Acquisition boosts Lewis

The Lewis share price reacted positively to news that the group is purchasing an upmarket cash furniture retailer, United Furniture Outlets, with the share price gaining 1.94% to close at R27.32.

The Lewis share price reacted positively to news that the group was purchasing cash furniture retailer United Furniture Outlets, with the stock gaining 1.94% to close at R27.32.

United Furniture Outlets is an upmarket, privately owned retailer with a footprint of just 30 stores. The hefty R320m price tag will be paid in cash from the group’s cash resources. United Furniture Outlets’s audited net assets at the end of February were R66.4m and attributable profit for the year to end-February was R21.9m.

The end-August unaudited balance sheet reflects net assets of R82m. However, although the Lewis board is satisfied with the unaudited information, it advises shareholders to exercise caution in relying on it.

The acquisition does not require shareholder approval.

The R320m represents a historic price:earnings rating of almost 15 times and a substantial premium on net asset value, whether the February or August figure is used.

The Lewis board said the acquisition would enable the group to achieve improved economies of scale and provide a platform to penetrate new market sectors through a wider, more exclusive product range.

“Importantly, Lewis Stores is of the view that the acquisition will diversify its offering by increasing its cash-to-credit sales ratio and facilitate access to a higher-income customer market segment,” the company said on Thursday.

Lewis believes the United Furniture Outlets brand and business model is scalable and provides opportunity for growth not only in SA but also in neighbouring countries.

Although the deal is not substantial, the response of investors indicates support for a move that will see a slight reduction in the group’s reliance on credit sales to the lower-to-middle income market.

Although this market segment has generated strong profit over decades, boosted by steep credit and related charges, in recent years, Lewis’s business model has come under threat.

In the 2017 annual report, the management noted that changes to the regulatory environment could have an effect on the business in the short to medium term. These changes include the capping of customer protection insurance, the affordability assessment regulations and insurance regulations.

Regulatory changes and tougher trading conditions have caused attributable profit to drop from a high of R911.7m in 2013 to R355m in financial 2017.

Over the same period, the share price has slumped from a high of R100 in June 2015.