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Figures recently released by furniture groups JD Group [JSE:JDG] and Lewis Group [JSE:LEW] paint an encouraging picture of the sector’s recovery after a protracted stay in the doldrums. Both retailers boost double-digit growth figures in merchandise sales over the past year, raising expectations of improving earnings in a year where general retailers largely remain uncertain about their performance due to continued muted consumer spending.
While much of JD’s growth is due to its low base advantage, data from Statistics SA also point to an improving trend. In its last survey of retail sales, the State agency reported sales of household furniture, appliances and equipment recorded the highest annual growth of 11,8% in March. Of course, it remains to be seen if the trend is sustainable. But the outlook generally looks promising.
But most importantly, bad debt is declining. In difficult economic times credit retailers are often troubled by rising debtor costs as collections become difficult to make. JD was particularly hit by bad debt at the height of the recession, exacerbated by massive retrenchments. It’s had to work very hard to turn the tables around. Its debtor costs reduced from R427m to R344m and the impairment ratio dropped from 12,6% to 8,8% over the six months to February.
“I don’t think consumers are in a better position than they were a year ago – they’re still under pressure,” says JD executive chairman David Sussman. “I think our strategy of separating retail from financial services is paying off.”
In its lengthy restructuring completed a year ago, JD separated its financial services from retail to focus more on its traditional retail business. Sussman attributes JD’s improvement in collections to its decision to deploy a centralised collection system, plus new sophisticated technology.
On the contrary, Lewis prides itself on its decentralised system, saying store collection brings it repeat business from satisfied customers. Says Lewis CEO Johan Enslin: “Our decentralised collection keeps us in touch with our customers. More than 55% of our merchandise sales during the year (ended March) were out of our existing customer base. The business model works and we have no intention of changing it.”
Lewis’s debtor costs dropped from 10,9% to 10,2% over the year under review, encouraging the group to further extend credit. Over that period its credit sales as a percentage of total sales grew from 68,5% to 71,4%.
However, JD wants its financial services division to leverage its acquisition of Steinhoff’s building materials and DIY businesses (Steinbuild) and Unitrans Auto, such as extending credit to Steinbuild customers.
But such bold plans require stable market conditions. No doubt the underlying trend is towards improving conditions, albeit at a slow pace. Nedbank economists predict retail sales will continue benefiting from low interest rates and income growth over the year. However, the growth rate will partly be contained by high debt levels, worries about the prospect of interest rate hikes next year plus higher fuel and electricity prices. To mitigate those concerns, the SA Reserve Bank would have to delay its first interest rate hike until early next year, as an earlier one would risk curbing the economic recovery, Nedbank says.
While much of JD’s growth is due to its low base advantage, data from Statistics SA also point to an improving trend. In its last survey of retail sales, the State agency reported sales of household furniture, appliances and equipment recorded the highest annual growth of 11,8% in March. Of course, it remains to be seen if the trend is sustainable. But the outlook generally looks promising.
But most importantly, bad debt is declining. In difficult economic times credit retailers are often troubled by rising debtor costs as collections become difficult to make. JD was particularly hit by bad debt at the height of the recession, exacerbated by massive retrenchments. It’s had to work very hard to turn the tables around. Its debtor costs reduced from R427m to R344m and the impairment ratio dropped from 12,6% to 8,8% over the six months to February.
“I don’t think consumers are in a better position than they were a year ago – they’re still under pressure,” says JD executive chairman David Sussman. “I think our strategy of separating retail from financial services is paying off.”
In its lengthy restructuring completed a year ago, JD separated its financial services from retail to focus more on its traditional retail business. Sussman attributes JD’s improvement in collections to its decision to deploy a centralised collection system, plus new sophisticated technology.
On the contrary, Lewis prides itself on its decentralised system, saying store collection brings it repeat business from satisfied customers. Says Lewis CEO Johan Enslin: “Our decentralised collection keeps us in touch with our customers. More than 55% of our merchandise sales during the year (ended March) were out of our existing customer base. The business model works and we have no intention of changing it.”
Lewis’s debtor costs dropped from 10,9% to 10,2% over the year under review, encouraging the group to further extend credit. Over that period its credit sales as a percentage of total sales grew from 68,5% to 71,4%.
However, JD wants its financial services division to leverage its acquisition of Steinhoff’s building materials and DIY businesses (Steinbuild) and Unitrans Auto, such as extending credit to Steinbuild customers.
But such bold plans require stable market conditions. No doubt the underlying trend is towards improving conditions, albeit at a slow pace. Nedbank economists predict retail sales will continue benefiting from low interest rates and income growth over the year. However, the growth rate will partly be contained by high debt levels, worries about the prospect of interest rate hikes next year plus higher fuel and electricity prices. To mitigate those concerns, the SA Reserve Bank would have to delay its first interest rate hike until early next year, as an earlier one would risk curbing the economic recovery, Nedbank says.
