HIGH interest rates and a weakening domestic economy have plunged apparel retailer Truworths into a going concern crisis as the business is now desperately pinning hopes on a recapitalisation exercise to turnaround its fortunes.
Last year, the government raised interest rates to 200% per annum to discouage borrowing for speculative purposes following a near-collapse of the local currency. The rates were later cut down to 150% and remain one of the highest in the region.
Truworths, in its latest financial report for the half-year ended 3 January 2023, warned that it is facing viability problems due to a floundering economy.
In the period under review, current liabilities exceeded current assets by ZW$492 million, posing a threat to the continuity of the business in the near future.
In addition, the company recorded a loss amounting to ZW$590 million in inflation-adjusted terms, compared to the profit of ZW$367 million registered in the same period last year.
The group said this indicated the existence of a material uncertainty that might cast significant doubt on the group’s ability to continue as a going concern.
“These conditions may give rise to a material uncertainty, which may cast doubt on the company’s ability to continue operating as a going concern and to realise its assets and discharge its obligations in the normal course of business,” the company said.
To mitigate these threats, chairperson Mordecai Mahlangu said the company was engaged in a transaction that would assist in raising working capital requirements.
“The group is engaged in discussions in a transaction that involves raising capital for the group’s working capital requirements and expansion initiatives through the issuance of shares by way of a rights offer,” said Mahlangu.
Meanwhile, the group had a 45% decline in units sold due to the suspension of credit from July last year when the bank policy rate was increased to 200% per annum.
“It was not viable for the business to finance the credit at those interest rates. In addition it was not affordable for our customers to service their account obligations at rates in excess of 200% p.a,” Mahlangu explained.
He added that the business reduced its exposure to credit sales, at the onset of hyperinflation because of the loss of value of the debtors’ book.
Retail merchandise sales for the period declined from ZW$868 million to ZW$529 million. Mahlangu said the sales value performance was negatively affected by price controls enforced by the central bank’s Financial Intelligence Unit using the official exchange rate in the sale of merchandise.
“The business maintained a competitive US dollar price in order to be able to compete on a US dollar basis, translating the US dollar price to ZWL price at the auction rate resulted in the uneconomic ZWL prices and loss of value,” he said.
He also said the business could not compete against prices in the informalised economy, which resulted in illegal imports selling at below manufacturing costs.
Hence, the company recorded revenue of ZW$578 million compared to the ZW$1 billion achieved in the first half of 2022.
Although the company projects a difficult trading period owing to the existence of multiple diminishing exchange rates, Mahlangu said the business introduced US dollar credit in April this year to improve sales.