FURNITURE retailer Lewis Group said yesterday that pretax profit rose 14% in the six months to September as sales increased and bad debt costs stabilised.
The company that operates 565 stores under the Lewis, Best Home and Electric brands, said pretax profit increased to R441,9m from R386,6m.
Furniture and appliance sales rose 11,1% with electronic goods sales up 11,7%.
Sales on credit rose to 71,7% from 68,5% of total sales.
“It’s a satisfactory result for us,” CEO Johan Enslin said. “We’ve had six very strong months on the collection side of things. Increasing debtor costs have slowed. Sales are really looking up.”
Many Lewis customers are public servants who have benefited from the recent generous wage increases.
The proportion of customers in the “satisfactory paid” category — those paying 70% or more of amounts due over the contract period — rose to 71,6% from 69,6% from a year earlier .
The company’s impairment provision, however, increased from 17,9% to 18,4% of net debtors over the period due to the higher capital investment in longer-term contracts.
The company, which builds in incentives to customers to borrow more as their existing loan terms come to an end, said 55% of all business generated during the period was with existing customers. “Targeted local store promotions that hone in on good- paying customers are the biggest weapons in our artillery,” Mr Enslin said.
Other issues that affect Lewis customers directly, such as food and fuel prices, are working in the company’s favour, he said.
However, unemployment remains the biggest concern for the company, which declined to predict a stronger Christmas than last year.
“We are optimistic about Christmas. We went out and sourced some really excellent value-for-money merchandise,” Mr Enslin said. “We’ve got the stock to make this festive season as strong as possible.”
Cape Town – Furniture retailer Lewis Group increased headline earnings per share by 14.5% to 332.5 cents in the six months to September 2010 as merchandise sales grew by 11.2% and credit collections continued to improve.
An interim dividend of 156 cents per share was declared, an increase of 8.3%.
Chief executive, Johan Enslin, said the stronger sales growth was driven by the steadily improving financial state of consumers in the Lewis target market and the focus on sourcing exclusive merchandise ranges.
Merchandise sales in Lewis, which account for 83% of total sales, increased by 11.2% with Best Home and Electric sales growing by 16.3%. Credit sales increased from 68.5% to 71.7% of total sales through targeted customer promotions at store level and the launch of new furniture and appliance ranges.
Enslin said the strategy of sourcing exclusive merchandise continued to benefit the group. Gross margin, adjusted for currency losses, improved from 33.4% at the financial year end in March 2010 to 34.4%.
Debtor costs for the period reduced from 5.0% to 4.8% of net debtors.
Operating profit margin improved to 22.0% (2009: 21.8%) and translated into operating profit growth of 10.5%.
Eleven Lewis and nine Best Home and Electric stores were opened in the past six months, bringing the store base to 565. Eight of the new Lewis outlets are the smaller format stores. The group plans to open 40 to 45 new stores for the 2011 financial year.
A new trading brand, My Home, was successfully launched during June 2010. Thirteen Lifestyle Living stores were relaunched as My Home and the first new store opened in August. Trading for the first three months has been in line with expectations, he said.
Discussing the group’s prospects, Enslin said the outlook for consumers continues to improve. “Higher real wage increases granted across most sectors of the economy are positive while retrenchments and job losses in our customer base appear to have stabilised.
“The momentum in collections has been encouraging and our store expansion plan is on track. The festive season trading period will again be strongly supported by merchandise and promotional activity,” he added.
Ends
Issued by Tier 1 Investor Relations on behalf of Lewis Group
For further information kindly contact Graeme Lillie, tel (021) 702 3102 / 082 468 1507
Exclusive merchandise and an improved trading environment has seen furniture retailer Lewis Group (LEW) increase bottom-line profit by 14.5%.
“Stronger sales growth was driven by the steadily improving financial state of consumers in the Lewis target market and the focus on sourcing exclusive merchandise ranges,” said chief executive, Johan Enslin.
On Monday, the company, which sells furniture to the lower and lower-middle income market said headline earning per share (HEPS) were up 14.5% to 332.5 cents for the six months ended September 2010. Operating profit was up 10.5% to 468.9 million rand and the group’s interim dividend increased 8.3% to 156 cents per share. Credit sales increased from 68.5% to 71.7% of total sales.
Furniture and appliance retailers were among the hardest hit during the recession as a result of debt collection difficulties and a significant in sales of durable goods and big-ticket items.
But lower interest rates and a less-cautious approach to spending has seen consumers dipping into their pockets.
According to Stats SA, retail sales figures for August 2010 showed an increase of 4.6% year-on-year (y/y), with the highest annual real growth rate recorded for retailers in household furniture, appliances and equipment at 21.1%.
When asked by I-Net Bridge whether the worst was over for furniture retailers, Enslin said: “We can only speak for ourselves but with merchandise sales up 11.2% to 2.136 billion rand it’s evident that consumers are spending more.”
A retail analyst said that trading conditions in the sector had definitely picked up.
“There is a marked improvement in the furniture and appliance sector. People have more money to spend because interest rates are lower. They’re feeling more confident to part with their cash – not just for smaller price tags but for bigger items too,” he said.
Enslin added that the outlook for consumers continued to improve. “Higher real wage increases granted across most sectors of the economy are positive while retrenchments and job losses in our customer base appear to have stabilised,” he said.
He said that the company’s focus on sourcing exclusive merchandise ranges had benefited the group immensely.
“40% of our merchandise is imported. We source from South America, China
Retail sales figures grew for the fifth consecutive month to 4.6% year-on-year for the three months ended May, indicating that consumers are slowly releasing their spending brakes and dipping into their pockets.
Coming off a very low base after the economic downturn, hard-pressed furniture retailers seem to be gearing up for a turn in the cycle as one of the main contributors to this increase, with retailers in household furniture, appliances and equipment at 15.6% and contributing 0.8 of a percentage point.
During the recession, furniture and appliance retailers were among the hardest hit because of debt collection difficulties and a large in sales of durable goods.
However, some fared better than others.
Lewis Group (LEW), which sells furniture to the lower and lower-middle income market, reported that pretax profit for the year to March 2010 grew 5%, while revenue lifted 8% to 4.1 billion rand.
“Sales of the higher margin furniture and appliance category increased by 8.5% as our merchandise strategy of sourcing exclusive and differentiated furniture ranges continued to benefit the group,” Chief Executive, Johan Enslin said.
Of the overall sales for the period under review, 68% was from credit customers.
The group said that the growth in sales came from the company’s strategy of keeping a close relationship with its credit customers, shunning the call-centre approach and encouraging customers to come into the stores to pay their accounts.
Rival JD Group, owner of Joshua Doore, Incredible Connection and Hi-Fi Corporation said that pretax profit in the six months to February 2010, fell 20%, while turnover increased 1% to 6.8 billion rand.
The company said that credit sales for the period under review fell 7.6% because customers stopped applying or qualifying for credit. Credit makes up 67% of JD Group’s sales.
On the bright side, the JD Group reported a reduction in debtors’ costs to 454 million rand from 561 million rand, largely as a result of the centralisation of the credit granting and credit collections strategy completed by the company in 2009. Lewis on the other hand, whose focus is to retain customers on their books, reported that its bad-debt impairment provision rose to 16% from 15.7% a year earlier.
“JD’s bad debt has come down, while Lewis’s is increasing because of extended terms on borrowing for those customers who can’t meet their payments,” a retail analyst said.
Lewis Chief Executive Johan Enslin said that debtor costs appear to have peaked and should moderate in the year ahead as the credit collections environment continues to improve.
Earlier in the year Lewis announced an aggressive expansion programme that would see its store base increase from 548 to 700 over the next three years.
The furniture retailer said that its new upmarket trading brand, My Home would target customers in the LSM 7-8 category and that of its 19 Lifestyle Living stores, 13 would be converted to My Home divisions.
“We will focus on differentiating our merchandise by offering exclusive and innovative ranging to attract customers who would use in-store credit infrastructure,” Lewis said.
With almost 55% of sales turnover generated from repeat sales, Lewis’s customer-centric business model seems to be a winning formula during torrid times that has seen it post good numbers among its peers in the furniture industry.
Johan Enslin – he’s 36 years old. And yet after being in the hot seat for barely a year, Johan Enslin – CEO of household furniture and home appliances group Lewis – has taken the investment community into his confidence and demonstrated he was the right choice to fill the shoes of retail doyen Alan Smart. When delivering his first set of annual results just over a week ago, Enslin didn’t only impress investors with good numbers – given the harsh trading environment – but also outlined an ambitious growth plan for the group, which includes growing Lewis’s store base from the current 548 to 700 over the next three years and improving its debtors book.
While the good results might have been somewhat expected, given Lewis’s positioning in the market, Enslin’s commitment to grow its store base by 45 new outlets in the current year signals the group’s belief the sector has passed the worst of the recession. “We believe we’ve turned the corner. If you look at our merchandise sales growth over the past 12 months – which came in at 6% – our cash collection has really started to improve after our half-year results. So since October last year we’ve really collected good cash for seven months in a row and that also resulted in debtor costs starting to moderate. So we really believe we’re through the worst,” says Enslin.
“Our customers aren’t exposed to bank credit in a big way. Less than 5% of our customers actually have a house or a car financed through a bank.”
As chief operations officer, Enslin was thrust into succeeding Smart, who retired late last year after a rewarding career in the furniture retail industry and who’s largely credited with having built the Lewis chain into what it is today.
Stepping into those big shoes, Enslin is expected to build on that growth story. It’s thus not entirely surprising he’s already taken the bull by the horns. After all, he’s been strategically prepared for the position.
“I was privileged to have worked with Smart. He played an instrumental role in developing me and I was really flattered to be the person who actually got the opportunity to take over from him,” says Enslin.
Born in Humansdorp in 1974, a small farming town in the coastal part of the Eastern Cape, Enslin calls himself a “true-blue retailer”. He joined the Lewis group in 1993 as a salesman on the store floor in Kimberly, straight after matric. Over the years he climbed the ladder within the group, demonstrating his capabilities and eventually landing the top position.
Though admitting he’s always been ambitious, Enslin says his appointment came a little earlier than he’d anticipated. At the time he was appointed CEO designate in November 2008 he was 34. “You can never decline an opportunity to lead a company as great as this. It’s a one-off lifetime opportunity.”
Growing up in Gauteng and the Northern Cape, Enslin played his fair share of rugby, was an athlete and won several colours for his provinces. He has always been a very focused individual who knew from a young age what he wanted from life. “I think I developed into a leader quite early in my life: being captain of several sports, being head boy. When I was young, I wanted to become an attorney, but as I grew older I got interested in business and saw this sales position as an opportunity to get a foot in the door.”
Throughout the recession Lewis generally fared well compared with its peers. And the group remains a favourite among investors. Enslin isn’t surprised at that suggestion and shares his winning formula. “It all comes down to our business model. We have a customer-centric business model, focusing on retaining customers on our books. We encourage customers to come in and pay their accounts at the store. We don’t get people to sign debit orders. We want to see our customers and build relationships with them. It’s that personal relationship with the customer that makes us different,” says Enslin.
“We don’t collect cash out of a call centre. Stores do the collections, because they’re located where the customer is. They know the customer quite well and can be sympathetic if the customer is having some financial difficulties. Life isn’t easy: people have problems – and you’ve got to understand that. And because of that we build tremendous loyalty.”
That might sound old fashioned but it works very well. “Fifty-five percent of our business is done with repeat customers. People come to us because there’s personal service.”
Another advantage is that Lewis is largely a single brand group with the flagship chain contributing almost 85% of the group’s revenue. But Enslin throws cold water at that suggestion, saying while being a single brand has some marketing benefits, relevant merchandise and good pricing are what ultimately trigger consumers to buy.
Lewis has the best merchandising team who scour the world for best innovative products and value, he says. “Some of these guys have got the talent to actually design the merchandise and take it to a supplier to make it for us.” Currently, Lewis directly imports 25% of its merchandise.
And what of Enslin’s management style? He prefers a hands-on approach. “I like to lead from the front. I don’t like to sit behind my desk. The rolling up of sleeves is a very integral part of our company’s culture. As CEO it’s vital to know what’s going on in all your stores, otherwise you can’t make informed decisions. That’s one of my strengths. I grew up in this business: started as a salesman, branch manager, regional, divisional, general manager – so I saw all of that. If a branch manager discusses his frustrations with me, I can relate to that because I did that job. It’s not something I read in an American textbook that doesn’t apply to SA. It’s real experience.”
That’s the operational side. What about his team?
“I believe it’s the people around you who make you strong. You need to those people carefully. You need to deal with them with integrity, dignity and respect. And you need to motivate them to go the extra mile – not for you, but with you. I think that also speaks to my leadership style. I surround myself with strong people and as a team we deliver good results. So it’s not about me. It’s about all the good people I’ve worked with. I’ve been with the group for almost 17 years working with a lot of different people, and I’ve been privileged to touch their lives in the way they’ve also touched mine. This is about the team: it’s not about Johan Enslin.”
While mapping out a growth strategy for the group, Enslin has also had to rebrand its Lifestyle Living outlets – a small division contributing 3% to group revenue – into My Home following its ongoing lack of profitability.
“We’re now changing the entire furniture range – the whole merchandise offering in those stores – to attract a customer who will make use of credit facilities; traditional, but a little bit more inspirational than what you can get in our stores at Lewis.”
Furniture retailer Lewis Group lifted revenue by 8% to R4.1 billion in the year to March 2010 as the early signs of improving economic conditions started to benefit consumers, while improved margins increased the group’s profitability by 9%.
Earnings per share increased by 5.6% to 672.0 cents and the total dividend was maintained at 323 cents per share for the year.
Chief executive, Johan Enslin, said merchandise sales grew by 6.5% to R2.1 billion. “Sales of the higher margin furniture and appliance category increased by 8.5% as our merchandise strategy of sourcing exclusive and differentiated furniture ranges continued to benefit the group,” he said.
Merchandise sales in the flagship Lewis brand, which contributes 83% of total sales, increased by 7.7%. Best Home and Electric grew sales by 7.8% and sales in Lifestyle Living declined by 10.4%. Credit sales supported by merchandise initiatives and in-store promotions increased to 68.5% from 64.3% of total sales.
Enslin said the group’s gross margin improved from 31.3% to 34.9%, fully recovering the currency losses reported at the half year. Adjusting for currency losses, the net position improved from 31.9% to 33.4%.
“The group operating margin improved to 22.1% (2009: 21.9%) which has translated into a 9.0% uplift in operating profit to R907 million, once again reflecting the resilience of our business model.”
Debtor costs increased by 28% from 10.0% to 10.9% of net debtors. Enslin said while credit collections were slow in the first six months, the situation has improved since half year and debtor costs have stabilised. The year end impairment provision moved from 15.7% to 16.0%, improving on the level of 17.9% reflected at half year.
“Our credit application decline rate at 27.5% is in line with first half experience, although up on last year’s 25.4%. The group’s centralised credit granting process has been a core strength in this difficult credit environment,” he commented.
Ten Lewis and six Best Home and Electric branches were opened, bringing the store base to 548 at the end of March. A more aggressive store expansion programme will see the group open 40 to 45 new stores in the year ahead.
A new trading brand, My Home, targeting customers in the LSM 7 – 8 categories will be launched in June 2010.
Enslin said My Home will adopt the successful Lewis business model and use the group’s well established credit infrastructure. “We will focus on differentiating our merchandise by offering exclusive and innovative ranging to attract customers who would use in-store credit facilities. Thirteen Lifestyle Living stores will be converted to My Home stores”.
Discussing the outlook for the group, Enslin said while trading conditions are showing early signs of improvement, the environment will remain challenging as the country emerges from recession.
“Debtor costs appear to have peaked and should moderate in the year ahead as the credit collections environment continues to improve. However, job creation remains key to stimulating economic growth among the Lewis target market,” he added.
For further information kindly contact:
Graeme Lillie Tier 1 Investor Relations
AFTER A TORRID 2009, this year may yet be another rough one for South Africa’s furniture stocks, despite signs of economic recovery. That’s because the sector’s recovery largely hinges on two factors: better debt collections and an uptick in sales.
But analysts have expressed mixed feelings about the sector’s prospects this year in light of last year’s jobs bloodbath – with its effects still filtering through to all the corners of the economy – as well as consumer restraint, as was the case late in 2009.
The Bureau of Market Research has forecast an uptick in retail sales this year, but only at a marginal 1,5%, with sales of non-durable goods anticipated to increase by 2,2% and sales of durable goods expected to grow by 1,6%. While that suggests SA is gradually emerging from the recession, significantly positive numbers are only expected later this year.
Shanay Narsi, an equity analyst at BoE Private Clients, says it’s doubtful whether consumers in the lower to middle end ranks would recover before second half 2010. However, stocks could rally in anticipation. “The market is looking closely for evidence that bad debt levels have stabilised. That should be evident first before a sales uptick,” says Narsi.
Nevertheless, the very low base from which furniture retailers are coming off could also rally investors to anticipate positive numbers. “I expect some recovery this year,” says Jeanine van Zyl, a retail analyst at Omigsa. “We aren’t expecting the same extent of job losses to recur this year, which was the primary drag on the consumer in 2009,” she says. “Lower food inflation, combined with reasonable wage increases, will also result in more disposable income.”
Furniture retailers were last year among the hardest hit companies on the JSE due to significant drops in sales of durable goods, as well as difficulties with debt collections. While that was a product of the recession, stocks such as the JD Group and Abil’s Ellerine were also affected by their restructuring exercises.
JD Group – which reported an 85% plunge in headline earnings per share to 44,2c and a bad debt charge growth of 23,5% to R1,1bn in the year to August 2009 – has since separated its financial services business from its retail division, while Abil’s Ellerine chains continue to shut down loss-making outlets and are implementing a brand and cost rationalisation strategy.
“At the moment there’s no evidence either strategy is working,” says Narsi of the two groups’ restructuring exercises. “Their customers require debt to make purchases but most are failing to meet the high requirements set by the NCA. The existing books are still quite messy, as job losses and wage cuts have compromised the ability of some good, paying customers to maintain payments.”
However, Warren Buys, portfolio manager at Cadiz Asset Management, is somewhat encouraged by JD Group’s turnaround strategy, especially its focus on customer satisfaction. “We really now need to see the results of their efforts. However, that could take a while to filter through,” says Buys. But it’s a different story for Ellerine. “Ellerine has lost a lot of market share due to its store rationalisation, which could be quite difficult for the company to regain. I do feel that in future the combination of Ellerine and Abil could be very powerful, but first the group needs to strengthen its furniture brand and win back customers with a relevant product offering.”
Rival Lewis Group has been able to mitigate the effects of the recession by having a close relationship with its customers and lengthening its debtors book, says Buys. As a result it hasn’t had as aggressive write-offs as its competitors, he says.
A less complicated business, with only three brands, both Van Zyl and Narsi say Lewis has been better positioned at the bottom end of the market and its unflinching focus on merchandise has held up sales relatively well. “At the end of the day, as a retailer it’s also important to be a merchant and have the right merchandise. Lewis appears to be ahead of its peers in that regard,” says Narsi.
The big risk in furniture retail is bad debt management. However, the analysts are hoping for improvement in that regard, saying most of the newer business the furniture retailers have been writing is of good quality.
COMPANY ANALYSTS’ FORECAST
YR1
YR2
YR3
10,2
7,55
6,48
9,85
13,2
15,4
7,13
8,83
10,5
285
383
446
Fourth-quarter revenue increases by 7.9%
Furniture retailer Lewis increased merchandise sales by 11.7 percent last month, astonishing analysts who had expected a dismal performance for durable goods retailers over the festive season.
Revenue for the quarter to December grew by 7.9 percent year on year, with merchandise sales for the same period increasing by 7.3 percent.
“This is bizarre. We are definitely seeing a segmentation of the consumer here,” said Christopher Gilmour, a retail analyst from Absa Asset Management. According to Gilmour, the results show the more affluent consumer is “coming back to the party”.
The overall condition of the debtors book, as measured by the group’s doubtful-debt provision, remained stable. Paul Bosman, an analyst from PSG Tanzanite, said the fact that provisions had not moved out any further was very encouraging.
“We were slightly concerned about the significant increase in unemployment leading to a deterioration of the Lewis book. The doubtful-debt provision as a percentage of the total debtors book has in fact decreased slightly, from 17.9 percent to 17.4 percent.
“Decreasing provisions lead to higher profits, which is why the earnings of credit retailers take off when the cycle turns – top line growth is combined with shrinking provisions.
“Keeping this in mind, Lewis remains attractively priced,” Bosman said.
The key to the performance of the group, which includes the Lifestyle Living and Best Home and Electric chains, lay in its customer-centred focus.
“They have not gone the call centre route, which has stood them in good stead,” Gilmour noted.
Both analysts felt that the company’s sales had been boosted by the “good relations they have with their customers”. The group’s business model shows that more than 60 percent of its sales take place on a repeat basis.
Lewis is South Africa’s largest furniture brand and contributes 82 percent of the group’s merchandise sales.
Best Home and Electric has increased its share of group sales to 12 percent through a store-expansion programme over the past few years, while Lifestyle Living focuses on higher-income customers and accounts for 6 percent of sales.
Gilmour said Lewis had performed better than some cash retailers, such as Mr Price, which posted an 8.4 percent rise in third-quarter sales last week.
“This result shows that the majority of the group’s clients are relatively secure in their jobs, although most are not that exposed to interest rates, as they fall within the middle to lower living standards measures,” Gilmour said.
Lewis shares rose 1.5 percent yesterday to R50.50.
By Florence de Vries
Furniture retailer Lewis Group continues to earn solid returns – it released a trading update yesterday showing revenue for the final quarter of last year rising by 7.9%.
December was particularly encouraging, with sales up by 11.7%. For the interim reporting period, growth was up 8%. Most of the food and clothing retailers have posted increased sales, but they have been below analysts’ expectations.
BoE retailing analyst Shanay Narsi said the Lewis Group had strong sales and a stable debtors’ performance. “It looks like sales are improving and taking up the slack from lower inflation and financial-service yields,” Narsi said.
Lewis’s target market is less sensitive to interest rates, but more exposed to job losses. The impact of unemployment on sales has been insignificant.
The group’s customers have a debt-to-disposable-income ratio of 35%, far lower than the South African average. About 70% of the group’s account base does not have accounts elsewhere.
Real retailing sales declined for the 10th consecutive month in November, by 6.6% year on year, after October’s revised 6.1% decline, according to Statistics SA on Tuesday.
We are excited to launch this website as a key information and communication portal on the corporate social initiatives of the Lewis Group.
We endeavour to make a difference in our communities and society – and core to the Lewis CSI strategy is our motto – Supporting communities that support us – that you see strongly positioned on the home page of the website.
The corner stone of this strategy is to identify opportunities that are in line with our goals and objectives; promise sustainability; show measurable results in the short-, medium- and long-term; a win / win relationship between us and our beneficiaries, and provide the greatest social impact and value for the society we work and live in.
The majority of our support goes toward education and nutrition followed by health and social development – especially towards the plight of children at risk in our society.
It is important to us that we actively pursue our integrated CSI strategy in a transparent manner and this website will play a key role in providing access to anyone who wishes to find out about the CSI focus within our organisation.
We trust you will find this website informative and welcome any feedback you might have.
