Chief Executive Officer's report

GROUP RETAIL SALES increased by 3.6% to R21.4 billion (2023: R20.6 billion)

In South Africa, several external factors adversely affected retail trading conditions, especially in the latter half of the reporting period. A major issue was the pressure on disposable income, which reduced discretionary spending, compounded by persistently low consumer confidence.

Global shipping disruptions and congestion at South African ports impacted inventory levels and the merchandise mix. Consequently, sales from November 2023 through the peak trading period and into the winter 2024 season were negatively affected.

Truworths experienced a weaker second-half performance due to the late onset of winter in South Africa, with unseasonably warm weather persisting into late May. This reduced demand for winter merchandise, impacting retail sales and resulting in a shorter season with more end-of-season promotional activity and markdowns to optimise stock levels. Retail sales for the reporting period in Truworths decreased by 3.2% to R14.5 billion.

In the UK, trading conditions remained under pressure due to the decline in real disposable income since 2021, high interest rates, and modest economic growth. However, despite these challenges, Office's branded fashion footwear business proved resilient, with sales increasing by 10.8% to £290 million. This growth is particularly noteworthy given that the UK retail sector sales declined by 0.2% year-on-year.

Office contributed 32.0% of the Group's retail sales and showed sustained improvement in its gross, trading, and operating margins. Profit before tax increased by 24%, and Office ended the financial period debt-free with cash (including money market fund investments) of £79.3 million.

Overall, Group retail sales increased by 3.6% to R21.4 billion. The Group's gross profit margin decreased slightly from 52.5% to 52.3%, remaining well within management's target range of 49% to 53%. The gross margin in Truworths contracted by 50 basis points to 54.9%, while the Office margin expanded by 180 basis points to 47.0%.

ASPIRATIONAL FASHION

Over the past year, we have made significant strides in reinforcing the unique DNA of each of our brands. This effort has improved lifestyle differentiation and identified opportunities to further elevate our products, thereby strengthening the appeal of our brand portfolio.

Our merchandise team has been focused on driving sales growth to increase market share in strategic product categories. We have seen gains in several key opportunity categories.

Our merchandise and operations teams have focused on growing the most recently developed brands, Fuel and Sync. Both brands have expanded their store presence and extended their product offerings to include shoes, bags, and accessories.

Office's unique market positioning and continued focus on the fashion-savvy 'London girl' make it a sought-after retail partner for top fashion footwear and sneaker brands globally. Strengthened relationships with key brand partners have ensured better access to on-trend, top-tier products, attracting larger stock allocations and broader ranges. Over the past year, we introduced several new branded partners into Office and Offspring.

Office's own label made-to-order (MTO) footwear is a strategically important area for future growth. We aim to grow its contribution and margin by continually improving product quality and sourcing, ensuring Office maintains its status as a style leader in high-street footwear fashion.

Customer demand for online shopping has continued to grow in Truworths and Office, with e-commerce now accounting for 18% of Group retail sales, up from 9% five years ago.

E-commerce sales in Truworths grew by 34%, now accounting for 5% of its retail sales. Office's online sales grew by 14% and now represent 46% of the footwear chain's retail sales, up from 24% when the business was acquired by the Group in 2015.

SUPPLY CHAIN

Our supply chain faced significant challenges due to the international shipping crisis, which caused global container shortages, extended shipping times, and increased freight rates. The local manufacturing sector was also affected because of its reliance on imported fabric.

These issues were exacerbated by disruptions at local ports due to infrastructure failures and productivity challenges, leading to delays in berthing and unloading container vessels. To mitigate these delays, we have established alternative shipping routes to market and implemented various measures to reduce this risk to our business.

Over the past year, we have continued to invest in our distribution facilities, design capabilities, and the sustainability of the local manufacturing sector.

The new Truworths distribution centre (DC) near Cape Town International Airport has been completed and will be commissioned in phases from November 2024 to March 2025. This facility will enable greater volumes of replenishment merchandise to stores. The current four warehouses will be consolidated into this 52 000m² facility, which is expected to support business growth for at least the next 10 years.

The facility will be completed at a final cost of around R1.05 billion, with capital expenditure to date of approximately R750 million and R291 million committed for the 2025 financial period. The Group has utilised R268 million of the green loan facility, concluded in December 2022, to fund the land and building construction costs.

Shortly after the end of the reporting period, the new DC was awarded EDGE (Excellence in Design for Greater Efficiencies) Advanced green building certification. This certification, managed by the Green Building Council of South Africa in partnership with the International Finance Corporation, aims to increase energy, water, and materials efficiency.

In Office, we have continued to re-engineer and upgrade the central warehouse facility in Kilmarnock, Scotland, to increase capacity, enhance productivity, and improve efficiencies. The lease on the warehouse has been extended by 10 years.

The restructuring of the Barrie Cline and Bonwit design centres and their integration into the Truworths Africa Design Division have been successfully completed. This has created a single ladieswear design and manufacturing capability for local production, improving our ability to respond quickly to consumer demands and changing market trends through increased local production and fast fashion capabilities.

RETAIL PRESENCE

Our store portfolio, showcasing our market-leading brands, expanded with the opening of a net 12 new stores. By period-end, the Group's retail footprint comprised 888 stores (Truworths 802 and Office 86).

We launched our latest store concept, Truworths Emporium Re-imagined, at the V&A Waterfront in Cape Town early in the financial period. This was followed by openings in three additional high-profile shopping malls. The new concept has been well received, with these stores experiencing an encouraging uplift in sales post-conversion. We plan to open five more large-format Emporium Re-imagined stores in the 2025 financial period.

The presence of our most recently launched brands in the Truworths segment continued to grow. Fuel has expanded to 52 stores (including seven stand-alone stores); Sync added seven new stores, bringing its total to 26 stand-alone stores, and Context has grown to 18 stores (including one stand-alone store).

Office continued to reinvest in modernising and expanding its store estate, increasing trading space by 11.4%, compared to a 12.6% reduction in the prior period. Office opened eight new stores, including a flagship stand-alone store for our specialist sneaker brand Offspring in King's Cross, London. Strategically located stores in Oxford Street (London), Stratford, and Dublin were modernised and expanded.

The accessibility of the Office brand is a key attraction for customers and brand partners, with a blend of online and in-store shopping resulting in a current retail sales mix of 54% in-store and 46% online.

Group trading space is projected to increase by approximately 2% for the 2025 financial period, with a 1% increase in Truworths and an 11% increase in Office.

ACCOUNT MANAGEMENT

Truworths experienced a strong demand for its premium-quality, aspirational fashion merchandise, resulting in 5.3 million account applications during the reporting period. A record 900 000 new accounts were opened, with 44% of applicants being young South Africans under 30. Only 17% of applications resulted in opened accounts as a result of our strict credit-granting and risk management criteria.

Active accounts grew by 2.5% to 2.9 million.

However, increased living costs and high interest rates negatively impacted credit sales, which decreased by 2.5%, and consumers' ability to service debt.

The TransUnion SA Consumer Credit Index, which measures the credit health of South African consumers, was below the neutral level of 50, at 47 in Q1 and 46 in Q2 of 2024. Despite the ongoing deterioration in the credit environment, the decline has slowed since June 2023, when the index hit an all-time low of 39.

Active account holders able to make purchases stood at 79% (down from 80% in 2023), and overdue balances to active gross trade receivables were at 17% (up from 16% in 2023). The expected credit loss allowance on the active trade receivables portfolio decreased slightly from 20.6% in 2023 to 20.3%.

Truworths ' account portfolio is well-positioned for growth. Lower interest rates are expected to support credit demand and affordability, helping with a recovery in account sales growth.

RETURNS AND PRODUCTIVITY

For many years, the Group has aligned its financial strategy with its Business Philosophy. A key aspect of this philosophy is our Vision for Shareholders, which asserts that by fulfilling our Business Philosophy's Purpose statement, shareholders will prefer to remain long-term investors, trusting in our ability to deliver significant value over time. Key performance measures include total shareholder returns (TSR) and return on invested capital (ROIC).

Our business model has consistently generated strong cash flow, comparatively higher margins, and a focus on cost containment.

The success of this strategy is evident in our five-year review and 10-year review, showing that shareholders have enjoyed inflation-beating long-term compound annual total shareholder returns (TSR) and an average ROIC exceeding the weighted average cost of capital (WACC) over time.

The table below highlights the Group's long-term capital productivity, showing TSR and ROIC results over a 15-year period:

This long-term focus positions the Group well for continued growth and value creation for shareholders.

APPRECIATION

Thank you to our Chairman, Hilton Saven, for his decisive leadership of the board, and to our non-executive directors for their invaluable guidance and counsel. My gratitude also goes to our Joint Deputy CEOs, Sarah Proudfoot and Mannie Cristaudo, for their unwavering support in leading the Group, alongside the executive teams at Truworths and Office.

Our 12 000 employees across the Group embody our Values daily, and I thank them for their dedication and commitment.

A special thank you to our loyal customers who support us both in-store and online. We look forward to continuing to exceed your expectations for quality fashion apparel and footwear in the year ahead.

Michael Mark
Chief Executive Officer