Lewis Financial report hit by dismal interim profits

The Lewis share price touched a low of R34.50 on Wednesday before recovering to close at R36.50, after the furniture retailer’s announcement that its interim dividend would be cut to 100c a share from 215c in 2015 as earnings collapsed 41%.

The slump in earnings in the six months to the end of September comes as concern is growing about some of the group’s lending practices. Critics say if the group does not adapt its model, earnings will remain on a downward trajectory.

The board attributed the weak performance to the "challenging economic and consumer environment", coupled with the effect of tougher credit regulations.
Sales held up as a result of the acquisition of some Beares and Ellerines stores; at R2.7bn they were only 2% below the 2015 interim figure. However, like for like, sales were down 9%. Gross margin was up to 40.5% from 36.4%, helped by a change in product mix.
The major knock to performance came below the merchandise sales line, with nonmerchandise revenue down 10%. The group earns almost as much from finance charges, initiation fees, insurance, club fees and extended warranties as it does from selling furniture and white goods.

 

Although income from finance charges and initiation fees were up marginally, helped by a slight increase in the interest rate charged on instalment sales, income from the sale of insurance and other services took a hit.

Operating costs, excluding debtor costs, increased 8.4%, mainly as a result of integration costs relating to the Beares and Ellerines stores that were acquired and that made a limited contribution to turnover. Higher bad-debt levels pushed debtor costs up 7.3%. This all resulted in the operating margin plummeting to 10% from 14.7%.

The dividend was less than twice covered by earnings of 195c a share, which were down 40% from 322.6c in the previous interim. The board is not expecting conditions to improve in the six months to end-March 2017, with consumers expected to face increasing pressure on disposable income. But the directors are positive about the group’s medium-to longer-term prospects and say the business remains cash generative with low levels of gearing.
The board said the affordability regulations, which require customers to provide three latest salary advice slips or bank statements, is proving a major challenge for many consumers. This, says the board, has restricted access to credit for lower to middle-income consumers who are self-employed or work in the informal sector.

The stricter affordability regulations were aimed at preventing over-indebtedness among consumers, though National Credit Regulator statistics show they have had limited effect as the rate of over-indebtedness has risen with the economic slowdown. At the end of June, 40% of the country’s 24-million credit-active consumers had impaired records.
David Woollam, a director of Summit Financial Partners who was pursuing a number of legal challenges against Lewis, described the latest results as part of a slow leak and said the company was at high risk from the increasing scrutiny on its lending practices.
The tougher conditions and the tighter scrutiny of its lending practices have seen the group’s return on equity plummet to 6.4% from 25% in 2007. At its current level Lewis is unlikely to be covering its cost of equity.

 

 by Ann Crotty/BDlive