Johannesburg – Furniture store Lewis’ [JSE: LEW] revenue was down 3.2% to R2.7bn mainly due to lower credit sales and changes to its insurance offering following an intervention of its credit assessment.
This is according to the group’s interim results report for the six months ended September 30, 2017, released on Monday.
The group’s merchandise sales were up 5% to R1.3bn, and credit sales accounted for 68.8% of these sales. Insurance revenue was down from R420.3m reported previously to R356.4m.
Operating costs amounted to R1.7bn, down from R1.73bn reported for the same period last year. Operating profit amounted to R191.8m, down from R275m reported previously. Net profit was down 17.7% to R143.4m. Headline earnings per share was down 15.8% to 163.9c. A dividend of 100c was declared.
“The group's core lower to middle income customer base continues to be impacted by increasing living costs, high unemployment and limited prospects in the current low growth environment in the country,” the report read.
Credit sales were restricted by the National Credit Regulator’s affordability assessment regulations.
The group has “developed advanced credit-granting systems” to properly assess its customers.
This involves credit scoring where existing customers have behavioural scorecards to assess risk, and new customers have application risk scorecards. Information collected from credit bureaus and third parties, such as employers, are used to make the assessment.
Thereafter client affordability is assessed, using its own expense model alongside the NCR’s expense table. The credit limit for the customer is determined using the scorecard, expense assessment and outstanding obligations.
The group’s report also revealed that the performance of the debtors book is “satisfactory”. Debtor costs declined by 11.5% and collection rates improved to 76.2%, compared to 74.6% for the same period last year.
The main credit risk for the group is that customers will not meet their payment obligations in terms of the sale agreements concluded, the report indicated.
As at the end of September 2017, the group was trading from 744 stores, following the closure of 17 stores during the period.
“Trading space reduced by 4.2% as the group continued to open smaller format Lewis stores and close marginal stores.”
The group's 110 stores outside South Africa account for 15% of the total store base.
Following the end of the reporting period, the group announced the acquisition of cash retailer United Furniture Outlets (UFO) for R320m.
UFO’s offering of luxury household furniture is targeted to the higher income market. It has 30 stores. The acquisition is part of Lewis’ diversification strategy to access higher income customers and to improve its cash-to-credit mix, the report explained.
“The business is considered to be scalable, offering the opportunity to extend the store footprint across South Africa and into neighbouring countries and will benefit from the group's buying power,” the report read.
Despite the tough trading environment expected for the rest of the year, management will focus on sales growth, managing its expenses and reducing debtor costs.
The festive season will also be important for the group to boost sales and Lewis plans to introduce new merchandise ranges as well as promotions.
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