Lewis, hit by new credit rules, sees 26.5% profit drop

Cape Town – The Lewis Group [JSE:LEW] on Wednesday announced a 26.5% decline in full-year profits, which it said was caused by tough trading conditions in the credit retail sector, adverse economic conditions and the introduction of the National Credit Regulator's affordability assessment regulations.

The group's operating margin, impacted by slower revenue growth and the Beares integration costs, contracted to 14.1% (2015: 19.4%), it announced in in its preliminary reviewed results for the year ended March 31 2016.

Operating profit before investment income was 25.7% lower at R815m. Headline earnings declined from R751m to R552m. Revenue rose by 2.2% to R5.8bn. Headline earnings per share were 26.5% lower at R6.22 per share.

"The launch of new merchandise ranges in the second half saw the gross profit margin strengthen by 140 basis points to 38%," it said. " All three brands have reported an improved gross profit margin."

At close on Tuesday, Lewis was trading 3.91% lower at R48.19.

Affordability regulations

The group said the "significant impact of the affordability regulations is reflected in the decline of 10.3% in credit sales for the second half of the year".

“These regulations require customers to provide their three latest pay advices or bank statements as part of the credit application process. This is proving a major challenge for many consumers in the group's lower to middle income target market who are self- employed.

“Group credit sales for the year were 4.5% lower. Credit sales in Beares account for 50% of the brand's total sales while in Lewis and Best Home and Electric 66% of total sales are on credit.”

Alleged breaches in credit act

In July 2015, the National Credit Regulator referred both Lewis and Monarch to the National Consumer Tribunal for alleged breaches of the National Credit Act (NCA) in relation to the sale of loss of employment insurance and disability cover to customers who were pensioners or self-employed persons, the group explained.

Following an internal investigation the group identified about 15% of cases where loss of employment insurance policies were invalidly sold to pensioners and self-employed customers “as a result of human error at store level and contrary to company policy”, it said.

Lewis refunding R67.7m

“Lewis is currently refunding the premiums and interest totalling approximately R67.7m to the affected customers.

“Lewis and Monarch have opposed the referral, filing detailed answering affidavits which address both issues. The tribunal has set the date of hearing for the matter as 28 July 2016. Shareholders will in due course be advised of the outcome of the hearing, once the ruling of the Tribunal has been made available."

In February 2016, Lewis customers (and former customers) served the group with a summons issued in the name of 15 plaintiffs and in April 2016 a second summons was served by 13 plaintiffs.

“The summonses were issued at the direction of Summit Financial Partners,” Lewis said. “The total quantum of both claims is R85 082 plus interest. The plaintiffs' claims are for damages as a consequence of alleged breaches of the NCA in relation to delivery charges and extended maintenance contracts. Lewis disputes liability on the merits and various other grounds and is contesting the action.”

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