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Preliminary report on the audited Group annual results for the 52 weeks ended 26 June 2016
TRUWORTHS INTERNATIONAL LTD
REGISTRATION NUMBER: 1944/017491/06
JSE CODE: TRU
NSX CODE: TRW
ISIN: ZAE000028296
PRELIMINARY REPORT ON THE AUDITED GROUP ANNUAL RESULTS
FOR THE 52 WEEKS ENDED 26 JUNE 2016
HIGHLIGHTS Group, Group,
including Office* excluding Office**
Sale of merchandise up 48% up 14%
Gross margin 52.9% up at 55.3%
Operating margin 24.9% up at 30.7%
Headline and fully diluted headline earnings per share up 12% up 8%
Adjusted fully diluted headline earnings per share*** up 16%
Annual dividend per share up 12%
* Including 31 weeks of Office results since acquisition.
** Prior to consolidating the results of Office.
*** Refer to note 5 in the summarised financial statements.
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 and Office Holdings 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 and the United Kingdom, and have a presence in Germany,
the Republic of Ireland and other sub-Saharan African countries.
TRADING AND FINANCIAL PERFORMANCE
Group retail sales for the 52-week period ended 26 June 2016 (the period) increased by
46.1% to R17.0 billion compared to the 52-week period ended 28 June 2015 (the prior
period), with cash sales growth of 129.7% and credit sales growth of 11.0%. These
results are inclusive of the non-comparable sales of the Office, Earthchild and Naartjie
businesses, which were acquired with effect from 4 December 2015, 1 March 2015 and
1 April 2015 respectively. Credit sales accounted for 53% of retail sales for the period
(2015: 70%). The credit:cash metrics changed materially during the period as Office
only generates cash sales.
Excluding the retail sales reported in both the current and prior periods by the acquired
businesses, retail sales increased by 11.3% to R12.8 billion, with cash sales growth of
15.4% and credit sales growth of 9.7%. Credit retail sales were significantly impacted by
the introduction of new affordability assessment regulations in September 2015, which
management estimates resulted in a loss of between R200 million to R250 million in sales
during the reporting period, with a resultant impact on the Group's earnings (refer to
the section on Credit Management). Comparable store retail sales for the period, which,
by definition, exclude those attributable to the acquired businesses, increased by 7.3%
(2015: 1.3%) while product inflation averaged 9.5% (2015: 5.6%). Excluding the
acquired businesses, credit sales accounted for 70% (2015: 71%) of retail sales.
Group sale of merchandise, which comprises Group retail sales, franchise sales and
delivery fee income less accounting adjustments, grew 48% to R16.7 billion
(2015: R11.3 billion).
Since the prior period-end a net 23 stores were opened across all brands while the
retail footprint was boosted by the Office acquisition, which added 159 stores
(including 44 concession stores), resulting in an overall increase in trading space
of 8.6% (3.8% excluding the space attributable to the acquired businesses). At the
end of the period the Group had 929 stores (including 44 concession stores) (2015: 747).
Divisional sales 26 Jun 28 Jun % change
2016 2015 on prior
Rm Rm period
Truworths ladieswear 4 794 4 387 9
Office 3 751 - N/A
Truworths menswear 2 713 2 386 14
Identity 2 186 1 951 12
Truworths designer emporium* 1 680 1 464 15
Truworths kids emporium** 816 457 79
Other*** 1 075 999 8
Group retail sales 17 015 11 644 46
Delivery fee income 34 - N/A
Franchise sales 9 9 -
Accounting adjustments (404) (363) 11
Sale of merchandise 16 654 11 290 48
YDE agency sales 292 297 (2)
* Daniel Hechter, LTD and Earthaddict.
** LTD Kids, Earthchild and Naartjie.
*** Cellular, Truworths Jewellery and Cosmetics divisions.
The Group's gross margin decreased to 52.9% (2015: 55.2%), principally due to the
acquisition of Office, which operates at a lower gross margin. Excluding Office,
the Group's gross margin increased to 55.3%.
Trading expenses increased 51.6% to R6.2 billion (2015: R4.1 billion) and constituted
37.5% of sale of merchandise (2015: 36.5%). Excluding Office, the once-off Office
transaction-related costs as well as foreign exchange gains in both periods, trading
expenses increased 15.7%, mainly as a result of increases in employment costs of 20.2%
and increases in depreciation and amortisation of 17.2%. 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 and the cost of conversion of certain flexi-staff
to permanent employees following the labour law amendments in April 2015. Excluding these
items, incentive payments, share scheme costs and non-comparable store costs, employment
costs increased by 11%, which includes an annual review as well as growth in full-time
equivalent employees of 4%. Excluding non-comparable stores, depreciation and amortisation
increased by 7.1%. Included in other operating costs is R34 million (2015: R5 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 African subsidiaries.
Interest received increased 21.2% to R1.3 billion (2015: R1.1 billion) due to the growth
in the debtors book and increases totalling 125 basis points in the South African repo
rate during the period. Operating profit increased 20.7% to R4.2 billion while the
operating margin decreased to 24.9% from 30.5% owing to the reduction in the gross
margin and the increase in trading expenses. Excluding Office, the operating margin
increased to 30.7%.
As a result of the interest-bearing borrowings raised in the current period to fund
operating expenditure, as well as the fact that Office is geared, finance costs have
increased by R202 million.
Headline earnings per share (HEPS) and fully diluted HEPS increased 12.4% to 667.6 cents
and 12.5% to 665.9 cents respectively. Adjusted fully diluted HEPS, being fully diluted
HEPS adjusted to exclude the impact of the once-off Office transaction-related costs,
increased 16.2% to 688.2 cents.
FINANCIAL POSITION
The Group's financial position remains strong, with net asset value per share increasing
by 13% to 2 031.8 cents (2015: 1 790.9 cents) since the prior period-end.
As a result of the acquisitions, goodwill and intangible assets increased to
R5.4 billion, following the finalisation of the Office purchase price allocation
(refer to notes 6 and 9 of the summarised financial statements).
Inventories increased to R2.4 billion at the end of the period. Excluding the inventory
of Office, but including the Earthchild and Naartjie inventories, gross inventory
increased 13%. Excluding Office, inventory turn remained at 4.7 times.
During the period the Group raised interest-bearing borrowings of R4.4 billion
(R4.2 billion in term loans and R227 million in revolving credit facilities) to fund
its operating activities and incurred R208 million in finance costs. The term loans
are repayable over three, four and five years.
Included in non-current liabilities is a liability of R562 million in relation to put
options granted to the non-controlling management shareholders in Office, while
derivative financial assets of R15 million represents the call options of the Group
over the shares in question.
CAPITAL MANAGEMENT
During the period the Group raised interest-bearing borrowings of R4.4 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 (R1.4 billion). At the end of the period the Group had cash and cash
equivalents of R1.6 billion, an increase of 8.9% on the prior period. The Group's net
debt to equity ratio at the end of the period was 33% and 0.6 times EBITDA.
To provide for potential further acquisitions in future 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).
OFFICE ACQUISITION
With effect from 4 December 2015 the Group 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 a leading young
fashion footwear retailer in the UK, Germany and the Republic of Ireland. The remaining
11.1% non-controlling interest is owned by management of Office. The Group has granted
put options to management in respect of their non-controlling interest in Office and
management has granted the Group call options in respect of their non-controlling
interest, on the same terms as the put options. Refer to note 9 of the summarised
financial statements for further detail.
CREDIT MANAGEMENT
Gross trade receivables in respect of the debtors book (Truworths, Identity and YDE)
grew by 11.6% to R5.8 billion. The growth in the book is attributable to Group credit
sales growing by 11.0% relative to the prior period. Excluding the retail sales
attributable to the acquisitions, credit sales contributed 70% (2015: 71%) to Group
retail sales for the period. Overdue accounts as a percentage of the total debtors
book remained at 14%.
The doubtful debt allowance as a percentage of gross trade receivables has been
reduced to 12.3% from 12.5% in the prior period. Net bad debt as a percentage of gross
trade receivables decreased to 12.4% (2015: 12.5%) 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
14% to R1 092 million (2015: R960 million).
The National Credit Regulator (NCR) of South Africa published regulations which came into
effect during September 2015 in relation to the assessment mechanisms and procedures
to be followed when opening new credit facilities and increasing credit limits.
These regulations have resulted in a reduction in the new account acceptance rate from
30% in the prior period to 24% in the current period, resulting in a 0.5% decline in
the Group's active account base to 2.66 million accounts. This is due to the onerous
administrative burden introduced by the regulations for customers to produce documentation.
In the period prior to the coming into force of the regulations, cash sales (excluding
Office) grew by 26% (assisted by the acquisition of Earthchild and Naartjie) and credit
sales by 18%. Subsequent to the introduction of the regulations, cash sales grew by 19%
while credit sales grew by 8%.
The Group, together with two other major listed retailers, has initiated legal action
against the NCR and DTI in connection with the affordability regulations. The Group is in
the process of implementing various strategies to attempt to mitigate the impact of these
regulations.
DIRECTORATE
The board has resolved to appoint Douglas Norman Dare (55) as an Executive Director of the
company with effect from 19 August 2016. Doug has been a Director: Buying and Merchandising
of the principal trading subsidiary Truworths Ltd since 1999, and an employee of the Group
since 1984. He has a wealth of experience in relation to merchandise management and planning,
as well as retail operations and marketing, and will serve to strengthen the board's
capabilities in these important retail functions.
OUTLOOK
We expect the South African trading environment to remain challenging during the 2017
financial period, with slow economic growth and rising inflation putting pressure on consumers.
The continued impact of the new affordability regulations remains a concern as, in our opinion,
it unreasonably restricts our ability to open new accounts and to grow credit sales. They also have
the effect of denying access to credit to many otherwise creditworthy customers.
The trading environment in the United Kingdom is also faced with uncertainty after
the decision to withdraw from the European Union.
Non-comparable Group retail sales for the first six weeks of the 2017 financial period are
40% up over the corresponding six weeks of the 2016 period. However, the Truworths business
unit showed marginally positive sales growth for the six weeks over the prior period. This was
a consequence of the new affordability assessment regulations, the delayed allocation of new
goods to stores due to the implementation of a new warehouse system and compared to the
unusually high base established last year following a highly successful new account drive.
The Office business unit sales grew by approximately 3% in UK Pound Sterling over the period.
In the second half of the 2017 financial year the beneficial impact of lower product inflation
could be expected if the currency remains at current levels. Furthermore we hope to have made
more progress in implementing certain mitigating strategies in relation to the affordability
assessment regulations. Additionally the trading environment in the UK is likely to be less
uncertain as more clarity regarding Brexit emerges, and the Group's influence on Office stock
management and ranges is expected to have had more impact.
Capital expenditure of R547 million (Truworths R516 million and Office R31 million)
has been committed for the 2017 financial period, while trading space is expected to
grow by approximately 3% (Truworths 3% and Office 6%).
H Saven MS Mark
Chairman Chief Executive Officer
DECLARATION OF CAPITALISATION SHARE AWARD WITH CASH DIVIDEND ALTERNATIVE
The board of the company has resolved to declare an award in respect of the 52-week
period ended 26 June 2016 in the form of the issue of fully paid capitalisation shares
in the company, such award to be made to ordinary shareholders reflected in the company's
register on the record date, being Friday, 16 September 2016 (capitalisation share award).
The number of ordinary shares of 0.015 cent each in the company to which shareholders
participating in the capitalisation share award will become entitled will be in the
ratio that 182 cents multiplied by a factor of 1.05 bears to the volume-weighted average
price (VWAP) of the ordinary shares of the company on the JSE during the three-day
trading period ending on Monday, 5 September 2016. Fractional entitlements to a share
will be rounded downwards, and cash payments made in respect of such fractional
entitlements based on the weighted average price of the company's shares on Wednesday,
14 September 2016 less 10%. By way of an example, if VWAP is confirmed as being R90.00,
the number of ordinary shares in the company to which shareholders participating in
the capitalisation share award will become entitled per one hundred shares held will
be 2.12 shares, rounded down to 2 shares, and the shareholders will receive a cash
payment of R9.99.
As an alternative to receiving the capitalisation share award, ordinary shareholders
of the company will be entitled, in respect of all or part of their shareholding, to elect
to receive a gross cash dividend of 175 South African cents (2015: 169 South African cents)
per ordinary share, which cash dividend will be paid only to those ordinary shareholders
who elect it on or before 12:00 on Friday, 16 September 2016 (the cash dividend alternative).
Shareholders of the company not electing the cash dividend alternative in respect of
all or part of their shareholding will, by default, be issued with fully paid ordinary
shares of the company in terms of the capitalisation share award.
The last day to trade in the company's shares cum the capitalisation share award and
cash dividend is Tuesday, 13 September 2016. Consequently no dematerialisation or
rematerialisation of the company's shares may take place over the period from Wednesday,
14 September 2016 to Friday, 16 September 2016, both days inclusive. Trading in the
company's shares ex the capitalisation share award and cash dividend alternative will
commence on Wednesday, 14 September 2016.
The new ordinary shares to be allotted pursuant to the capitalisation share award
will be issued as fully paid capitalisation shares, the value of which will be charged
to the company's share premium account. At 26 June 2016 the company's issued ordinary
share capital is R65 427, comprising 436 182 828 ordinary shares of 0.015 cent each,
and the company's share premium account balance is R705 802 049.
The cash dividend alternative is scheduled to be payable in South African Rand (ZAR)
on Monday, 19 September 2016 from the company's retained earnings. Such dividend is
subject to and will be paid net of dividends tax of 15%, to be withheld and paid to
the South African Revenue Service. Such tax must be withheld unless beneficial owners
of such dividend have provided the necessary documentary proof to the relevant regulated
intermediary (being a broker, CSD participant, nominee company or the company's transfer
secretaries, Computershare Investor Services (Pty) Ltd, PO Box 61051, Marshalltown,
2107, South Africa) that they are exempt therefrom, or entitled to a reduced rate,
as a result of a double taxation agreement between South Africa and the country of
tax domicile of such owner.
The withholding tax, if applicable at the rate of 15%, will result in a net cash dividend
per share of 154.7 South African cents, applicable to the cash dividend alternative. As the
capitalisation share award does not constitute a dividend as defined in the Income Tax Act,
no withholding tax is applicable to the capitalisation share award.
The cash dividend alternative will only be paid by electronic funds transfer, and no cheque
payments will be made. Accordingly, shareholders who have not yet provided their bank
account details should do so to the company's transfer secretaries using the form to be
provided.
The directors have determined that gross cash dividend alternative amounts and cash payment
amounts in respect of fractional entitlements to shares less than 1 000 South African cents,
due to any one shareholder of the company's shares held in certificated form, will not be
paid, unless otherwise requested in writing, but the net amount thereof will be aggregated
with other such net amounts and donated to a charity to be nominated by the directors.
A circular setting out full details of the capitalisation share award and cash dividend
alternative and containing a form of election is scheduled to be mailed to shareholders
by Tuesday, 23 August 2016.
A finalisation announcement providing details of the capitalisation share award ratio
and other relevant particulars is scheduled to be published on Tuesday, 6 September 2016.
By order of the board
C Durham
Company Secretary
Cape Town
18 August 2016
One Capital
Sponsor
SUMMARISED GROUP STATEMENTS OF FINANCIAL POSITION
Note At 26 Jun At 28 Jun
2016 2015
Audited Audited
Rm Rm
ASSETS
Non-current assets 7 413 1 876
Property, plant and equipment 1 622 1 053
Goodwill 6 1 805 346
Intangible assets 7 3 631 217
Derivative financial assets 15 -
Available-for-sale assets 32 19
Loans and receivables 78 82
Deferred tax 230 159
Current assets 9 648 7 281
Inventories 2 401 1 074
Trade and other receivables 5 281 4 637
Derivative financial assets - 13
Prepayments 374 95
Cash and cash equivalents 1 592 1 462
Total assets 17 061 9 157
EQUITY AND LIABILITIES
Total equity 8 625 7 504
Share capital and premium 706 551
Treasury shares (882) (770)
Retained earnings 8 903 7 533
Non-distributable reserves (102) 190
Non-current liabilities 5 481 192
Interest-bearing borrowings 8 4 042 -
Deferred tax 576 -
Put option liability 10 562 -
Post-retirement medical benefit obligation 57 57
Leave pay obligation 5 4
Straight-line operating lease obligation 181 36
Contingent consideration obligation 58 95
Current liabilities 2 955 1 461
Trade and other payables 2 177 1 302
Interest-bearing borrowings 8 366 -
Provisions 150 54
Contingent consideration obligation 42 -
Derivative financial liability 25 -
Tax payable 195 105
Total liabilities 8 436 1 653
Total equity and liabilities 17 061 9 157
Number of shares in issue
(net of treasury shares) (millions) 424.5 419.0
Net asset value per share (cents) 2 031.8 1 790.9
SUMMARISED GROUP STATEMENTS OF COMPREHENSIVE INCOME
Note 52 weeks 52 weeks
to 26 Jun to 28 Jun
2016 2015
Audited % Audited
Rm change Rm
Revenue 4 18 231 44 12 619
Sale of merchandise 16 654 48 11 290
Cost of sales (7 837) (5 060)
Gross profit 8 817 42 6 230
Other income 4 274 259
Trading expenses (6 240) 52 (4 116)
Depreciation and amortisation (345) (221)
Employment costs (1 916) (1 186)
Occupancy costs (1 822) (1 102)
Trade receivable costs (1 092) (960)
Other operating costs (1 065) (647)
Trading profit 2 851 20 2 373
Interest received 4 1 288 21 1 063
Dividends received 4 15 7
Operating profit 4 154 21 3 443
Finance costs (208) (6)
Profit before tax 3 946 3 437
Tax expense (1 129) (977)
Profit for the period 2 817 15 2 460
Attributable to:
Equity holders of the company 2 804 2 460
Holders of the non-controlling interest 13 -
Profit for the period 2 817 2 460
Other comprehensive (losses)/income to be
reclassified to profit or loss in subsequent periods (216) 10
Fair value adjustment on available-for-sale
financial instruments 8 1
Movement in effective cash flow hedge (54) 1
Movement in foreign currency translation reserve (170) 8
Other comprehensive income/(losses) not to be
reclassified to profit or loss in subsequent periods 7 (1)
Re-measurement gains/(losses) on defined benefit plans 7 (1)
Other comprehensive (losses)/income for the
period, net of tax (209) 9
Attributable to:
Equity holders of the company (191) 9
Holders of the non-controlling interest (18) -
Other comprehensive (losses)/income for the
period, net of tax (209) 9
Total comprehensive income for the period 2 608 2 469
Attributable to:
Equity holders of the company 2 613 2 469
Holders of the non-controlling interest (5) -
Total comprehensive income for the period 2 608 2 469
Basic earnings per share (cents) 667.1 13 591.2
Headline earnings per share (cents) 5 667.6 12 593.8
Fully diluted basic earnings per
share (cents) 665.4 13 589.5
Fully diluted headline earnings
per share (cents) 665.9 12 592.1
Weighted average number of shares (millions) 420.3 416.1
Fully diluted weighted average number of
shares (millions) 421.4 417.3
Key ratios
Gross margin (%) 52.9 55.2
Trading expenses to sale of merchandise (%) 37.5 36.5
Trading margin (%) 17.1 21.0
Operating margin (%) 24.9 30.5
SUMMARISED 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
2016
Balance at the beginning
of the period 551 (770) 7 533 190 7 504 - 7 504
Total comprehensive income
for the period - - 2 811 (198) 2 613 (5) 2 608
Profit for the period - - 2 804 - 2 804 13 2 817
Other comprehensive income
for the period - - 7 (198) (191) (18) (209)
Cash dividends - - (1 441) - (1 441) - (1 441)
Premium on shares issued
in terms of the 1998
share option scheme 32 - - - 32 - 32
Premium on shares issued
in terms of the restricted
share scheme 123 (123) - - - - -
Premium on shares vested in
terms of the restricted
share scheme - 11 - (11) - - -
Share-based payments - - - 52 52 - 52
Acquisition of subsidiary - - - - - 432 432
Recognition of put option
liability - - - (135) (135) (427) (562)
Balance at 26 June 2016 706 (882) 8 903 (102) 8 625 - 8 625
2015
Balance at the beginning
of the period 368 (652) 6 774 152 6 642 - 6 642
Total comprehensive income
for the period - - 2 459 10 2 469 - 2 469
Profit for the period - - 2 460 - 2 460 - 2 460
Other comprehensive income
for the period - - (1) 10 9 - 9
Cash dividends - - (1 700) - (1 700) - (1 700)
Premium on shares issued
in terms of the 1998
share option scheme 65 - - - 65 - 65
Premium on shares issued
in terms of the restricted
share scheme 118 (118) - - - - -
Share-based payments - - - 28 28 - 28
Balance at 28 June 2015 551 (770) 7 533 190 7 504 - 7 504
Dividends (cents per share) 2016 2015
Final - payable/paid September 182 169
Cash interim - paid March 270 236
Total 452 405
SUMMARISED GROUP STATEMENTS OF CASH FLOWS
Note 52 weeks 52 weeks
to 26 Jun to 28 Jun
2016 2015
Audited Audited
Rm Rm
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flow from trading and cash EBITDA* 3 273 2 654
Working capital movements (468) (476)
Cash generated from operations 2 805 2 178
Interest received 1 288 1 063
Dividends received 15 7
Finance costs (177) (4)
Tax paid (1 092) (1 099)
Cash inflow from operations 2 839 2 145
Dividends paid (1 441) (1 698)
Net cash from operating activities 1 398 447
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment to
expand operations (441) (266)
Acquisition of plant and equipment to maintain operations (110) (61)
Acquisition of computer software (48) (53)
Proceeds on disposal of property, plant and equipment 22 1
Net acquisition of businesses 9 (2 559) (270)
Premiums paid to insurance cell (10) (12)
Amounts received from insurance cell 6 -
Loans repaid 4 19
Acquisition of mutual fund units - (2)
Net cash used in investing activities (3 136) (644)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on shares issued 32 65
Loans repaid (2 613) -
Loans received 4 485 -
Contributions to post-retirement medical benefit plan assets (1) (2)
Net cash from financing activities 1 903 63
Net increase/(decrease) in cash and cash equivalents 165 (134)
Cash and cash equivalents at the beginning of the period 1 462 1 588
Net foreign exchange difference (35) 8
CASH AND CASH EQUIVALENTS AT THE REPORTING DATE 1 592 1 462
Key ratios
Cash flow per share (cents) 675.5 515.5
Cash equivalent earnings per share (cents) 759.0 642.9
Cash realisation rate (%) 89 80
* Earnings before interest received, finance costs, tax, depreciation and amortisation.
SELECTED EXPLANATORY NOTES
1 STATEMENT OF COMPLIANCE
The information in these summarised financial statements has been extracted from
the Group's 2016 annual financial statements. The summarised financial statements have
been prepared in compliance with International Financial Reporting Standards (IFRS),
the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee,
Financial Reporting Pronouncements as issued by the Financial Reporting Standards
Council, IAS 34: Interim Financial Reporting, the South African Companies Act
(71 of 2008, as amended) and the Listings Requirements of the JSE. Any forward-looking
statement in this announcement has not been reviewed or reported on by the company's
external auditors.
This preliminary report has been prepared under the supervision of Mr DB Pfaff CA(SA),
the Chief Financial Officer of the Group.
The Group's 2016 annual financial statements and the summarised annual financial
statements have been audited by the Group's external auditors, Ernst & Young Inc.,
and their unqualified audit opinions on both the annual financial statements and
summarised annual financial statements are available for inspection at the company's
registered office.
The audit report on the summarised annual financial statements does not necessarily
report on all of the information contained in this preliminary report. Shareholders
are therefore advised that in order to obtain a full understanding of the nature of
the auditor's engagement they should obtain a copy of the auditor's report on the
summarised financial statements.
2 BASIS OF PREPARATION
The annual financial statements for the period ended 26 June 2016 are prepared in
accordance with the going concern and historical cost bases, except where otherwise
indicated. The accounting policies are applied consistently throughout the Group.
The presentation and functional currency used in the preparation of the Group and
company financial statements is the South African Rand [ZAR] (Rand) and all amounts
are rounded to the nearest million, except where otherwise indicated.
3 ACCOUNTING POLICIES AND METHODS OF COMPUTATION
3.1 The accounting policies and methods of computation applied in the preparation
of the Group's 2016 annual financial statements are in terms of IFRS and
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 Group's annual financial statements comprise the 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, is 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.
52 weeks 52 weeks
to 26 Jun to 28 Jun
2016 2015
Audited % Audited
Rm change Rm
4 REVENUE
Sale of merchandise 16 654 48 11 290
Retail sales 17 015 11 644
Accounting adjustments* (404) (363)
Franchise sales 9 9
Delivery fee income 34 -
Interest received 1 288 21 1 063
Trade receivables interest 1 205 969
Investment interest 83 94
Other income 274 6 259
Commission 123 119
Display fees 63 61
Financial services income 63 61
Lease rental income 15 7
Other 4 3
Insurance recoveries 3 6
Royalties 3 2
Dividend received from insurance
business arrangements 15 7
Total revenue 18 231 44 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.
52 weeks 52 weeks
to 26 Jun to 28 Jun
2016 2015
Audited Audited
Rm Rm
5 RECONCILIATION OF PROFIT FOR THE PERIOD TO HEADLINE EARNINGS
Profit for the period, attributable to equity holders
of the company 2 804 2 460
Adjusted for:
Loss on disposal of property, plant and equipment 2 6
Impairment of financial assets - 5
Headline earnings 2 806 2 471
Once-off Office transaction-related costs 111 -
Call option fair value adjustment (17) -
Adjusted headline earnings 2 900 2 471
6 GOODWILL
Balance at the beginning of the period 346 90
Goodwill arising on acquisitions 1 459 256
Office 1 520 -
Movement in exchange rates (61) -
Earthchild - 243
Naartjie - 13
Balance at the reporting date 1 805 346
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 final allocation of
the purchase consideration to the identifiable assets (including trademarks) and
liabilities of Office, based on the externally reviewed statement of financial
position at the acquisition date (refer to note 9).
52 weeks 52 weeks
to 26 Jun to 28 Jun
2016 2015
Audited Audited
Rm Rm
7 INTANGIBLE ASSETS
Balance at the beginning of the period 217 106
Additions 48 53
Additions arising on acquisitions 3 399 80
Office 3 539 -
Movement in exchange rates through other comprehensive income (140) -
Earthchild - 73
Naartjie - 7
Disposals - -
Cost (3) (7)
Accumulated amortisation 3 7
Amortisation (33) (22)
Balance at the reporting date 3 631 217
The Office trademarks have been allocated to the Office cash-generating unit since
its initial recognition on the acquisition of the Office business with effect from
4 December 2015 and are measured at fair value. The Office trademarks are well
established in the UK market and reflect a wide range of shoe brands. For this
reason there is no foreseeable limit to the period over which the asset is expected
to generate net cash inflows for the Group. The trademarks are therefore considered
to have an indefinite useful life.
52 weeks 52 weeks
to 26 Jun to 28 Jun
2016 2015
Audited Audited
Rm Rm
8 INTEREST-BEARING BORROWINGS
Non-current liabilities 4 042 -
Unsecured variable-rate long-term bank loans 2 580 -
Secured variable-rate long-term bank loans 1 462 -
Current liabilities 366 -
Secured variable-rate revolving credit banking facility 227 -
Current portion of secured variable-rate long-term bank loans 121 -
Current portion of unsecured variable-rate long-term bank loans 18 -
Total interest-bearing borrowings 4 408 -
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 1.73 percentage points, 1.94 percentage
points and 2.18 percentage points respectively above the three-month Johannesburg
Interbank Agreed Rate (JIBAR). Three-month JIBAR at the reporting date was 7.31% pa.
The secured variable-rate long-term bank loan comprises R1.6 billion UK Pound
Sterling-based debt in the form of a single facility of £77 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 percentage points above the three-month London
Interbank Offered Rate (LIBOR). Three-month LIBOR at the reporting date was 0.6% 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 percentage points above LIBOR.
Interest on all long-term bank loans is paid quarterly in arrears.
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 operational expenditure, 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, wholly-owned subsidiary,
Truworths UK Holdco 1 Ltd, thereby gaining control over Office and its subsidiaries.
Office is a leading young fashion footwear retailer in the UK, Germany and the
Republic of Ireland. 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 annual
financial statements 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. Transaction-related costs of R111 million (R116 million
before tax) 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 has been 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. Additional identifiable assets (including
trademarks) and liabilities have been recognised on completion of the purchase price
allocation, with a corresponding reduction in goodwill. The balances at acquisition
date were translated to South African Rand at an exchange rate of R:£ of R21.44.
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 Office
enterprise value.
The fair value and carrying amount of the identifiable assets and liabilities of the
Office business at acquisition date were as follows:
Rm £'000
Non-current assets 3 910 182 391
Property, plant and equipment 371 17 311
Intangible assets 3 539 165 080
Current assets 2 825 131 738
Inventories 1 523 71 040
Trade and other receivables 347 16 157
Derivative financial assets 1 46
Prepayments 144 6 728
Cash and cash equivalents 798 37 217
Tax receivable 12 550
Non-current liabilities 762 35 543
Straight-line operating lease obligation 163 7 584
Deferred tax* 599 27 959
Current liabilities 3 758 175 262
Trade and other payables 1 029 47 979
Interest-bearing borrowings 2 613 121 884
Provisions 114 5 301
Derivative financial liabilities 2 98
Total identifiable net assets at fair value 2 215 103 324
Purchase consideration transferred 3 303 154 065
Non-controlling interest at fair value 432 20 155
Total purchase consideration, on a 100% basis
(equity value of Office) 3 735 174 220
Fair value of identifiable net assets acquired 2 215 103 324
Goodwill arising on acquisition 1 520 70 896
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 798 37 217
Net cash outflow on acquisition 2 559 116 848
Goodwill of R1.5 billion has been attributed to the acquisition, as Office is a
leading UK footwear retailer, with strong in-house brands coupled with excellent
relationships with third party brands, an attractive customer base demographic and
a highly efficient multichannel distribution model.
Office has achieved the following results for the seven months since acquisition
to the reporting date:
Rm £'000
Revenue 3 773 170 330
Profit before tax 157 7 072
If the Office business had been acquired at the beginning of the reporting period
the results to the reporting date would have been as follows:
Rm £'000
Revenue 6 093 284 178
Profit before tax 140 6 553
* Includes £29 million (R631 million) deferred tax liability on trademark
recognition on acquisition.
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
annual financial statements 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 the Office consolidated EBITDA adjusted for net debt. The discount rate applied
in determining the present value of the liability is the forecast three-month LIBOR
plus 2.15 percentage points.
52 weeks 52 weeks
to 26 Jun to 28 Jun
2016 2015
Audited Audited
Rm Rm
Present value of the amount payable on exercise of the
put options 562 -
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 inter-relationship between
these inputs is likely to magnify the impact of the valuation.
Any changes in the redemption amount of the liability is recognised directly in
non-distributable reserves. Accordingly, changes in the valuation assumptions will
not have any impact on profit or loss.
A 10% increase or decrease in Office's EBITDA relative to the estimates applied in
the current valuation will result in a £2.7 million (R56 million) increase or
decrease in the present value of the redemption amount 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 £4.3 million (R88 million) increase or decrease in the
present value of the redemption amount of the liability.
11 SEGMENT REPORTING
The Group's reportable segments have been identified as the Truworths and Office
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, including by the YDE
business unit which comprises the agency activities through which the Group retails
clothing, footwear and related products on behalf of emerging South African designers.
The Office business unit comprises the footwear retail activities conducted by the
Group through stores, concession stores and an e-commerce channel in the United Kingdom,
Germany and the Republic of Ireland.
The YDE business unit, which was disclosed in the prior period, is no longer considered
a reportable segment following the acquisition of Office. The prior period figures have
been restated accordingly.
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.
Consoli-
dation
Truworths Office entries Group
Rm Rm Rm Rm
2016
Total third party revenue 14 561 3 773 (103) 18 231
Third party 14 458 3 773 - 18 231
Inter-segment 103 - (103) -
Depreciation and amortisation 259 86 - 345
Employment costs 1 426 490 - 1 916
Occupancy costs 1 265 557 - 1 822
Trade receivable costs 1 092 - - 1 092
Other operating costs 794 374 (103) 1 065
Interest received 1 287 1 - 1 288
Finance costs 171 37 - 208
Profit for the period 2 698 119 - 2 817
Profit before tax 3 789 157 - 3 946
Tax expense (1 091) (38) - (1 129)
Segment assets 13 308 7 213 (3 460) 17 061
Segment liabilities 4 509 3 927 - 8 436
Capital expenditure 559 37 - 596
Gross margin (%) 55.3 45.0 - 52.9
Trading margin (%) 20.6 5.1 - 17.1
Operating margin (%) 30.7 5.2 - 24.9
Credit:cash sales mix (%) 69:31 0:100 - 53:47
Consoli-
dation
Truworths Office entries Group
Rm Rm Rm Rm
2015
Total third party revenue 12 619 - - 12 619
Third party 12 619 - - 12 619
Inter-segment - - - -
Depreciation and amortisation 221 - - 221
Employment costs 1 186 - - 1 186
Occupancy costs 1 102 - - 1 102
Trade receivable costs 960 - - 960
Other operating costs 647 - - 647
Interest received 1 063 - - 1 063
Profit for the period 2 460 - - 2 460
Profit before tax 3 437 - - 3 437
Tax expense (977) - - (977)
Segment assets 9 157 - - 9 157
Segment liabilities 1 653 - - 1 653
Capital expenditure 380 - - 380
Gross margin (%) 55.2 - - 55.2
Trading margin (%) 21.0 - - 21.0
Operating margin (%) 30.5 - - 30.5
Credit:cash sales mix (%) 70:30 - - 70:30
2016 2015
Contribution to revenue Contribution to revenue
Rm % Rm %
Third party revenue
South Africa 13 894 76.2 12 141 96.2
United Kingdom 3 428 18.8 - -
Namibia 251 1.4 237 1.9
Germany 187 1.0 - -
Republic of Ireland 132 0.7 - -
Botswana 102 0.6 75 0.6
Swaziland 93 0.5 78 0.6
Zambia 33 0.2 24 0.2
Ghana 25 0.1 22 0.2
Lesotho 20 0.1 15 0.1
Mauritius 19 0.1 12 0.1
Rest of Europe 13 0.1 - -
Kenya 16 0.2 9 0.1
Nigeria 6 - 6 -
Middle East and Asia 5 - - -
United States 4 - - -
Australia 3 - - -
Total third party revenue 18 231 100 12 619 100
26 Jun 28 Jun
2016 2015
Audited Audited
Rm Rm
12 CAPITAL COMMITMENTS
Capital expenditure authorised but not contracted:
Store renovation and development 332 322
Distribution facilities 97 163
Computer software and infrastructure 80 86
Buildings 28 170
Head office refurbishment 7 21
Motor vehicles 3 5
Total 547 767
The capital commitments will be financed through cash generated from operations,
available cash resources and financing facilities and are expected to be incurred
in the 2017 reporting period.
13 EVENTS AFTER THE REPORTING DATE
No event, material to the understanding of these financial statements, has occurred
between the reporting date and the date of approval.
ADMINISTRATION
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
Date: 18/08/2016 03:15:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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