Share price falls as Steinhoff ends supply deal

INVESTORS may be a little more wary of Steinhoff’s stock after the group’s quarterly update this week showed margins were expected to come under pressure after the Mattress Firms’ supply agreement for the TempurSealy brand ends.

Since the release of the results on Tuesday, the share price has fallen almost 6%.

Charles Allen, a senior retail analyst at London-based Bloomberg Intelligence, said Steinhoff had added to any feeling of uncertainty about the purchase of Mattress Firm by dropping one of its major suppliers and entering “into an alternate, but still unspecified, arrangement”.

“That it will cause short-term sales and margin disruption,” said Allen.

This week, Mattress Firm announced the termination of its supply deal for Tempur-Sealy products by early to mid-May.

In the short term, industry pundits have said the fact that Mattress Firm stores would not stock this brand could have an effect on group revenue and profitability, the company said.

For the three months to December quarter, Mattress Firm and Poundland, which were both bought last year, contributed à1.3-billion to the group’s total revenue, which overall rose 45%. Excluding these acquisitions, revenue would have risen 11%.

Andreas Riemann, an equity analyst at Commerzbank, said the decline in the share price may have been a result of the group’s recent deals as investors may not be sure whether the companies Steinhoff bought will drive profitability, especially given the termination of the TempurSealy contracts.

He said the company had only “provided sales numbers, which makes it difficult to assess all the moving pieces at Steinhoff”.

The group, which has more than 11 000 stores on four continents, recently withdrew from talks with Africa’s largest retailer, Shoprite, after crucial players failed to agree on a price for the deal.

On the JSE, Steinhoff’s share price has fallen about 33% since March last year.

Allen said: “Most of Steinhoff’s business is in Europe and its accounts are not prepared in euros. In Frankfurt, the decline is only about 15%.

“The difference represents the strengthening of the rand against the euro. In addition, because the number of shares in issue has increased so much, the strong growth at the earnings before interest and tax level has not been reflected in earnings per share growth.”

But it was still too early to tell whether Mattress Firm was a good buy for Steinhoff.

“Steinhoff has gained a very strong market position in US mattress retailing and has the potential to improve margins through completing the consolidation of earlier Mattress Firm acquisitions.”

The share price fell 0.9% to R65.55 by the close on Friday.