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Lewis sitting pretty – Finweek

January 27, 2010

AFTER A TORRID 2009, this year may yet be another rough one for South Africa’s furniture stocks, despite signs of economic recovery. That’s because the sector’s recovery largely hinges on two factors: better debt collections and an uptick in sales.

But analysts have expressed mixed feelings about the sector’s prospects this year in light of last year’s jobs bloodbath – with its effects still filtering through to all the corners of the economy – as well as consumer restraint, as was the case late in 2009.

The Bureau of Market Research has forecast an uptick in retail sales this year, but only at a marginal 1,5%, with sales of non-durable goods anticipated to increase by 2,2% and sales of durable goods expected to grow by 1,6%. While that suggests SA is gradually emerging from the recession, significantly positive numbers are only expected later this year.

Shanay Narsi, an equity analyst at BoE Private Clients, says it’s doubtful whether consumers in the lower to middle end ranks would recover before second half 2010. However, stocks could rally in anticipation. “The market is looking closely for evidence that bad debt levels have stabilised. That should be evident first before a sales uptick,” says Narsi.

Nevertheless, the very low base from which furniture retailers are coming off could also rally investors to anticipate positive numbers. “I expect some recovery this year,” says Jeanine van Zyl, a retail analyst at Omigsa. “We aren’t expecting the same extent of job losses to recur this year, which was the primary drag on the consumer in 2009,” she says. “Lower food inflation, combined with reasonable wage increases, will also result in more disposable income.”

Furniture retailers were last year among the hardest hit companies on the JSE due to significant drops in sales of durable goods, as well as difficulties with debt collections. While that was a product of the recession, stocks such as the JD Group and Abil’s Ellerine were also affected by their restructuring exercises.

JD Group – which reported an 85% plunge in headline earnings per share to 44,2c and a bad debt charge growth of 23,5% to R1,1bn in the year to August 2009 – has since separated its financial services business from its retail division, while Abil’s Ellerine chains continue to shut down loss-making outlets and are implementing a brand and cost rationalisation strategy.

“At the moment there’s no evidence either strategy is working,” says Narsi of the two groups’ restructuring exercises. “Their customers require debt to make purchases but most are failing to meet the high requirements set by the NCA. The existing books are still quite messy, as job losses and wage cuts have compromised the ability of some good, paying customers to maintain payments.”

However, Warren Buys, portfolio manager at Cadiz Asset Management, is somewhat encouraged by JD Group’s turnaround strategy, especially its focus on customer satisfaction. “We really now need to see the results of their efforts. However, that could take a while to filter through,” says Buys. But it’s a different story for Ellerine. “Ellerine has lost a lot of market share due to its store rationalisation, which could be quite difficult for the company to regain. I do feel that in future the combination of Ellerine and Abil could be very powerful, but first the group needs to strengthen its furniture brand and win back customers with a relevant product offering.”

Rival Lewis Group has been able to mitigate the effects of the recession by having a close relationship with its customers and lengthening its debtors book, says Buys. As a result it hasn’t had as aggressive write-offs as its competitors, he says.

A less complicated business, with only three brands, both Van Zyl and Narsi say Lewis has been better positioned at the bottom end of the market and its unflinching focus on merchandise has held up sales relatively well. “At the end of the day, as a retailer it’s also important to be a merchant and have the right merchandise. Lewis appears to be ahead of its peers in that regard,” says Narsi.

The big risk in furniture retail is bad debt management. However, the analysts are hoping for improvement in that regard, saying most of the newer business the furniture retailers have been writing is of good quality.






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I-Net Consensus: Hold





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