JD Group and Lewis still not sitting pretty
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