Lewis investors approve of earnings and sales growth
Share records strongest one-day rise since start of November after release of interim results as increase in impairments sees net asset value decline 9.4%
Tougher new accounting rules saw furniture retailer Lewis, which targets mainly lower-income consumer through its Lewis, Beares and Best Home and Electric shops, increase its provisions for bad debt write-offs by 50%.
Management, which has had a number of run-ins with the National Credit Regulator (NCR) and activists, told shareholders on Wednesday that the new accounting standard IFRS 9 required the group to increase its provision for impairments by 50%, taking them up to R2.4bn from R1.6bn.
Under the old accounting rules, Lewis had provided for the impairment of 29.6% of its outstanding loans. The new rules require Lewis to provide for the impairment of 43.9% of the outstanding loans on its books at end-September.
Earlier in 2018, the high court dismissed an appeal by the NCR against a ruling that had cleared Lewis of breaching credit rules with fees it charges its customers.
The R803m additional impairment is in line with allegations made by credit lobby group Summit Financial Partners in 2015 that Lewis needed to increase its bad debt provisions by about R800m.
Ahead of the annual general meeting that year, chairman David Nurek slammed Summit Financial Partners for alleging that Lewis’s debtor impairment provision levels were inadequate.
The increase in impairments saw its net asset value decline 9.4% in the six months to end-September.
But investors appeared to overlook the knock to the retailer's valuation and focused instead on the revenue growth generated by the recent acquisition of upmarket furniture retailer United Furniture Outlets (UFO). By the close of trade on Wednesday, the share price had recorded its strongest one-day increase since the start of November, gaining 9.7% to close at R30.94, reflecting a hefty discount to its net asset value per share of R59.22.
The group’s results showed a 26% increase in sales and a 10.7% gain in headline earnings per share. Excluding recently acquired UFO, sales were up 8.1%. Management said UFO has enabled the group to access higher-income customers while increasing the cash-to-credit sales mix.
Lewis said it is already seeing benefits of the relaxation of the National Credit Act’s affordability assessment regulations following the high court ruling earlier this year. The court set aside parts of the act that required income verification from consumers. Lewis said the change has enabled self-employed and informally employed individuals to apply for credit.
“This is expected to improve the performance of the group’s stores in the rural areas, which have been most affected by these restrictive regulations,” said Lewis.