Investors offload debt-heavy JD Group
THE JD Group, the largest JSElisted furniture retailer, was walloped soundly this week when it revealed that its profits for the six months to December would be wiped out by writeoffs and increased provisions for bad debt.
The trading update was alarming, partly because it suggests that all furniture retailers could be in for a nasty few months as there appear to be too many stores servicing a population that cannot afford to repay much of the credit it took to buy lounge suites and fridges.
But the JD Group, a company now controlled by Steinhoff which owns brands such as Joshua Doore, Bradlows and Russells, may be in for a tougher ride than most.
Last year at the JD Group’s AGM, some shareholders grilled the company on whether it had set aside enough provisions to cover bad debt on its books.
At the time, then executive chairman David Sussman said it was all under control. This week, it turned out that it wasn’t.
In a trading statement for the six months to December, the JD Group revealed it had to hike provisions from 9.9% of its book to 15.1%.
The company said this added an extra R602-million to impairments. As a result, the JD Group is set to post a loss of between 65c and 70c a share.
This sparked a bloodletting as the share price fell 6.3% on the day of the news, then 3.1% the next day, before settling at about R25 a share.
Now the retailer has had to go to shareholders to raise between R1.3-billion and R1.5-billion through a rights issue underwritten by Steinhoff.
The JD Group said it followed an appropriate provisioning process — but analysts say otherwise.
Evan Walker, a portfolio manager at 36ONE Asset Management, expected that the furniture industry would see a bloodbath for the next three years.
“I think they need to cut 1 000 stores from this environment,” he said.
Walker said the industry never quite adjusted to the new environment.
The consequence is that now there are too many stores, too many bad customers, too many overhead costs and insufficient cover for what happens when it all goes pear shaped.
“They should have cut back stores. Ellerines started cutting back two years ago, Lewis has been adding, as has the JD Group. The business model is flawed because of the oversupply,” said Walker.
The JD Group, Walker said, had always managed its books poorly, taking bad credit risk to support bad stores.
“They have never given the shareholders enough comfort about their position .
“They have grown their store base, grown the book but never put a sufficient provision to support the risk.
“Lewis was always very well provided, Ellerines was somewhere in the middle and JD was the worst culprit,” he said.
Steinhoff is now likely to take the lead in re-engineering the group.
Analysts expect the JD Group to close stores, reconfigure brands (and possibly terminate some) and cut funding costs.
“They have been stuck with this model since the beginning of time, and this whole unsecured frenzy in the market propelled them to also offer loans, which made it worse.”