How Lewis does well in tough times
Structural changes to its sector in SA have favoured Lewis, and the group has also increased its cross-border reach
Lewis Group has become the de facto leader among SA’s listed furniture and appliance retailers — and it didn’t really have to do much. The demise and restructuring of its listed rivals has left it with a comparatively larger footprint.
Lewis CEO Johan Enslin says that, by his count, as many as 1,100 retail stores have closed over the past few years.
There has long been talk that the furniture retail sector was overtraded and that for some chains to remain viable they would have to go through consolidation.
The truth of this can be seen in Steinhoff’s subsidiary Pepkor closing 300 furniture and appliance retail operations over the past three years. It did this before Steinhoff’s troubles came to light. It even shut down its once iconic Joshua Doore chain in the restructuring.
Pepkor, with retail chains like Russells and Bradlows, now has only 589 furniture and appliance shops and 163 Sleepmasters stores, compared with Lewis’s 779 outlets.
There’s a similar story at the troubled African Bank, which at one stage owed its creditors about R1.3bn. It used to run more than 1,000 Ellerines and Beares stores, but the bank’s problems eventually caused it to either sell them off or close them. African Bank was also forced to sell Dial-a-Bed to Coricraft for R200m in 2014 and at about the same time dispose of 217 Wetherlys luxury furniture stores to Shoprite for an undisclosed amount.
Besides having few competing stores, Lewis gained by acquiring 62 Ellerines and Beares outlets outside SA for R250m in 2015. The transaction significantly increased its cross-border reach. "We doubled the number of stores we operate in Africa [outside SA]," Enslin says.
Fewer competitors for Lewis does not mean it doesn’t have any competition, however. Avior Research analyst Mark Hodgson says that though "it’s a bit easier" for Lewis, the company still has many competitors in the form of independent retailers and Shoprite’s furniture retail operations. Shoprite runs more than 400 OK Furniture stores, and independent chains such as Decofurn have also increased their presence in the market.
The structural changes to the furniture and appliance retail market might favour Lewis, but the group is not content just depending on having few competitors to drive growth.
Enslin says its acquisition of cash furniture retailer United Furniture Outlets, which helped boost total merchandise sales 25.9% to R1.6bn for the half-year to end-September, had a marked impact. It increased the proportion of cash sales to total sales and also helped move the group from selling mostly to low-income earners to dealing with middle-to upper-income customers. It also expanded its focus on this market by creating its Inspire chain during the period.
Enslin says Lewis decided to focus on increasing cash sales and selling more goods to people with higher incomes as a way "to derisk the business".
There’s been a longstanding debate about whether furniture and appliance retailers are retailers at all, as they make a lot of money from the credit financing of their own sales. Lewis made R2.97bn in total retail sales, but close to R1bn came from charges relating to the financing of the purchases.
Enslin defends the practice of credit financing, as it makes it possible for people who cannot buy goods for cash to do so.
"Credit is an enabler," he says.
This is why Lewis backed a recent court ruling that made it easier for credit-granting companies to provide credit to self-employed people.
Enslin might be enthusiastic about being able to grant prospective customers credit, but not all retailers are keen to do so.
Mr Price incoming CEO and current CFO Mark Blair said last week that though there was an increased demand for credit by consumers, his company was reluctant to give it to them, as there were also signs that many of them were starting to take financial strain.
Hodgson says the amount of debt consumers are carrying is a concern, but he understands why Lewis is prepared to do business with self-employed people. "They know these customers," he says.
Lewis’s commitment to credit sales has already made it pay a price. New accounting standard IFRS 9 forced it to increase its bad-debt provision from 29.6% to 43.9%. This effectively meant it had to raise bad-debt provisions by R803m to R2.42bn. The accounting change knocked its NAV per share, which dropped 9.4% to 5.9c.