Truworths technically insolvent with net liability of US$994k

HARARE – Truworths (Zimbabwe) Limited, which has been a staple in the retail sector since its incorporation in 1957, has reported a net liability position of US$994,321, marking it as technically insolvent.

As of August 7, 2024, Truworths reported total assets amounting to US$1.54 million. This figure includes non−current assets valued at US$780 452 and current assets totaling US$759 918. Notably, the current assets comprise inventory worth US$588 194 and debtors amounting to US$163 280, alongside a very modest cash balance of US$5 157.

However, the company’s liabilities far exceed its assets, with total liabilities reported at US$2.53 million. This includes non−current liabilities of US$24 242 and current liabilities of US$2.51 million. The current liabilities are particularly concerning, as they include significant obligations to employees totaling US$1.38 million, trade and other creditors amounting to US$930 255,and statutory liabilities of US$195 865.

The contrast between total assets and total liabilities has resulted in a net liability position of US$994,321, indicating that Truworths is technically insolvent.

The financial distress faced by Truworths is attributed to a confluence of factors that have severely impacted its operations. A total 85% of the group’s sales are conducted on credit, which has led to inadequate liquidity to support inventory and manage the debtors’ book. This liquidity crisis has resulted in suboptimal sales performance, further exacerbating cash flow issues and hindering the company’s ability to meet its financial obligations.

The macro-economic policy environment in Zimbabwe has also played a significant role in Truworths’ struggles. The country has been grappling with exchange rate instability and soaring interest rates, which have diminished the true value of products.

A recent capital raise through a rights issue in 2023 lost 50% of its USD value due to a dramatic depreciation of the Zimbabwe Dollar.

Additionally, a monetary policy statement issued in June 2022 effectively halted US dollar-based lending and increased the Zimbabwean dollar interest rate to approximately 200%, forcing the Group to cease lending to customers and further limiting its revenue streams.

Moreover, the company has been unable to fully cover its payroll obligations for the past 16 months, leading to increased operational challenges.

The non-enforcement of laws banning the importation of second-hand clothes has also negatively impacted the retail sector, as the informal market continues to thrive, often selling goods at prices below production costs. This has created an uneven playing field, with formal retailers like Truworths struggling to compete.

As a result of these compounded issues, suppliers have ceased extending credit, landlords have initiated legal actions, and some leases have been terminated.
The diminishing supplier base in Zimbabwe has forced the company to rely on importing raw materials and finished products, which necessitates upfront funding in US dollars. This situation is compounded by the fact that Truworths’ customers require credit facilities, leading to prolonged cash flow cycles that the company struggles to finance. As a result, the retailer has experienced branch closures and understocking issues.

The importation process has also introduced longer turnaround times, with materials taking extended periods to reach the manufacturing facility, Bravette. This delay affects the timely availability of products in stores, especially given that customers are offered installment plans of up to nine months.

Additionally, the limited supply of raw materials, exacerbated by negative cash flows, has hindered the group’s ability to meet seasonal merchandise demand, further impacting sales and customer satisfaction.

Moreover, Truworths’ retail computer system requires upgrades to effectively manage the multi-currency regime in Zimbabwe. This technological shortcoming has resulted in slow delivery of management reports, hampering timely decision-making and strategic planning for the company.

These operational hurdles highlight the urgent need for Truworths Limited to address its supply chain inefficiencies and invest in technology to enhance its competitiveness in a challenging retail environment.

In light of these challenges, the Corporate Rescue Practitioner (Crowe Advisory) has expressed a cautious optimism regarding the croup’s prospects for recovery. The group has reasonable prospects of being rescued as opposed to liquidation”

Crowe’s first report to creditors presents three scenarios for dividend distribution based on asset liquidation discounts:
25% Discount: Estimated dividend of approximately US$310,612.
50% Discount: Expected dividend of around US$48,325.
75% Discount: Potentially no dividends, as available resources may not cover liquidation expenses-finx