Four things you should know about Lewis

fin­week takes a look at the fur­ni­ture re­tailer’s re­sults for the six months to end Septem­ber.

Finweek English Edition - - NEWS - ed­i­to­rial@fin­week.co.za By Shoks Mzolo

Lewis expects its gross profit mar­gin to im­prove dur­ing the sec­ond half of the year as newly in­tro­duced ex­clu­sive mer­chan­dise gains trac­tion. Lewis re­lies heav­ily on credit sales, which to­talled 65.9% in the six months to end Septem­ber, slightly down from last year’s 69.7%.

HOW DID IT GO?

Lewis Group, which owns re­tail­ers Lewis, Beares and Best Home and Elec­tric, earned 81% of its rev­enue from the sale of fur­ni­ture and ap­pli­ances. It grew rev­enue by 8.3% in the pe­riod to R2.8bn, while head­line earn­ings per share (HEPS) were down 13.4% to 323c.

Once a stock mar­ket dar­ling, Lewis has been strug­gling to im­prove its mar­gins and grow earn­ings in re­cent years. Its op­er­at­ing mar­gin over the pe­riod was 14.7%, a far cry from the first half of 2014 when it re­ported an op­er­at­ing mar­gin of 20.6% (and HEPS of 420c). The in­terim div­i­dend was 215c a share, the same as for the six months to 30 Septem­ber 2014.

WHY IS IT STRUG­GLING?

Lewis links its mid­dling num­bers to “de­te­ri­o­rat­ing re­tail trad­ing con­di­tions since July, with the weak­en­ing job mar­ket and on­go­ing eco­nomic un­cer­tainty in the coun­try lim­it­ing prospects for the group’s lower- to mid­dle-in­come tar­get mar­ket”.

A credit rat­ing up­grade by Global Credit Rat­ings (GCR) on Lewis Group in Au­gust also warned about the im­pact of a weaker rand on im­ported goods, as well as the group’s “lim­ited pric­ing power in a com­pet­i­tive mar­ket”.

Lewis re­lies heav­ily on credit sales, which to­talled 65.9% in the six months to end Septem­ber, slightly down from last year’s 69.7%. Bad debts writ­ten off in­creased by 16.7% year-on-year to R244m, while the im­pair­ment pro­vi­sion in­creased by the same per­cent­age to R224m. Its credit ap­pli­ca­tion de­cline rate re­mained stable in the pe­riod un­der re­view at 41% (up from about 7% of credit ap­pli­ca­tions seven years ago). The group has also de­cided to adopt the Na­tional Credit Reg­u­la­tor’s (NCR’s) new af­ford­abil­ity as­sess­ments reg­u­la­tions early, which ham­pered sales.

How­ever, de­spite the de­te­ri­o­ra­tion in its debtors book over the past two years, CGR felt it “re­mains in ad­e­quate con­di­tion over­all”. Lewis also ran into trou­ble with the NCR, de­scribed in more de­tail be­low.

OTHER KEY IS­SUES

Lewis is cur­rently re­fund­ing some cus­tomers – pen­sion­ers and self­em­ployed clients – R67.1m in pre­mi­ums plus in­ter­est af­ter it sold them “loss of em­ploy­ment” in­sur­ance. The re­pay­ment comes af­ter the Na­tional Con­sumer Tri­bunal re­ferred a com­plaint to the NCR, trig­ger­ing an in­ter­nal in­ves­ti­ga­tion by Lewis.

The af­fected cus­tomers made up 15% of cases iden­ti­fied by Lewis’s own in­ter­nal probe which, in turn, fin­gered “hu­man er­ror at store level”.

On the plus side, Lewis expects its gross profit mar­gin to im­prove dur­ing the sec­ond half of the year as newly in­tro­duced ex­clu­sive mer­chan­dise gains trac­tion. In the longer term, it expects the higher cost struc­ture of Beares to be brought in line with the rest of the group. It bought Beares last year from El­ler­ines fol­low­ing the col­lapse of El­ler­ines’ ma­jor share­holder, African Bank In­vest­ments (Abil). De­spite its high reliance on credit sales and the cost of its debtors book, the group re­mains strongly cash gen­er­a­tive.

WHAT’S NEXT

The “high lev­els of cus­tomer loy­alty and brand aware­ness”, once de­scribed by Lewis as “par­tic­u­larly im­por­tant dur­ing chal­leng­ing trad­ing pe­ri­ods”, where just not enough to drive per­for­mance in the past half-year.

Lewis warned that the cur­rent ad­verse trad­ing con­di­tions are “not ex­pected to im­prove in the short term. Con­sumer con­fi­dence re­mains muted and un­em­ploy­ment con­tin­ues to im­pact the group’s tar­get mar­ket, with cus­tomers in the min­ing and agri­cul­tural sec­tors be­ing un­der par­tic­u­lar pres­sure.”

Lewis has been the worst per­former by far in its cat­e­gory on the JSE over the past 12 months, with its share price de­clin­ing 18%. Of the three bro­kers who up­dated their rat­ings on Lewis since the release of the in­terim re­sults, all rec­om­mend a “hold” on the stock, ac­cord­ing to INET BFA data.

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