Truworths Chief Favors Using Cash Hoard for Expansion

Truworths International Ltd. (TRU) Chief Executive Officer Michael Mark said he would rather use the South African clothing retailer’s record-high cash hoard to boost credit sales and acquisitions than pay a special dividend.

The retailer’s cash balance has swelled more than eightfold over the past five fiscal years to 1.8 billion rand ($231 million), along with a doubling of sales and an average 24 percent annual increase in dividends. Since 2002, Cape Town- based Truworths spent 1.7 billion rand buying back shares.

“I wish I could use it internally first and that’s mainly on the debtors’ book,” Mark said in an interview. “My second preference is on expanding the business. My third is a great acquisition. My fourth is neutral between increasing dividend flow and a steady share buy-back or a combination. My least appealing option, personally, is a special dividend.”

Truworths, which competes against Bain Capital LLC’s Edcon Holdings (Pty) Ltd., Foschini Group Ltd. (TFG), Woolworths Holdings Ltd. (WHL) and Mr Price Group Ltd. (MPC), operates 552 stores, 21 of them in African countries outside its home market. More than 70 percent of sales are derived from the retailer’s 2.4 million account holders, which have to be financed.

‘Good Investment’

“Truworths could increase their dividends, but their return on equity has been pretty good,” said Gabriel Sacks, an assistant fund manager at Aberdeen Asset Management Plc (ADN) in London, which oversees about 20 percent of Truworths stock. “They have been a very good investment. We do like our companies to have robust balance sheets so we wouldn’t want to see them moving to a highly geared” position.

Truworths has a return on equity of about 39 percent compared with about 27 percent at Cape Town-based Foschini and a global median for specialty apparel stores of 20 percent, according to data compiled by Bloomberg. The stock has more than doubled over the past five years compared with an increase of about 72 percent in Foschini over the same period.

The shares rose 0.4 percent to 83 rand in Johannesburg, giving the company a market value of 38.2 billion rand.

All options to utilize excess cash, including paying a special dividend, remain under consideration, and there is plenty of scope for share buy-backs without reducing the tradability of the company’s stock, Mark said in the April 24 interview in Cape Town.

‘Not Our Money’

“I am very, very aware that it’s not our money,” he said. The pressure to use the company’s cash is “contained because our return on equity is still well above the norm and above the industry average.”

Truworths last made an acquisition in 2006, when it bought a controlling stake in South African fashion retailer Uzzi for an undisclosed amount. While it has looked at buying a number of other businesses since then, the owners demanded a higher price than Truworths was willing to pay, Mark said.

“I don’t want us to be known as these guys who are always looking and never buying,” he said. “I’m hoping we will be more successful over the next 12 to 18 months. I think lately we have found a methodology and a formula” to value acquisitions that will satisfy Truworths and the sellers.

Plans by Spain’s Inditex SA (ITX), the world’s largest clothing retailer, to roll out its Zara chain in South Africa don’t pose a major threat, he said.

Low Down on List

“Quite low down on my list of concerns would be the foreign entrants, because they are small, they have got their own learning curves they have got to go through,” he said. “Their brands are not well known.”

Truworths is expanding its presence in Africa, opening stores in Nigeria, Ghana, Kenya and Zambia and acquiring its franchise outlets in Botswana. It has also entered into a franchise agreement in Angola. Truworths is not considering making acquisitions in other African countries, Mark said.

“We are quite encouraged by their more active role in Africa,” Aberdeen’s Sacks said in a phone interview. “It’s a better use of cash to expand than to have it sitting on the balance sheet.”

Establishing a sizable presence in Africa will take time and South Africa will remain Truworths’ main focus for some time, Mark said.

“Ten or 15 years into the future, which I have to admit is going to be past my time, Truworths has got to be, and will be, an African chain,” Mark said. “We will have to make lots of changes and adjust.”

To contact the reporter on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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