Johannesburg - Furniture retailer JD Group [JSE:JDG]
says “the tide has turned” and it’s confident last year’s dismal performance over the festive season won’t be repeated this year.
Its “strategies are gaining traction day by day” – building on the solid performance achieved in the second half of its 2010 financial year for an even better 2011, says executive chairperson David Sussman.
Analysts agree JD – the parent company to retail chains such as Joshua Doore, Russells and Incredible Connection – has turned the corner.
But they remain cautious about uncertainties over the short term. The group has been struggling to keep up with its rivals – mainly Lewis – over the past few years due to its positioning in the upper-end customer sector, which is troubled with heavy interest-bearing debts.
Recently JD posted an encouraging set of results for the year to end-August, marked by a 32% decline in debtor costs, although sales grew marginally by 3% to R9.5bn.
Sales in the second half of the year were 6.7% up from last year. Headline earnings of 303.6 cents per share (or 251.5c, excluding tax settlement) were reported and a dividend of 150c/share declared.
“If you exclude the R380m tax settlement made last year, then earnings growth of around 21% was recorded,” said Shanay Narsi, an equity analyst at BoE Private Clients.
“It clearly shows an improvement in the second half of the year. But the improvement was more pronounced in cost control, mainly through lower bad debt rather than in terms of sales growth.”
But Narsi, like other analysts, is “still not sure” if JD will outperform its competitors over the short term.
Though second half sales were encouraging, it’s still hard to forecast robust performance because not all the fundamentals are in place, especially in the retail business.
Employment remains stagnant, while consumers are more focused on repaying their debts, taking advantage of lower interest rates.
Significant improvement over the short term depends on the group’s book growth and acceleration in sales growth.
Sussman said “there’s no question” the group is reaping the fruits of the separation of its retail business from financial services.
Compounding the group’s underperformance at the height of the recession was its restructuring exercise aimed at refocusing the company in the furniture and appliances retail business.
Sussman says the separation of retail from financial services “involved taking one step backwards before” the company could move forward.
“The results are now evident in our high-quality debtors’ book,” he said. Centralised collections and top of the range technology significantly helped reduce bad debt.
Other measures the group put in place included an index to measure customer satisfaction through continuous communication, which Sussman said has resulted in a “marked improvement” in floor sales.
“I think it’s too early to judge the effect of the separation of the two businesses,” said Warren Buys, a portfolio manager at Cadiz Asset Management.
He thinks recovery next year will be moderate but reckons the business is pretty much geared for recovery.
“If furniture sales go back to double digits and debtors’ costs continue to fall, you should see good earnings growth,” said Buys.
Narsi says separating retail from financial services highlighted inefficiencies in retail and so there’s scope to grow by offering new credit products and managing debtors more effectively.
“Effectively, the retail operations have nowhere to hide and the retail team must focus on merchandise and taking costs out.”
Financial services is more robust. Blake and Maravedi should boost credit offering and collections processes.
While a great business, its cash division – which consists of Hi-Fi Corporation and Incredible Connection – remains troubled from its exposure to the stronger rand, often resulting in markdowns.
In the year under review the division posted 8.3% sales growth.
However, the impact of lower imported prices across all major categories – plus some margin compression due to aggressive pricing at Hi-Fi Corporation – resulted in a reduction in operating profit of R28m for the division as a whole. Hi-Fi Corp is currently undergoing rebranding.
“The sector (appliance retail) is fiercely competitive and sourcing and inventory management are critical,” said Narsi.
“I believe Walmart’s entry could really upset the apple cart in this area of the business.”
Sussman “would rather come to the market with a pleasant surprise than overstating the case”.
He said of the outlook: “We’re still at the mercy of the vagaries of the economy, including an improvement in employment levels and housing starts. Nevertheless, I’m extremely positive about the future and looking forward to sustained improved performance.”
This article first appeared in Finweek.
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