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JD GROUP This furniture retailer’s recent warning about a deterioration in the credit profile of its customers is sharply reminiscent of a similar warning in January 2002.

While that proved to be a year of poor earnings for JD Group, by early 2003 things were looking better. Sales and profit margins were up and JD had been able to substantially boost its asset base by acquiring the floundering Profurn group.

In early 2002 JD Group shocked the market with a trading update saying its gross profit margin had fallen 2 percentage points in the four months to December. The decrease was attributed to management’s efforts to protect the quality of the group’s asset base in the face of the expected economic fallout from Aids.

The impact on market sentiment was aggravated by the woes suffered by microlender Unifer and the generally bearish expectations for any company exposed to low-income consumers. Within days, JD Group’s share price had dropped to R23, a dramatic decline from the R48 high it had reached in 2001.

But in a considerably weaker position was Profurn, which had grown credit sales dramatically over a relatively short period.

In less that a week, its share price dropped 40 percent as analysts raised questions about the quality of its debtors book in view of its rapid growth. By June, JD Group and FirstRand were working on a plan for Profurn’s rescue.

Five years later, JD is again the first major retailer to warn of deteriorating trading conditions as it reported a slowdown in earnings growth. The deterioration is due to an increase in the rate at which customers are defaulting on loans.

While an opportunistic acquisition is unlikely, the apparent deterioration in trading conditions might help steer through the proposed deal between JD Group and Steinhoff.