At Lewis’s last year-end I said in this column that the company’s shares offered an attractive way of participating in a resurgence of consumer confidence. In the event, though I was correct I perhaps understated what was to come.
Lewis’s interim results were blockbuster across the income statement and the share price has reacted accordingly. And even though the share price has risen sharply, along with the share prices of most discretionary retailers, it’s still a long way off its 2015 peak of about R99 per share.
This presents a delicious conundrum for potential investors. Having had such a steep run-up in the share price and a profound improvement in earnings and dividends, one is naturally drawn to the conclusion that the best must surely be over for the time being.
And yet SA is just at the start of what will probably be a long-term reduction in interest rates, which should promote further consumer spending on so-called “big-ticket” items such as furniture and appliances. Lewis makes greater profits from credit sales than it does from cash sales, so there is a lot of leverage to be expected from the results over the next few years as well.
On the negative side, Lewis is a small-capitalisation stock and is not well covered by the institutional sellside analysts, which is a great pity. It is very much in the private-client domain.
For the six months to end-September group revenue rose by 13.6% to R4.35bn. Merchandise sales grew 8.5% to R2.36bn, while other revenue grew 20.4% to just under R2bn. The gross profit margin rose from 40.7% to 40.9%, while operating costs rose by 10.5% to R1.96bn. Credit sales rose 16.9%, while cash sales declined 6.7%. Credit sales accounted for 69.4% of total merchandise sales, up from 64.4% in the previous interim period.
UFO, the low-end cash-orientated chain in the group, appears to have turned around, with comparable store sales increasing by 3.3%. Operating profit rose 54.1% to R477m, expanding the operating margin from 14.2% to 20.2%. Attributable earnings rose 45.1% to R283m. Headline earnings per share rose 49.1% to 555c and an interim dividend of 300c per share was declared, an increase of 50%.
On the balance sheet, gearing doubled from 13.4% to 26.5%, but is still relatively low. However, if lease liabilities are included in the calculation, gearing rises to 46.1% from 34% previously. This is still within the group’s self-imposed limit of 50%. The debtors book remains sound, with satisfactory paid customers at a record high level of 81.6%.
The group repurchased 900,000 shares at a cost of R43.9m in the six months to September at an average price of R47 per share. Since the start of the share repurchase programme in 2017 the group has bought back 36.7-million shares at a cost of R1.3bn and an average price of R35.96 per share.
Going into 2025, though the ambient economy will remain tough there can be little doubt that consumers have reignited their appetite for credit. Lewis advances credit in a highly disciplined fashion and, as interest rates fall and consumer demand continues to improve, Lewis Group shares should ride the wave of falling interest rates.
At an average share price over the past month of about R77, Lewis Group shares are trading on a cheap price-earnings ratio of 8.3 times and an attractive dividend yield of 7.8%. And even though the share price has almost doubled this year, it is still almost 25% below its record high of nearly a decade ago.
Thus, with a continuation of no load-shedding, a declining interest rate background and a resurgent consumer spending environment (especially on credit), Lewis shares have the potential to surpass their previous high without too much difficulty.
• Gilmour is an investment analyst.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.