Lewis’s UFO deal beams up the cash
Acquisition of luxury brand gives Lewis a better client balance
● Lewis Group’s acquisition of cash furniture retailer United Furniture Outlets (UFO) may be one of its best decisions this year. The purchase of the luxury brand has helped Lewis draw in high-income earners and improve the ratio of cash sales to credit sales.
Lewis CEO Johan Enslin said on Wednesday, after the retailer reported that its group cash sales had surged, that the plan was “to continue to run that business [UFO] as a cash-only retailer”.
“We see it as a mechanism to de-risk the business, and the first six months of trade under the Lewis Group have been good. We’ve seen some encouraging results coming out of UFO,” he said.
Mark Hodgson, an industrials analyst at Avior Capital Markets, said the acquisition of UFO with its 33 stores bodes well for Lewis.
“The numbers [merchandise sales] are obviously higher because of UFO being in the base, but even stripping that out it’s still pretty healthy, it’s a lot better than it has been previously,” Hodgson said.
Cash can be king
Lewis Group recorded a 72% jump in cash sales in the six months ended September 30, signalling that it is making good on its plan to steer away from credit sales, on which it previously relied heavily.
Cash sales accounted for 43% of total sales compared with 31% in the same period last year.
Merchandise sales accounted for more than 55% of revenue, and charges and initiation fees, insurance premiums and services rendered declined by 2.8%.
Merchandise sales excluding UFO were up 8.1%.
“They [Lewis] just certainly seem a lot more comfortable with where they are,” Hodgson said.
After stringent credit regulations were introduced by the National Credit Regulator (NCR) in 2015, Lewis bled a lot of customers who bought on credit, hurting its revenue growth.
In an attempt to guard against reckless lending, the National Credit Act was amended to set out criteria for credit providers to use in assessing a customer’s ability to pay.
The NCR also accused Lewis of infringing credit regulations by charging club fees on credit agreements and extended warranties, but a high court decision in 2017 found in favour of Lewis.
In June, affordability guidelines were relaxed to allow people without formal employment, as well as the self-employed, to apply for credit.
Enslin said the trading environment had been challenging as a result of the tighter affordability regulations, which particularly hampered such Lewis brands as Beares and Best Home & Electric.
However, Enslin said that the relaxation of credit assessment regulations had allowed the group to restore 10,000 customers to its books since July.
New rules help bottom line
“We believe that we will continue to benefit from this change in the affordability regulations well into the future,” he said.
Hodgson said the UFO acquisition had given Lewis Group a much better cash-tocredit profile.
“UFO is largely cash. They [Lewis Group] are much better balanced to be less reliant on credit, and they can offer credit to selfemployed and informally employed people now that the affordability restrictions have been relaxed a bit,” he said.
“I think in a responsible way they can still grow their credit side sufficiently.”
Lewis Group could also be benefiting from rising demand for furniture.
Stats SA data shows that retail sales of furniture and white goods has been one of the best-performing retail categories for the year.
We believe that we will benefit from this change in the affordability regulations well into the future Johan Enslin
Lewis CEO