Investment guide: Investing in Lewis Group

The Lewis Group has been in the media recently following reports of overcharging and failure to adhere to the National Credit Act (NCA). With all this bad publicity, the investigation by the National Credit Regulator (NCR), as well as a court case against Lewis launched by Summit Financial Partners, is Lewis still a good investment?

This guide looks at the Lewis Group and two experts’ opinion on the group’s investment prospects.

Should you invest in Lewis?

Personally, Paul Khweyane from GT247.com would not invest in the Lewis Group. “I have issues with businesses that embark in unethical behaviour just to improve their bottom line. Earlier in the year Lewis Group was found guilty of selling unemployment insurance policies to people who were unemployed or pensioners.”

However, from an analyst’s perspective, he added: “The nature of the business depends a lot on the buying power of consumers which is mainly impacted by the well-being of the economy. In a sluggish economy, like what we have now, the credit affordability of consumers diminishes.

“The NCR’s new credit affordability regulation which focusses more on household savings rather than gross disposable income has a negative impact on the group, especially the LSM (living standards measurement) segment. The new NCR affordability assessment regulation along with poor economic fundamentals have restricted revenue growth for the group and will most likely continue to do so.”

Chris Gilmour, investment marketer and analyst at Absa Stockbrokers and Portfolio Management, noted that when it comes to investing in Lewis there are two sides to the coin. “Yes [I would invest in Lewis] because of the very high dividend yield and no because of the extremely challenging consumer conditions currently prevailing. These conditions are likely to persist for some time and thus Lewis likely to remain under pressure. It thus also begs the question as to how long can the dividend be maintained at these rarefied levels? On balance, for the time being, it is thus probably not a good investment, even allowing for the very juicy yield.”

According to Khweyane, there are three factors that are fundamental to Lewis’ success, and together, these will restrict the group’s growth prospects. These are:

1. The capping of credit life insurance amounts
2. Affordability assessments
3. Poor economic fundaments and household debt

The effect of these factors were reflected in the preliminary results for the year ended 31 March 2016. Khweyane pointed out that there was a 10.3% decline in credit sales for the second half of the year. In addition, group sales were 4.5% lower and insurance revenue declined by 7.3%.

However, on more positive note, goup revenue increased by 2.2%. Merchandise sales increased by 2.9%, however, this was two percent down from the first quarter.

“Other factors which have impacted Lewis are: draught (which has had a huge impact in rural areas) and the high unemployment rate (which has made it difficult for people to get credit),” stated Khweyane.

The impact of recent incidents on Lewis’ stocks

Lewis has suffered reputational damage and as a result the share price has dropped. Khweyane highlighted that the stock price has depreciated by more than 55%.

However, Gilmour emphasised: “Lewis has made reparations to affected customers with interest and the market appears to like this.”

In addition to making reparations to affected customers, the group also launched a new call centre to help enhance the credit sales process.

The competition

Commentators are divided as to whether investors have an alternative to Lewis.  Khweyane believes Mr Price is a competitor for the Lewis Group but Gilmour stated that there are currently no competitors to Lewis on the stock exchange.

“With the collapse of Ellerines in the wake of the ABIL scandal two years ago and JD Group minorities being bought out by Steinhoff, there are now no listed competitors to Lewis,” said Gilmour.

Investing in the retail and furniture industry

“Furniture and appliances will always be in demand however this demand is cyclical. During times of economic hardships you will most likely see a drop in demand for these products which will impact the profitability of the business. However, in a robust economy where interest rates are low and employment is high (with good wages) then these type of companies thrive creating investor value,” revealed Khweyane.

When looking to invest in companies such as Lewis, Khweyane highlighted that the following factors should be considered:

1. Is it a cash retailer or credit retailer? Find out where most of their sales come from – from credit sales or cash sales?
2. If it’s credit – then what provisions have they made for bad debts, what is their collection policy etc.?
3. Who is their target market and how quickly or sensitive is this market to adverse economic conditions?
4. I would also look at their products – can these products be easily substituted with cheaper products with similar quality?

Gilmour added: “Investors need to look at the background economic cycle (currently extremely poor), the health of the credit book, the debt level of the company, the ability of the company to manage debtors efficiently and effectively and finally the ability of a furniture and appliance company to adapt to fundamental changes in consumer buying habits.”

Handy tip: If you are looking to invest but don’t want to buy stocks directly, consider a unit trust.