Furniture trade left rocking

Tables and chairs went flying this week as furniture retailers joined the scrap about how badly high interest charges are hurting consumers.

Accounting changes to the previous practice of taking the revenue on hire-purchase sales upfront, have been treated with outrage.

African Bank Investments has restated figures which now show that Ellerines' revenue was inflated by R1.4-billion because it took potential revenue on credit sales upfront.

This was even though the revenue only accrued over several months.

JD Group this week issued a profit warning and said it had changed similar accounting practices.

Furniture retailers have been known as aggressive granters of credit, charging significant interest on long repayment terms.

Two of the big three furniture groups, JD Group and Lewis, report results within the next two weeks.

Leon Kirkinis, the chief executive of African Bank — the new owner of Ellerines — told the Financial Mail that his bank had paid R450-million more than it thought it had when it bought the retailer last year for R9.1 billion.

Syd Vianello, retail analyst at Nedcor Securities, said that while the accounting changes would make little difference to profits in the long term, the companies would have to make one-off adjustments.

“That's where the fun starts. They have to make this one-off adjustment and reverse all the upfront insurance premiums and then amortise into profit the length of the insurance contract.

“At the end of the day it comes off the equity and reduces net asset value substantially,” Vianello said.

Sales under pressure

After the news of the Ellerines problem, JD Group released a trading update which said that interim results for the six months ended February would incorporate a change in the basis of accounting for insurance income.

It also said operating profits before debtor costs were expected to be between 19% and 24% lower than the previous year. JD Group will report its results on May 26.

JD Group, Ellerines and the Lewis Group are struggling to generate sales as customers are wary of committing themselves, while the collection of outstanding monthly amounts is deteriorating.

Vianello said of Ellerines: “They're discounting prices like mad, offering extended credit, they've retrenched thousands of people and moved the entire credit function to the African Bank model,” said Vianello.

Ellerines is planning to close a number of brands and stores, and JD Group's new management is believed to be contemplating similar action.

Lewis, the smallest of the three, collects money through agents in the stores.

Vianello believes it could benefit by picking up cheap retail space, as it is not a national chain.

A factor that will change the landscape, though, are new entrants Massmart, Mr Price and Steinhoff.

Source: Business Times

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