Lewis – can you believe it’s the JSE’s best-performing retailer? 

Results from furniture retailer Lewis – home to chains like UFO, and purveyor of leatherette couch suites – serve as a stark reminder that not all retail is doing badly in South Africa.

For the year ended March, Lewis grew total revenue 11% to R10.3bn – helped by the bracing cost of its credit, which brought in almost half of its sales. A steady share buyback programme meant headline earnings per share rose 18.3%, to R17.53, and the group has paid out a dividend of 897c a share. Little wonder it is the best-performing retailer in South Africa over five years. Currency spoke to CEO Johan Enslin about the numbers.

It’s quite something to see your results set against other retailers, but if you look at the breakdown between merchandise sales and “other revenue” – in other words, interest on lay-bys – it wouldn’t have looked nearly as spectacular.

A lot of the support came through in the “other revenue” line and this is the result of good credit sales growth over a long period. So it was basically sales over the past three years that are now really getting good support. But in this current climate, the sales growth of over 7% is still a good achievement.

Your customer base was up 11%, by 77,000. How are you attracting customers in such a tough environment?

What’s more important for us is that we got an additional 58,000 customers that are really servicing their accounts well and that will enable [us] to continue at acceptable rates as we do repeat or follow-up business with these customers.

We’ve got a very strong focus on ensuring that we bring exclusive furniture to the market; we also do very strict quality control to make sure that the merchandise we sell is of a quality that, once they’ve settled their accounts – and these are typically three-year repayment periods – they must still feel very happy with the product they’ve bought from us, which will continue to motivate them to do repeat business with us.

Over very many years, the return rate of customers to our stores has been really high and it’s one of the successful factors in our business.

How many of your customers are repeat buyers?

Over the past 12 months, 45% of all our business was done on a repeat basis.

And over the longer term?

Typically 85% of our customers only deal with one account at a time, so they’ll only repurchase when they come up for settlement.

You could argue that Lewis is as much a financial services company – a microlender – as it is a seller of couches and TV units. And if companies like Pep are looking at getting a banking license, why don’t you?

I must respond by saying that, first and foremost, we believe that we are a retail company. At the end of the day, your ability to go and source quality and attractive merchandise that speaks to the taste of the market out there is really the driving force behind our business. To put it bluntly, if we don’t get the merchandise offering right, we haven’t got a business.

Are we interested in a banking licence? The answer to that is no. We believe that it’s already a highly overtraded market and we don’t believe that the entrance of Pep in that area will actually increase competition from a Lewis perspective. The banks will have this fight among themselves; you know the Capitec success story – they are not going to be toppled easily – and we also know that Old Mutual with the strength of their balance sheet is not going to take this [lying down].

Your shares are up 175% over five years versus Shoprite’s 80% gain and Pepkor’s 47% increase. That’s some achievement, but many can argue that your success comes at a cost to your own customers, who end up paying huge amounts for items they’ve bought on credit. Must people just like it or leave it?

At the end of the day, if you look at the growth story in terms of the number of additional consumers that actually made use of our in-store credit offering, we believe that it’s very much needed; it’s an enabler in the market that we service. And I would like to add to that: there is absolute and full transparency in terms of the credit [cost]. It isn’t cheap, but one must realise we do credit in a higher-risk market and one must price for that price.

Sure – but does that include insurance charges, etc? Because a decade ago Lewis wasn’t always so transparent and massively overcharged unknowing customers on credit insurance fees.

If you go back to that time, we made mistakes during that period. There was some human error in our stores, and we implemented corrective action to make sure that that never happens again.

Shortly after that period we went as far as establishing a compliance call centre that is totally independently run and managed of the stores. In other words, those people are not incentivised on turnover or collections; they are simply responsible to engage with the customer after all the in-store measures have been taken and they have to make 100% sure that every customer fully understands the total cost of credit and the components that add up to that.

So once a local store manager has interacted and explained all of this, there’s a second leg. They will now get on a call with a person who’s got a standard checklist and we can service the customer in their mother tongue; they’ll be taken through all of these points.

It’s also very important from a collections perspective; it’s also making sure the customer is committed to pay us the 36 installments. So by introducing this (costly) leg we can say we are really going above and beyond to make sure everyone fully understands what they’re signing up for.

So would you say you have addressed the perceptions that you gouged customers?

We can with absolute certainty say that every customer who contracts with the Lewis group understands the total cost of credit and their responsibility, as well as the responsibility the group has to deliver against our part of the contract.

Everyone is looking at the diesel price with horror. Are you too? Is this potentially a really big problem for you?

Food and fuel are really the two biggest expense categories for our customers, so obviously this is something one needs to watch very closely from a collection and credit-granting perspective as it unfolds.

And then the direct impact on our suppliers is also enormous; it’s not only the diesel price. Most of what we sell has a very big foam component in it – lounge suites etc – and the higher oil price has already started washing its way through in terms of the cost of raw materials. And then obviously to transport these big bulky items is very costly. So, yes, there’s already pricing pressure.

Should we expect a much tougher year as a result?

Our management team has weathered a lot of storms in the past; we’ve adopted a strategy of basically running our business on a very short cycle. We go out and we negotiate pricing per SKU [stock keeping unit] on a 30-day basis. Because you must also keep your suppliers standing, and these guys are also facing tremendous pressure.

From what we know at this point, I would say: so far, so good. We stated that our gross profit target range this year is between 40% and 42%; so we do expect some pressure, but hopefully we can go and find a number of new additional customers that will compensate for that decline in gross profit margin.

ALSO READ:

• The real story behind South Africa’s retail results
• A good year for Lewis, Tiger and Nampak. The rest, not so much
• Inside Shoprite and Pepkor’s fintech pivot

_{Top image: Lewis CEO Johan Enslin. Picture: supplied.}