - 42.2 - 23.3
Operating margin (%) 31.3 - 44.3 - 31.8
Inventory turn (times) 5.7* - - 5.7*
Credit:cash sales
mix (%) 71:29 - 25:75 - 71:29
* Annualised.
** Annualised and presented based on the results and financial position of the Group,
prior to consolidating the results and financial position of Office.
2015 2014
Contribution to revenue Contribution to revenue
Rm % Rm %
Third party revenue
South Africa 7 651 84.8 6 460 96.5
United Kingdom 1 016 11.3 - -
Namibia 129 1.4 114 1.7
Botswana 52 0.6 38 0.6
Swaziland 46 0.5 36 0.5
Republic of Ireland 33 0.4 - -
Germany 31 0.3 - -
Zambia 17 0.2 13 0.2
Ghana 13 0.1 10 0.1
Mauritius 10 0.1 7 0.1
Lesotho 10 0.1 7 0.1
Nigeria 5 0.1 7 0.1
Kenya 3 0.0 - -
Franchise sales - Kenya 5 0.1 5 0.1
Total third party revenue 9 021 100.0 6 697 100.0
27 Dec 28 Dec 28 Jun
2015 2014 2015
Unaudited Unaudited Audited
Rm Rm Rm
12 CAPITAL COMMITMENTS
Capital expenditure authorised but not contracted:
Store renovation development 149 206 322
Buildings 166 - 170
Distribution facilities 158 - 163
Computer software and infrastructure 37 41 86
Head office refurbishment 7 12 21
Motor vehicles 4 4 5
Total capital commitments 521 263 767
The capital commitments will be financed from cash generated from operations and
available cash resources and are expected to be incurred in the remainder of the
2016 reporting period.
13 EVENTS AFTER THE REPORTING DATE
No event, material to the understanding of this interim report, has occurred
between the end of the reporting date and the date of approval.
14 SEASONALITY
Historically retail sales in the first half of the financial period have exceeded
those of the second half, because of the inclusion in the former of the Christmas
trading period. In the past five years the Group's first half retail sales have
ranged between approximately 53% and 55% of annual retail sales. These percentages
will change following the acquisition of Office, but the impact cannot be quantified
yet as Office has not yet been consolidated for a full reporting year.
15 RELATED PARTY TRANSACTIONS
Related party transactions similar to those disclosed in the Group's annual
financial statements for the period ended 28 June 2015 took place during the period,
with the exception of the following. During the period Truworths Ltd incurred once-off
costs relating to the acquisition of Office. These costs were incurred by
Truworths Ltd, the Group's main South African trading subsidiary, and on-charged to a
fellow UK-based subsidiary through which Office was acquired. The value of this
transaction was R110 million.
CORPORATE INFORMATION
TRUWORTHS INTERNATIONAL LTD
Registration number: 1944/017491/06
Tax reference number: 9875/145/71/7
JSE code: TRU
NSX code: TRW
ISIN: ZAE000028296
Company secretary
Chris Durham, FCIS, PG Dip. Adv. Co Law (UCT)
Registered office
No. 1 Mostert Street, Cape Town, 8001, South Africa
Postal address
PO Box 600, Cape Town, 8000, South Africa
Contact details
Tel: +27 (21) 460 7911 - Telefax: +27 (21) 460 7132
www.truworths.co.za
Principal bankers
The Standard Bank of South Africa Ltd
Auditors
Ernst & Young Inc.
Attorneys
Bernadt Vukic Potash and Getz
Edward Nathan Sonnenbergs Inc.
Spoor & Fisher
Webber Wentzel
Bowman Gilfillan
Sponsor in South Africa
One Capital Sponsor Services (Pty) Ltd
Sponsor in Namibia
Old Mutual Investment Services (Namibia) (Pty) Ltd
Transfer secretaries
In South Africa
Computershare Investor Services (Pty) Ltd
70 Marshall Street, Johannesburg, 2001, South Africa
PO Box 61051, Marshalltown, 2107, South Africa
Contact details
Tel: +27 (11) 370 5000 - Telefax: +27 (11) 688 5248
www.computershare.com
In Namibia
Transfer Secretaries (Pty) Ltd
Robert Mugabe Avenue No. 4, Windhoek, Namibia
PO Box 2401, Windhoek, Namibia
Contact details
Tel: +264 (61) 22 7647 - Telefax: +264 (61) 24 8531
Directors
H Saven (Chairman)§‡, MS Mark (CEO)*, DB Pfaff (CFO)*, RG Dow§‡, KI Mampeule§‡,
CT Ndlovu§‡, RJA Sparks§‡, AJ Taylor§‡ and MA Thompson§‡
* Executive § Non-executive ‡ Independent
WEBSITE:
www.truworths.co.za
Date: 18/02/2016 03:50:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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