Media coverage
Readying for growth
2010/05/28
14:01:00
Sasha Planting
JD Group's “annus horribilis”, as chairman David Sussman called it, was not that long ago — 2008, to be specific. Turnover fell by 14%, from R5,2bn to R4,5bn; bad debts began to spiral out of control and the group announced it would fundamentally change its business model.
“Decoupling” the financial business from the furniture business is the polite language CEO Grattan Kirk uses. Ripping the pulsing heart out of a living organism would have been more apt. “We’d been working that way for 25 years,” says Kirk of the pain involved.
It’s in this context that one must consider the company’s six-month results to February. Revenue rose by a meagre 1% to R6,8bn. Earnings per share increased to 140,9c, from a 17,4c loss the previous year.
The migration and integration of Ellerines’ financial services activities into African Bank and the completion of the project by the end of the 2010 financial year remain on track.
Competitor Lewis fared much better in its full year to March. Lewis increased revenue by 8% to R4,1bn and earnings per share by 5,6% to 672c. “These are similar companies with different strategies which are aimed at different segments of the market,” says Coronation Fund analyst Godwill Chahwahwa “Lewis mainly has a customer base at the lower end of the spectrum, where consumers are less indebted. JD operates in the middle market, where consumer indebtedness is far deeper and where competition on pricing of financial services products is intensifying. While both models are relevant to their target markets, their long-term sustainability will depend on the extent to which they adapt to the changing and more competitive lending market.”
What was heartening in JD’s results was the reduction in debtors costs.
African Bank is still busy with this process. A phased approach is being used to convert the existing Ellerines advances book onto the African Bank systems.
Also positive for JD was the news that turnover has been growing consistently since December. “There is not a single facet of this business that is not showing material improvement year on year,” says Sussman.
“JD may have lagged but it will come from behind,” says Gryphon Asset Management chief investment officer Abri du Plessis
Lewis, meanwhile, is not sitting around while its competitors restructure for growth.
“It’s the new-broom factor,” says Du Plessis. CEO Johan Enslin assumed the role in February 2009. The company, which has benefited from its wide footprint in small towns and rural areas, is now expanding aggressively. It plans to open 40 stores this financial year, in malls as opposed to its more typical small-town high street destination.
Lifestyle Living, Lewis’s brand targeted at upper-income shoppers, is being re engineered to appeal to middle-income shoppers who are more likely to shop on credit.
Enslin has also announced a new target — to lift the operating margin from 22% to 26% over the next three years.
The industry is gearing for a turn in the cycle. But there may be a hitch. The damaging price war between Ellerines and JD Group appears to be back under way. “This battle had abated,” says Du Plessis, “but there are signs that Ellerines is back at it.”
In situations like this the whole industry gets hurt.