Tough time for Lewis’s dodgy model to fail it
THIS week’s trading update from Lewis Stores will do nothing to reverse the company’s share price slump, which has taken the share from an all-time peak of R100 in July last year to a current level of R42.
The outlook for the sector in general and Lewis in particular points to continued share price weakness. “The regulatory noose is tightening around Lewis and it is also facing tough economic conditions,” said financial analyst David Woollam.
A key feature of the regulatory noose-tightening is the more vigorous enforcement of affordability assessment regulations, which will prevent credit providers from boosting shortterm performance through reckless lending.
The puzzling aspect of Lewis’s share price trajectory is not that it is in decline but that it ever reached R100 and particularly that it reached R100 when it was already evident the regulators were closing in on practices that, for years, had supported Lewis’s attractive margins. Investors were evidently relying on continued slack enforcement of tougher new legislation by the regulator — some of which had been introduced as far back as 2007.
What investors had not allowed for was the involvement of activists such as Woollam, a director of Summit Financial Partners, who released an in-depth analysis of Lewis’s lending activities and accounting policies in late July. The report, underpinned by “mystery shopper” trips to Lewis stores, and Woollam’s very public spat with chairman David Nurek at the company’s AGM in August, helped to ensure Lewis’s days of fat margins were numbered.
Woollam’s investigation revealed that Lewis’s margins were boosted by income from the credit life insurance, extended warranties and delivery fees it forced on its credit customers.
Consumer credit insurance, which covered loss of job, death and disability, generated just under R1-billion in premium income in financial 2015. For shareholders, it has the additional benefit of a very low claim rate.
Interest charges, initiation fees, extended warranties, delivery and monthly fees earned Lewis around R2.2-billion in 2015;
The regulatory noose is tightening around Lewis
this was equivalent to almost 100% of merchandise sales of R2.5-billion.
Woollam’s charges added to the damning allegations that had been levelled by the National Credit Regulator in early July. The NCR charged Lewis with selling loss-of-employment insurance to pensioners and self-employed customers.
This year looks certain to be another very tough one for Lewis and all the other players in the industry. Not only are they now forced to cap interest charges on credit but new legislation will limit the size of premiums that can be charged for credit life insurance.
And then there is the matter of the weak economy. The drought will not only increase the cost of basic food items but will aggra- vate the impact on employment caused by the slump in the mining sector. It is also likely that hard-pressed consumers will be hit by more interest rate increases this year.
In the trading update Lewis referred to the extremely challenging trading conditions “with weak consumer demand, constrained employment, the drought in the agricultural sector and difficulties in the mining sector”. Affordability assessment regulations had “proved challenging for consumers in the group’s lower- to middle-income target market”.
Unless management can dramatically adjust its cost base to bring it into line with the regulatory and economic environment, the share price will continue on its weaker trajectory.