South African furniture retailer JD Group reported a 37 percent fall in first-half headline earnings per share on Monday after it tightened its rules for granting credit to protect its future earnings.
Its shares fell after the retailer, which owns South African furniture outlets such as Bradlows and Joshua Doore, also said it had been hit by tough market conditions and stiff competition from rivals such as Ellerine Holdings and Profurn as companies fought to keep up sales.
Headline earnings per share (EPS), stripping out exceptional items and their tax effects, fell to 125.7 cents in the six months to February 28, from 198.5 cents in the same period a year earlier, the retailer said.
Last year, JD tightened its credit procedures and cut its exposure to the low-income market after studying the impact of the HIV/AIDS pandemic, high unemployment and stunted economic growth on future earnings.
This year, interest rates have risen following the rand’s sharp plunge late in 2001, which has further depressed the South African market and made it more risky for retailers to extend credit.
”This is a very disappointing set of results. They have had significant levels of increased bad debt, and none of their divisions have come through, and they have generated a loss in Poland,” said an analyst, who declined to be named.
”They are obviously operating in a tough trading environment, and there is not too much they can do…They can work to improve their debtors’ book and hope economic conditions improve somewhat,” he added.
JD Group shares on the Johannesburg bourse were down 4.8 percent at 15.90 rand by 1143 GMT, after falling as much as 6.6 percent earlier, against a firm sector.
The group said sales rose 14 percent to 1.4 billion rand from 1.2 billion rand.
But around 102 million rand of the total came from the acquisition of UK-based BoConcept, which JD Group bought from Club, a subsidiary of Denmark’s Denka Holding for 6.3 million pounds last year.
Future Prosperity
The stringent measures for granting credit hurt JD Group’s earnings but were adopted to ensure future prosperity in the long term, Executive Chairman David Sussman told Reuters.
”The measures had a serious impact, and had we not done that, we would have shown a material top-line growth…but we would be fooling ourselves because we are long-term players and we want to ensure future prosperity down the line,” Sussman said.
”The consumer is over-borrowed, and the ability to service additional debt is a serious issue.”
The group said the new credit-granting process resulted in an increase in deposits and cash sales and a consequent decline in group finance income earned.
Sussman said the group has no acquisition plans, but would work towards reaping benefits from its alliance with commercial bank Nedcor and its expansion into Poland and the United Kingdom.
JD Group bought 10 Abra furniture outlets in Poland three years ago. The furniture retailer now has 22 stores in the country, of which eight do not as yet contribute to income.
Its Polish operations reported an operating loss of nine million rand.
South African rival Ellerine Holdings posted a small profit in the six moths to February 28, but also cited tough competition and an over-traded market.
Profurn reported a 67 percent drop in headline earnings per share in annual results ended December 31, saying the market was saturated with too many furniture stores. In February, it announced a rights offer to recapitalise its business after being hit with heavy losses in low-income loans.
”While the short- to medium-term future for the local durable credit retail market will remain constrained, the group is well positioned to prosper beyond the short-term vagaries of the market,” JD Group said.
The company said it had implemented a new phase of its credit review process in March, which takes into account the effectiveness of each store’s ability to manage its receivables.
”This process has been successful in predicting the payment behaviour of debtors with a particular status in a specific geographical area. This has resulted in a reduction of risk, allowing for greater levels of predictability at store level.” – Reuters