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Truworths’ ability to deliver on consumers’ fashion tastes was the key reason it was trading ahead of bigger rival Foschini, analysts said yesterday.

July 22, 2008

By Tom Robbins

Cape Town – Truworths’ ability to deliver on consumers’ fashion tastes was the key reason it was trading ahead of bigger rival Foschini, analysts said yesterday.

Truworths has been one of the few credit retailers of discretionary goods to show resilience in sales, as interest rates have climbed by 5 percentage points over the past two years.

In the 46 weeks to May 18, Truworths sales were up 13.9 percent, compared with the same period a year ago. Since then sales growth has slowed to 10 percent in the four weeks to May 22, as higher living costs have cut into consumer spending.

Foschini’s six-month sales to March were up only 3.7 percent.

Mark Ansley, a portfolio manager at Cadiz, said the Truworths buying team’s skill at reading the fashion market gave the clothing retailer an edge over rivals. In addition it sourced significant stock from local manufacturers, resulting in quick turnaround times, Ansley said. This enabled the buying team to place small orders of items, which they could add to at short notice if need be.

But Ansley questioned the retailer’s relatively aggressive credit granting policy, which he said had the potential to hurt it through a significant rise in bad debts. But for now he believed profit from high product sales margins and interest earned on consumer loans was still exceeding the cost of bad debts from its band of riskier customers.

Conversely, Foschini had a far more conservative approach to granting store cards, including prior to the introduction of the stricter lending criteria of the National Credit Act in June last year. This would have lost Foschini sales but could prove to be prudent in the current high interest rate environment.

Foschini had taken a relatively aggressive approach to opening new stores, which could cause short-term pain but would get it well prepared for the consumer upturn.

Syd Vianello, a retail analyst at Nedcor Securities, said that while Truworths sales growth was also slowing, it had a 25-year record of outperforming rivals through selling “a feel-good factor”. This was through continually innovating products and store designs, Vianello said.

“There is no reason for Foschini not to be performing the same as Truworths, but Foschini does not have the right products.” New management at the core Foschini brand, including new divisional managing director Abigail Bisogno, could build a more formidable product pipeline.”It takes four [fashion] seasons to turn a ship around and they have been through two.”

Vianello shared Ansley’s concerns that Truworths was boosting sales by offering relatively easy credit.

“We think there is a deliberate push to extend accounts from six months to 12 months.”

This would “artificially” boost sales over the short term, but when consumers’ ability to take on new credit was exhausted sales would normalise.

Truworths shares lost 2.85 percent to R25.26. Foschini lost 5.74 percent to R32.52.