Lewis Group's growth strategy: New stores and record earnings

Lewis Group’s robust 66.9% increase in operating profit to R1.2 billion for the year to March 31 was driven by strong credit sales, expanding margins and good growth in the debtors’ portfolio.

The exceptional results saw investors drive up the share price by 6.28% on Thursday afternoon to R83.45, bringing the rally in the price to 83% over 12 months.

Satisfactory paying customers for the retailer of furniture, home appliances, electronics and homeware reached a new record high. The operating margin improved significantly by 790 basis points to 22.7% from 14.8%.

CEO Johan Enslin said in an interview that sales and collections in April and May were in line with their expectations. He said that exclusive new ranges in August and September would boost sales, and the group was on track to open at least 40 new stores in the upcoming financial year.

The furniture retail group increased headline earnings by 53.5% to R768 million and headline earnings per share by 60.3% to 1 483 cents, supported by the positive leverage from the share repurchase program.

Enslin said the share buyback program was on pause for now, after the valuation gap in the share price had closed following 8 years of share buybacks that had seen the group buy back some 48% of its shares.

The final dividend was increased 66.7% to 500 cents a share, bringing the total for the year to 800 cents a share, with the strong increase indicating confidence from management in the group’s cash-generating ability and growth prospects.

Cash flow from operations increased by 34%. Gearing sat at a comfortable 36.6% and the balance sheet was healthy, said Enslin.

The group exceeded its medium-term return on equity target of 15%, improving the return from 9.3% to 15.4% through higher profitability and the share repurchase program aimed at maximising shareholder returns.

He said they increased the store footprint to 918 with the opening of a net 33 new stores, and an additional 16 stores that were acquired through the purchase of cash retail bed specialist, Real Beds.

The acquisition would be integrated into the group through the new financial year, and there were no other acquisitions on the horizon at this stage, said Enslin.

Merchandise sales gained momentum in the second half and increased by 9.2% to R5.1bn. Credit sales increased 12.1%, with credit sales accounting for 68% of total merchandise sales compared to 66.2% last year.

Total revenue, comprising merchandise sales and other revenue, increased by 13.5% to R9.3bn. Enslin said sales were robust, despite a constrained consumer spending environment, because the group made it easy to buy on credit and because there were items in the home that needed to be replaced periodically.

He said the gross profit margin strengthened 30 basis points to 43.4% due to lower negotiated shipping rates on imported merchandise in the second half as well as the favourable movement in the rand/US dollar exchange rate.

The debtors’ book grew by 14.5% and the portfolio was of a high quality, said Enslin. Satisfactory paying customers increased to a high 83.5% from 81.3% in the previous year, and the collection rate ended at 78.9%. Non-performing accounts reduced from 5.5% to 4.1% of credit customers.

On the outlook, Enslin said geopolitical tensions had created uncertainty across international markets and increased business risks locally. This uncertainty was compounded by recent instability within the Government of National Unity, he said.

“The challenging environment has slowed the country’s economic recovery and dampened growth prospects. We expect a sustained turnaround in retail spending will now take longer to materialise than previously anticipated. Consumer demand for credit is expected to remain high,” said Enslin.

He said they were not expecting economic growth in the country this year and the group’s growth would likely be at the expense of market share from competitors.

The group intended to open a minimum of 20 new traditional retail stores and 20 specialist bed stores in the 2026 financial year.

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