Ques­tions, ques­tions

JD Group and Lewis still not sit­ting pretty

Finweek English Edition - - Cover - ANA MON­TEIRO

SOUTH AFRICA’S FUR­NI­TURE re­tail­ers – hav­ing borne the brunt of the re­tail down­turn – are di­vided as to whether the credit re­tail cy­cle has bot­tomed and taken a turn for the bet­ter. The founder and now ex­ec­u­tive chair­man of fur­ni­ture re­tailer JD Group, David Suss­man, says while tough trad­ing con­di­tions con­tin­ued over the past six months for its fi­nan­cial year to end-Au­gust, the group – whose brands in­clude Joshua Doore, In­cred­i­ble Con­nec­tion and Hi-Fi Cor­po­ra­tion – saw a 15% de­cline in bad debt write-offs in the last quar­ter of the fi­nan­cial year (June to Au­gust 2008) when com­pared with the same pe­riod in 2007.

“We took the pain early. [That in­di­ca­tion] makes us feel pretty good and bodes well for the fu­ture,” says Suss­man. The com­pany ex­pects “a pleas­ing im­prove­ment in earn­ings”.

So do in­vestors and an­a­lysts, says re­spected vet­eran re­tail an­a­lyst at Ned­group Se­cu­ri­ties, Syd Vianello, as head­line earn­ings for the year halved to 301c/share from 621,7c/share a year ago.

How­ever, Lewis Group gives no in­di­ca­tion of when it ex­pects the tide to turn, say­ing only that trad­ing is ex­pected to re­main dif­fi­cult. The group re­ported a 0,9% de­cline in head­line earn­ings to 305,7c/share last week.

“Other credit providers – such as the banks – say things are get­ting worse and con­sen­sus fore­casts are that rates may start com­ing down in the mid­dle of 2009. The re­cov­ery could be pro­tracted,” says Cadiz African Har­vest fund man­ager Mark Ans­ley.

While re­tail­ers are gear­ing up for their busiest sea­son, it’s those who sell semi-durable, value-for-money goods such as cloth­ing group Mr Price, Mass­mart’s Game and Makro chains, gen­eral mer­chan­dise and beauty re­tailer New Clicks and food re­tail­ers Spar and Pick n Pay who look set to ben­e­fit from 13th cheques and not pur­vey­ors of big-ticket items like fur­ni­ture, says Vianello. “It’s not go­ing to be a mas­sively ro­bust Christ­mas. How­ever, there are signs in re­tail sales in lower price point cat­e­gories that things are eas­ier on wal­lets as a re­sult of the re­duc­tion in the fuel price.”

How­ever, from an in­vest­ment per­spec­tive, shares in fur­ni­ture could be ripe for the pick­ing given how far they’ve dropped. Eigh­teen months ago, JD Group reached its all-time high of R100/ share and is now trad­ing at 2800c. Lewis reached a high of 7250c/share in May 2007; it cur­rently trades at around 3700c.

Lewis’s op­er­a­tional pro­ce­dures have been con­sis­tent for 20 years – with a sin­gle flag­ship brand, cen­tralised credit ap­proval and store­based col­lec­tion – and man­age­ment doesn’t plan to change that.

JD Group, on the other hand, is un­der­go­ing a struc­tural over­haul, with the sep­a­ra­tion of its fi­nan­cial ser­vices and re­tail di­vi­sions. It’s bought new premises for a cen­tralised con­tact cen­tre in Rand­burg to deal with col­lec­tions across its brands and is cur­rently ap­point­ing staff and in­stalling IT sys­tems. To date, one of its debtors books has been loaded on to the sys­tem.

As with any new project, there could be teething prob­lems. But there are ad­van­tages, says Ans­ley. “While a de­cen­tralised col­lec­tion model suits Lewis’s cus­tomer base, well cen­tralised col­lec­tions are known to be more ef­fi­cient, both lo­cally (as seen with cloth­ing re­tail­ers) and glob­ally. For the next few years JD Group will be go­ing through steep struc­tural changes.”

JD Group’s mount­ing tax li­a­bil­i­ties – which now to­tal R773m fol­low­ing two new claims, one re­lat­ing to a trans­ac­tion declar­ing debt null and void (a de­fea­sance); the other a R197m claim re­lat­ing to a con­vert­ible loan trans­ac­tion – are also a con­cern for share­hold­ers and the mar­ket.

“The amount is enough to wipe out prof­its,” says Vianello. “JD mustn’t think it can wave a magic wand and it will dis­ap­pear. It feels rea­son­ably re­laxed be­cause it’s been get­ting de­fer­ments. But when the five years are as­sessed, it could have to write a cheque for R500m. Fund man­agers are get­ting un­easy and un­der th­ese mar­ket con­di­tions I don’t know where JD will get a loan fa­cil­ity.”

Says Ans­ley: “Any is­sue with the SA Rev­enue Ser­vice is prob­lem­atic for a share­holder. JD’s man­age­ment be­lieves it has im­ple­mented struc­tures that are above board and is con­fi­dent with the le­gal ad­vice re­ceived.”

Ans­ley notes the mar­ket has dis­counted JD Group shares to the ex­tent that its mar­ket cap of R4,7bn is only slightly higher than the value of its debtors book, which stood at R4,6bn at end-Au­gust. “The mar­ket isn’t giv­ing much of a val­u­a­tion to JD’s cash po­si­tion, given the tax li­a­bil­ity.” The group had R1,1bn in cash and cash equiv­a­lents at its year-end.

With the earn­ings drop at JD Group it’s clear the counter will pro­vide sub­stan­tial earn­ings growth when com­pared with Lewis, says Vianello. “JD Group earn­ings should creep up by 30%. But fol­low­ing a 50% drop it’s still way short of where it was.”

Vianello says un­der the watch of new CEO Grat­tan Kirk there are pos­i­tive changes tak­ing place. “But the un­cer­tain­ties are so mon­u­men­tal I pre­fer to play it safe. There are too many things to get right.”

Rosy fu­ture. David Suss­man

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