Rough tides for retail sector, the best will sail through

13 Oct, 2017 - 00:10 0 Views
Rough tides for retail sector, the best will sail through

eBusiness Weekly

Kudzanai Sharara Taking Stock
Few industries have felt the effects of the country’s economic strain as acutely as the clothing retail sector. The impact of plummeting consumer spending on the sector has been well documented, with many retailers dealing with tumbling revenues, slow-turning inventory, steep discounts, and stressed cash flows.

Add to that an operating environment that is pro-informal sector both from a consumer and competitor point of view, the clothing retail sector is left on the fringes of viability.

As a result, many large clothing retailers are in a state of strategic and operational stasis, limiting activity, slowing spending, renegotiating leases, and holding on tight as they wait for recovery. For some in the sector, there is little guarantee of going concern.

Truworths’ FY2017 results were a story of disappointment as merchandise sales of $12,26 million for the 52 weeks to July 2017 were 28,8 percent lower than those of the 52 week period ended July 2016, the prior period. The group also extended its loss after tax to $1,78 million from a loss of $1,02 million prior year comparative.

Tough tides to sail through for Truworths.
Comparing Truworths’ results with those of Edgars, one is tempted to think that Truworths performance is however a result of its own missteps. Is Truworths’ product range and pricing out of sync with the market?

Edgars’ first half results showed revenue of $24,6 million, a 6,8 percent growth from $23,1 million prior year comparative, but for almost the same period, Truworths’ revenues were down by 7,1 percent.

While Edgars increased revenues over the same first half of 2017, some of this growth may be attributed to the cash crisis that saw consumers getting rid of bank balances. And we cannot entirely rule out the fact that some of the growth came from improved disposable incomes driven by agriculture and small scale mining.

Overall though, the operating environment has been malignant. The aforementioned boost in spending power was spontaneous and not sustained.

Not surprisingly, Truworths and even Edgars is taking all manner of steps to cut costs as they wait for recovery. Growth plans have been put on hold with Truworths only using $17,912 million for store development against $32,875 million prior year comparative.

Employees have either been laid off or have seen their salaries reduced as reflected in the Truworths’ financial reports where basic salaries decreased by 20,7 percent compared to prior period. The group also resorted to the use of flexible staffing options to deal with subdued trading conditions.

Across the sector, occupancy terms have also been renegotiated with base rentals coming off by 21,7 percent. This is due to both rent reductions and the closure of six Number 1 Stores. Premises operating lease expenses were also lowered by 15 percent while maintenance costs were lower by 26,1 percent.

The future not so bright
The 2016 festive season was one of the worst in years and it will be no shock if retailers like Truworths take a cautious and conservative approach to what threatens to be another subdued Christmas period in 2017.

So it will be understandable if we continue to see low inventory levels at clothing retail outlets given expectations for continued lackluster consumer spending.
No expense places greater stress on retail companies than slow moving inventory, and getting clothes off the shelves has been a drag.

In that regard it will not be a surprise if aisle space will not be as crowded this coming festive season, as retailers are likely to be watchful of their inventory levels.
Chances are very high that Truworths will be stocking less inventory in the 2018 financial year.

In FY2017, inventories were reduced by 37,5 percent in line with trading volumes and chances are that a similar strategy will be implemented as the consumer has remained largely constrained or is looking for cheaper offerings.

Slowing inventory turnover has also forced clothing retailers to resort to more aggressive discounting.

In FY2017, Truworths’ gross profit margin decreased to 40,2 percent (2016: 44,4 percent) as product was discounted to stimulate sales in the first half of the financial year.

While this may be helping to move stale inventory, these lower prices have a negative impact on the bottom line. Discounts are only sustained by volumes, otherwise they begin to eat up the bottom line as seen in most financial reports.

In the meantime
With the anxiety about consumer spending still more pronounced, retailers are expected to continue to have a guarded outlook and operate more cautiously while waiting for recovery. To see out the difficult times, it will take more promotion to bring frugal shoppers to formal retail outlets.

To stay in the game, and ahead of competition, there is strong need for retail companies to increase their ad spending or at least increase visibility on the plurality of platforms that interface with potential consumers.

And to further conserve capital, retailers are likely to continue working with their landlords to change their real estate terms and conditions.
For Truworths, this has been the trend for the last couple of years with occupancy costs coming off to $2,5 million in 2017 from $3,3 million in 2014.

Truworths recently closed its corner First Street and Kwame Nkuruma Avenue branch with management saying occupancy costs were out of sync with the trading densities.

This was a flagship store for the brand! Six unprofitable Number 1 Stores were also closed in January 2017. As a result, with so many storefronts vacant, landlords have no choice but to revise leases downwards.

One thing that bodes well for retailers when the market turns is that all excess costs would have been squeezed out of the system. Truworths’ trading expenses have been reducing for the last 4 reporting periods.

This, no doubt, will provide a nice boost when spending comes back. The tides have been rough for the retail sector, but the best sailors always prepare for smooth when the tide settles.

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