Truworths falling short of the mark
By Palesa Vuyolwethu Tshandu - Feb 22nd 2018, 08:28
With the group trailing its clothing peers, some wonder why its long-standing boss has not resigned yet.
If you ask those in the retail industry about Truworths CEO Michael Mark, many are quick to give anecdotes about the firm grip he has on the group; about a seemingly unshakeable leader, rooted in his ways. However, others believe that, after having spent almost 27 years at the retailer’s helm, it may be time for him to hang up his hat and call it a day.
Mark (64) has managed to transform Truworths from the specialised boutique store it was in the early 1980s into a retail behemoth with an appetite for expansion.
But the company’s high exposure to womenswear — a sector in structural decline due to increased competition, oversaturation and fast-paced changes in fashion — has left Mark’s legacy vulnerable and the group trailing its peers.
Avior Capital Markets equity analyst Atiyyah Vawda says it’s unclear whether the Truworths board will call for Mark’s resignation.
"The higher the pressure on earnings and returns, the sooner this can happen," she says.
"Mark is an excellent operator, with a good track record of managing costs and inventory levels. We saw evidence of this in the latest financial results and Truworths’ historic performance. However, if volumes are falling, then being a strong operator may not be sufficient to save margins in the medium term."
In its most recent trading update, Truworths said retail sales had risen by a just 1% to R10.3bn for the 26 weeks to December.
"Truworths’ brand value declined by 3% in 2017. Its strategy is focused on driving operational efficiency rather than on revenue, which we believe is crucial for success in the current operating environment," says Vawda.
But Mark, who is on a six-month rolling contract that can be terminated by the board with three months’ notice, was never meant to be in the driver’s seat quite this long.
In 2014, the Truworths board decided that his successor would be the then 45-year-old Frenchman Jean-Christophe Garbino. As Truworths’ Mr Fix It, Garbino’s first task would be to replace the legacy systems, such as the group’s heavy dependence on credit sales, that had affected the company’s sales performance. At the time Truworths was also battling the influx of international rivals like Zara, which had taken significant market share from local players — as it continues to do.
But the succession plan fell flat: Garbino resigned just over a year later.
An analyst, who does not want to be named, says: "[Mark] is at the end of his tenure, and the real issue is about succession planning."
The analyst says there has been no real communication from the group about succession, "other than to say that it would replace him with an internal candidate".
But who is suited to take over?
"It’s unlikely that [the group] will have another international CEO. It’s very difficult to import these guys. Sometimes they don’t want to move, and you don’t know how much you want to pay them," says the analyst. "That’s exactly the trouble Truworths is facing at the moment."
Many believe the company is lagging because of its poor merchandising decisions.
Says Vawda: "I believe the group needs to focus on the design of its products. There may be a place in the market for premium fashion, [and] providing the customer with highly desirable products will justify the premium and increase the price-to-quality ratio of the offer."
Adding to the perfect storm is Truworths’ reliance on credit sales: 70% of its SA sales are typically on credit, but credit regulations have become more stringent. The poor economic environment has also tightened consumers’ purse strings.
Mark Sardi, group CEO of the House of Busby and former Truworths group CFO, believes Mark can still contribute meaningfully to the Truworths business.
"I think there are fewer than five people on the planet who could have achieved what [Mark] has at Truworths," Sardi says. "He has the energy levels of a 20-year-old. I think it is unlikely that he will step down soon."
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