Furniture retailer Lewis Group has continued to show an improving trend in revenue growth in the six months to end September 2009, with revenue increasing 7.9% to R1.95 billion and merchandise sales up 6.8% to R951 million.
The group has maintained its interim dividend at 144 cents per share.
Chief executive, Johan Enslin, said the credit environment remained challenging over the period, with increasing unemployment, retrenchments and ‘short time’ impacting disposable income levels. This has resulted in higher debtor costs for the group.
“While operating profit increased by 4.3%, the 22% strengthening in the value of the Rand resulted in exchange losses on forward cover contracts of R30 million. This accounted for the 3.9% decline in headline earnings per share to 290.5 cents (2009: 302.2 cents).”
He said revenue growth had shown consistent improvement over the past 18 months, growing by 5.0%, 6.6% and 7.9% over the past three six-month reporting periods.
Furniture and appliance sales, which contribute 80% of group sales, increased by 7.8% for the six months, while sales of the more discretionary electronic merchandise grew by 2.8%. Enslin said Lewis continues to differentiate its offering with exclusive ranges which offer value-for-money to consumers in the current tough environment, with several new furniture ranges being successfully introduced in recent months.
The flagship Lewis brand, accounting for 85% of merchandise sales, grew revenue by 7.9%. Best Home and Electric lifted sales by 10.2% and Lifestyle Living by 0.8%.
Enslin, who was appointed chief executive last month, said gross margin improved from 33.1% to 33.5% as a result of innovative merchandising strategies.
The group’s operating margin at 21.8% (2009: 22.6%) came under pressure from increased debtor costs, but remains the highest in the furniture industry.
Enslin said the financial stress on consumers had resulted in debtor costs increasing from 4.5% to 5.0% of net debtors in the tightening credit collections environment. The doubtful debt provision for the first half of the year has increased from 15.5% to 17.9%.
“Credit scorecards are regularly reviewed to maintain acceptable credit risk levels. The credit application decline rate is now 27.4% compared to 24.5% in the corresponding period last year, highlighting the current levels of consumer indebtedness,” he said.
The group opened five Lewis stores and three Best Home and Electric outlets in the past six months. The small store model adopted by Lewis is proving successful and the five stores in this format are all performing ahead of expectations.
A further seven to ten stores are planned for the second half, with four small format Lewis stores scheduled to be opened in November.
On the outlook for the group, Enslin said the festive season trading period will be strongly supported by merchandise and promotional campaigns to maximise sales opportunities.
Ends
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Revenue grows 6% despite tough times
The passing of the National Credit Act nearly two years ago limited the number of customers who were overextended and many had now paid off earlier debt and were eligible for more credit, Alan Smart, the chief executive of furniture retailer the Lewis Group, said yesterday.
However, 25.4 percent of credit applications were declined, compared with 22.5 percent in the previous year.
The group lifted revenue by 6 percent to R3.8 billion in the year to March despite “demanding trading conditions”. It maintained its dividend unchanged at R3.23 a share.
The directors said revenue showed “an improving trend” in the second half, when it rose 6.6 percent.
But debtor costs rose from 6.5 percent to 10 percent of net debtors, including R202million worth of bad debt that had to be written off and doubtful debt provisions rising to R137m. As a result, headline earnings a share fell 7.6 percent to R6.371.
Smart said this was a comparatively small part of the total debtors book of R3.5bn. The worst had passed, with the majority of doubtful debtors still paying, but “a little slower”.
Noting that Lewis’s client base was not the high end, he said most customers were affected not by higher interest rates but by higher food and transport costs. The group concentrated on providing necessities. “If customers’ beds or refrigerators pack up, they have to be replaced.”
The group had remained “strongly cash generative”, with a 20.4 percent increase in cash generated by operations to R 670m, mainly through efficient cost and working capital management.
Its store-based collections model was proving effective, as direct monthly contact with customers gave an early indication of payment difficulties.
Rising numbers of retrenchments remained a major risk.
“While trading conditions are expected to remain difficult, the improving trend in revenue growth and slowing bad debt provision in recent months provide encouraging signs. Sales for the first six weeks of our financial year have continued to improve on the positive trend.”
The group was continuing its “cautious expansion” with 20 to 25 new stores to be opened.
Analysts’ comments were largely favourable. Paul Bosman of PSG said the group had contained the proportion of bad and doubtful debt well, enabling it to reduce its provisions from 13.5 percent to 6 percent in the year under review. It had succeeded in collecting a much higher proportion than some of its competitors.
Mark Ansley of Cadiz said the results were very good in the present environment, as it had managed to raise sales.
The shares rose 0.9 percent to close at R43.30 yesterday.
Business Report
Furniture retailer Lewis Group delivered a resilient performance in the year to 31 March 2009 as the group posted solid revenue growth, strong cash flows and maintained its dividend at 323 cents per share.
Group chief executive, Alan Smart, described trading conditions as “the most demanding experienced in the credit retail sector for many years.”
Revenue increased by 6% to R3.8 billion, a pleasing result in the current climate. Revenue has shown an improving trend in the latter stages of the year and increased by 6.6% in the second half relative to 5.0% in the first six months.
Smart said the financial stress on consumers resulted in the group’s debtor costs increasing from 6.5% to 10.0% of net debtors’ and this contributed to headline earnings per share declining by 7.6% to 637.1 cents.
He said the Lewis business model has shown its resilience and will remain a key differentiator in a market where competitors have separated their furniture retail and financial services businesses and centralised credit collections. “Operating margin at 22% continues to reflect the underlying strength of the business model.”
“Our store based model ensures that long-term relationships are developed with customers and this, together with integrated credit and marketing strategies, results in a high level of repeat business.”
The Lewis division, which accounts for 82% of merchandise sales, increased revenue by 5.7%. Best Electric was boosted by the introduction of furniture ranges into stores and lifted revenue by 9.1%. The chain has been rebranded as Best Home and Electric to reflect this change in the merchandise offering. Revenue in Lifestyle Living, which targets higher income earners, was the same as last year.
The group has remained strongly cash generative, with a 20.4% increase in cash generated from operations to R670 million, mainly through efficient cost and working capital management.
Credit risk management strategies have been consistently applied through the group’s centralised credit granting process. The decline rate of credit applications has increased from 22.5% in 2008 to 25.4%, evidence of the higher levels of consumer over-indebtedness.
The doubtful debt provision for the period was 15.7% of net debtors (2008: 13.5%). The movement in the doubtful debt provision was well contained in the second half of the year, increasing by R46 million relative to an increase of R91 million in the first six months.
Smart said the group’s store based collections model is proving effective in the current environment as direct monthly contact with customers provides an early indication of payment difficulties.
Discussing the prospects for the year ahead, Smart said continued government and private sector infrastructure spend supports ongoing job creation and retention in several sectors of the Lewis target market.
“However, rising retrenchments and unemployment remains one of the major risks facing the South African economy in the year ahead. The group’s national store base and diverse customer profile should limit the impact of unemployment affecting a particular sector of the economy or geographic region.”
A cautious expansion programme will see 20 to 25 stores opened across the three trading brands. Lewis is also well positioned to benefit from increased customer traffic as a result of store and brand consolidation among competitors.
“While trading conditions are expected to remain difficult, the improving trend in revenue growth and the slowing bad debt provision in recent months provide encouraging signs for the year ahead. Sales for the first six weeks of the new financial year continued to improve on the positive trend of recent months,” he said.
Alan Smart will be retiring as CEO in September 2009 and will be succeeded by Johan Enslin.
