Furniture retailer's 'suite relief'

The company announced a final dividend of 80c, bringing the total for the year to August to 150c. This is 275% up on last year's 40c. Turnover is also up, for the first time climbing to R13,2 billion, beyond the benchmark level of R12,9 billion set in 2007. After the first half of the year with its terrible Christmas sales, the furniture and cash divisions showed good growth in the second half, with sales up 9%. Operating profit climbed 20% to R772 million from R646 million. Helping this along was the reduction in debtors' costs.

Investors will be pleased with the 21% increase in headline earnings. Moreover, they will be relieved that for once this number does not need to be adjusted for one-off tax or restructuring or any other costs. "We are trading off a clean base, we have cleaned out a lot," says chairman David Sussman "The culture of the business is changing; we have turned the corner."

A hard road

It's been a hard road since 2006, when the group announced its intention to split the financial services business from traditional retail. There was also the introduction of the National Credit Act in 2007, which hit consumer spending.

"JD has a nine-year business cycle," says Nedcor Securities analyst Syd Vianello "This is the beginning of the next up cycle." The question to answer is how fast can the company grow? With cash being used to pay tax, rather than fund growth, the next cycle could be more sedate.

However, the ratings gap between JD Group and its less flamboyant peer, Lewis, is narrowing as investors factor in where each company is in its cycle, as well as Lewis's 27% share price rise in the past three months. "This is a solid company with stable growth prospects," says Vianello. "But on current valuations, the price is stretched."

Very acceptable results

However, the smaller company, with its generous dividend policy, did turn in a very acceptable set of results for the six months to September. Merchandise sales rose 11% to R1bn. "These are possibly the best in the industry," Vianello says, "and indicate small, but continued market share gains." Lewis's operating profit rose 10,5% to R469m and headline earnings per share rose 14,5% to 332,5c.

The company intends to continue its more aggressive store expansion programme, expanding its store base 27% over the next three years. This, it says, will be a mix of its smaller format stores as well as its new My Home brand, which caters to a higher income bracket than the traditional Lewis store.

However, as with JD Group, to fund faster growth the company has to be prepared to take on more gearing. Lewis's current policy is conservative, allowing for 35% net debt to equity. "This could be a constraint to growth," says Vianello.

Source: Financial Mail