The clothing retail sector is one which has witnessed a transformation since the adoption of the multi-currency system in 2009. The transformation has been a double-edged sword. In the first two years of dollarisation, significant revenue growth rates were witnessed by players in the sector. High growth rates were mainly due to the economy coming off a low base after the “lost decade”. The flipside, however, was not encouraging in as far as the sector’s sustainability is concerned due to the rising debt defaults in the economy, tight liquidity and high interest charges. Financial results for Edgars and Truworths in the current reporting season bear testimony to the changes that have taken place which are slowly robbing the lustre from the sector.
The main theme for the listed clothing firms in their results published in the current earnings season has been the high level of indebtedness of customers. This has impacted negatively on how firms fund their operations.
As was expected, the high default rate in the economy and slow progress in setting up a credit reference bureau has resulted in most customers being multi-borrowed. What has worsened the situation for clothing retail firms is that disposable incomes remain low and are not expected to increase due to depressed activity in the economy.
Another key sign of the high level of indebtedness is increasing non-payment by customers despite the continued increase in the number of accounts.
Truworths’ management closed more than 11 000 accounts despite a 5,4% growth in the number of active accounts to 74 563. Edgars’ management also cautioned that non-payment was becoming an issue yet active accounts had registered a 14% growth to 181 600. This has seen clothing retailers incurring extra costs of employing debt collectors and also upping their provision for bad debts. In Truworths’ latest interim results, management incurred additional costs which is a sign that rising defaults will persist into the future.
Clothing retailers’ growth prospects continue to be hampered by the short credit period afforded to consumers. Longer credit terms, especially when incomes are not growing, impact positively on revenue growth for retailers while the opposite is true.
In Zimbabwe, almost 100% of credit sales are on a six-month credit basis compared to South Africa where about 74% of credit sales are on the 12 months plan.
Zimbabwe’s shorter credit terms are aligned to the short-term expensive facilities they get from financiers.
High gearing ratios of 147% and 181% for Truworths and Edgars, respectively are explained by the predominance of short-term funding in the local market. Edgars’ recent results revealed that of the US$62,58 million revenue, 73% was on credit while Truworths’ credit sales accounted for 75% of its overall interim sales of US$13,87 million.
Topics, however, had a credit sales composition of 90,6%. With such a high composition of credit sales to total turnover and a low credit repayment period, the upside potential for upping revenues will be constrained and so ultimately will profitability.
Edgars’ overall earnings of US$3,80 million could have been higher were it not for the huge finance bill of US$2,71 million charged while another solid US$0,67 million finance bill ate into Truworths’ half-year earnings of US$1,06 million. The absence of longer repayment periods to some extent explains the reason why full-year revenue growth for Edgars in their recent financials was 14% compared with 47% in the prior year.
Another upsetting area concerning clothing retailers has been the continued increase in the so-called “clothing boutiques” in the informal sector. These have increased competition in the marketplace, resulting in traditional players such as Edgars and Truworths losing some market share. Worth noting however is that Number 1 Stores and Jet Stores, from Truworths and Edgars respectively, are to a lesser extent countering competition from boutiques through offering lower prices.
Number 1 Stores registered the largest sales growth of 28% to US$1,72 million compared to other units in the Truworths stable.
Jet Stores’ contribution to overall Edgars’ sales rose from 11% in prior year to 19% in the latest full-year revenue of US$62,58 million. Number 1 Stores’ growth was attributed to lay-bys; focus on children’s wear and relatively low pricing, compared to Topics and Truworths which are overpriced.
Number 1 and Jet stores are purely cash businesses and present direct competition to boutiques through their affordable prices. The focus by the two retailers will somehow cushion the slowdown in credit sales growth due to low disposable incomes. Management at both Truworths and Edgars should find a way to clear the perception in the market that clothes from Edgars and Truworths are overpriced. The growth in these stores is nonetheless coming at a cost through mark downs, which to consumers are good, but retailers will feel the heat through thin margins, other things being constant.
Changes in the traditional peak period are also a red flag to the sector’s growth prospects. December, which normally is a profitable period for listed clothing firms, failed to impact significantly upon revenue growth with Edgars’ management lamenting that the festive season was disappointing. The disappointment came from the slowdown in the formal employment space as most firms are failing to pay employees even their basic salaries.
The delay in accessing civil servants’ salaries and bonus payments weighed down on revenue growth. Clothing retailers engaged in promotions during the December season, which normally is regarded as a peak period. This is a negative sign as normally promotions are undertaken in off-peak periods.
Overall, clothing retailers are in for a bumpy ride as buyers continue to have high bargaining power due to the elastic nature of the products. Competition is expected to remain high which may see margin pressure in the future as we expect more promotions and mark downs.