Four things you should know about Lewis
finweek takes a look at the furniture retailer’s results for the six months to end September.
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.
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.