Our opinion on the current state of LEW

Jan 30

Lewis (LEW) is a retailer of furniture and electrical appliances operating through 807 stores under the Lewis (483 stores), Beares (137 stores), Best Home (144 stores), and most recently, United Furniture Outlets (43 stores) brands. Of these, 126 are in neighbouring countries. The company does 65,7% of its business on credit and offers customers credit insurance and other financial products. The company is exposed by the impact of COVID-19 because of its substantial debtors’ book which may be difficult to collect. The plan is to increase the number of UFO stores from 39 to 70 over the next few years. At current levels, the share is trading on a P:E of just 4,97 and the share price is well below its net asset value (NAV). The company's balance sheet remains debt-free which is extraordinary among listed retailers in this post-COVID-19 period. The company is in the process of buying back 10% of its issued share capital. We have always said that this share represents a bargain. It will benefit directly from any increase in consumer spending. It is an extremely tightly managed company which has no debt and a huge store footprint. It has been growing both organically and by acquisition. Obviously, as a retailer of furniture and white goods it is vulnerable to any economic downturn, but we see it as cheap right now and expect its share to rise as the economy improves. Certainly, it is one of the few retail outlets in South Africa which is doing reasonably well in the circumstances. The company is engaged in a share buy-back program in which it has so far bought back 29,9m shares at an average price of R34,20 per share. In its results for the six months to 30th September 2023 the company reported revenue up 8,3% and headline earnings per share (HEPS) down 6,6%. The company said, "The strong credit sales growth trend of the past two years continued, with credit sales increasing by 19.5% and cash sales declining by 14.4%. The contribution from credit sales increased to 64.4% of total merchandise sales from 56.5% in the previous half year." In a trading update on the nine months to 31st December 2023 the company reported total revenue up 8,7% with credit sales up 17,5% and cash sales down 14,4%. The company said, "Comparable store sales in the traditional brands grew by 3.2% for the nine month period and by 1.5% for the group." The modest results show that consumers are under pressure from high interest rates and loadshedding. This share remains one of the best-run businesses on the JSE at the moment. The company believes that it is under-valued on the JSE by 30% - and we think that is conservative. Technically, the share has broken up through its downward trendline and is in a new upward trend.