Lewis Group is a funny old company. It’s been around for a very long time, operating out of very humble offices in Salt River, Cape Town, selling furniture to the bottom end of the social spectrum, mainly on credit, and doing it exceptionally well.
It not only survived the pandemic but flourished as the so-called homebody economy took off as people increasingly took to working from home. But with the return of many people to their offices in the past year or so, one would intuitively have expected furniture retailers such as Lewis to have experienced a reversal of fortune. But not so. On the contrary, the group has managed to improve its results.
Lewis shareholders have enjoyed a spectacular share price rise over the past two years, even though the company is covered by hardly any investment analysts. But from now on, with interest rates rising in SA, discretionary retailers such as Lewis will find it progressively tougher to outperform.
Lewis Group presented its results to the financial community recently and kicked off by describing them as “a solid performance for the year”, especially considering record high unemployment and civil unrest in KwaZulu-Natal and parts of Gauteng, where 57 stores were directly affected and many more were affected indirectly. This was a major understatement, as all metrics at a per share level were markedly higher. However, at a pure operational level, there were a few signs that things may be slowing down somewhat. For example, operating profit declined 4% to R667.9m and the operating margin declined from 10.3% to 9.2%.
Shipping costs
For the year to end-March, revenue rose 7.9% to R7.3bn, sales were up 11.5% to R4.4bn and the gross profit margin was slightly lower at 40.5%. The margin was affected by, among other things, the continuing high cost of shipping containers from the Far East. To add some colour to this, CEO Johan Enslin pointed out that just before the SARS-CoV-2 pandemic, a 40 foot container could be hired for $3,000 per shipment into the Port of Durban. Now that cost is closer to $10,000.
Headline earnings per share rose 37.7% to 849c and the dividend was increased 26% to 413c for the year. Since listing in 2004, Lewis has never suspended a dividend payment. In the past four years, from 2018 to the present, the total dividend has more than doubled.
Credit sales constituted 51.4%, with cash sales of 48.6%. Interestingly, the credit rejection rate declined, which shouldn’t be interpreted as turning on the credit taps again. Customers with a lower credit risk were introduced, which lowered the rejection rate.
The balance sheet is strong with robust cash flows. Gearing is a modest 15.3%. The debtors’ book improved significantly in the past year. A total 8.8-million shares were repurchased last year, which is in line with the very aggressive share purchase programme over the past five years.
Divisionally, luxury furniture retailer UFO performed below expectations, which is perhaps not surprising considering that 70% of its products are imports, which have been adversely affected by supply chain disruption. However, only 8% of total sales are contributed by UFO.
Store expansion
Lewis is in good shape to cope with the inevitable increase in pressure that will hit consumers this year and next. Interest rates are in a hiking cycle, and fuel and food inflation show no signs of abating. Rotational power cuts from Eskom are likely to continue at a higher level than in the previous year, and the supply chain challenges that have bedevilled the industry since the pandemic struck are likely to continue.
Yet, the group is expressing confidence in the future by continuing to expand its store base with the planned opening of a net 16 new stores — 12 traditional retail and four UFO stores — and the revamp of 150 stores.
The historical price-earnings ratio at the current share price of R49 is an incredibly low 5.8 times and the dividend yield is a very juicy 8.4%.
• Gilmour is an independent investment analyst with Salmour Research.
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