Get in there Lewis


Get in there Lewis


Published Date: 2021-11-25 | Source: INCE|Community | Author: The Finance Ghost

Get in there Lewis

If you don't recognise the Formula 1 reference in the headline of this article, you're missing one of the best sporting rivalries we've seen in recent years.

This furniture group is as consistent as its Formula 1 namesake, albeit far less famous. With a year-to-date share price performance of over 93%, Lewis Group is winning its own race among the smaller and more interesting companies on the JSE.

In the six months to September, revenue increased 12.2% and operating profit increased by 23.3%, despite gross profit margin decreasing by 30bps. It gets better the further down you look, with headline earnings per share (HEPS) up 39.7%.

The interim dividend is 46.6% higher at 195 cents per share, which represents a 55% payout ratio.

As with all South African retailers, the current period includes the civil unrest and the prior period includes lockdowns. The furniture businesses were hit particularly hard last year, with stores closed for at least six weeks. This year, the unrest damaged 57 Lewis stores. Of total SASRIA claims of R78.8 million, R42.5 million has been received and recognised in the latest results. The remainder is expected by the end of the financial year.

The lockdowns are responsible for growth in operating costs of 16.9%, as there were substantial savings last year when stores were closed. Operating costs are up 6.3% vs. 2019 so the through-the-cycle cost growth is below inflation.

Merchandise sales increased 20.7%, with growth in credit sales of 24.4% and cash sales of 17.1%. Credit sales are now 50.6% of the total, up from 49.1%. Comparable store sales increased 17.9% so most of the growth is organic.

Stores in the rest of Africa (15.8% of the footprint) increased by 17.5% and contributed 18.3% of group sales.

Other revenue (i.e. not sales of merchandise) was much slower, up just 2.2% as interest rates are lower than in previous years. Collection rates improved to 78.7% from 66.5% last year when consumers simply couldn't pay debts.

This implies that higher rates may be helpful to Lewis, although there is an offsetting impact on credit sales and loss ratios. The net impact is tricky to guess given the current constraints on South African consumers. A further consideration is the finance charge on lease liabilities, which was R16.2 million lower this year thanks to reduced interest rates.

Importantly, Lewis had no borrowings during this period. The underlying business model has enough risks without layering leverage on top at group level.

The group has sufficient stock to make the most of Black Friday and is expecting a strong finish to the year.

HEPS for this interim period was 330 cents and the share was trading at R45.90 by midday yesterday.


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