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Last week the country’s largest furniture retailer, the JD Group, reported an impending black hole in net profit, but the second-biggest player, Ellerine, expects to lift earnings.

October 15, 2007 By Tom Robbins Cape Town – Last week the country’s largest furniture retailer, the JD Group, reported an impending black hole in net profit, but the second-biggest player, Ellerine, expects to lift earnings. While the JD Group reported in a trading update a probable modest decline in profit after normal monthly expenses, the bulk of a likely dramatic decline in net profit was either on account of a hefty once-off tax charge or ballooning bad debts at the credit retailer, or a combination of both. Investors are eagerly awaiting an explanation to the update, which is expected to be given when the company reports its annual results on November 5. Analysts have frequently described the JD Group and Ellerine as the furniture sector’s poorest performers in a climate of slowing sales growth and rising bad debts. But the JD Group’s profit fall and Ellerine’s gain suggest JD’s situation is really a company-specific issue and not indicative of the overall health of the consumer, despite rising interest rates. While there was an expectation that the JD Group’s profit would be poor, following a warning from the company in May, the results will be worse than the market expected. The company said in its update that it expected headline earnings per share (Heps) in the year to August to fall by as much as between 25 percent and 30 percent, compared with a year ago. But the JD Group said operating profit, which exclude taxation and debtors’ costs, would be down by less, at between 4 percent and 9 percent. On Friday, competitor Ellerine said it expected Heps to lift between 10 percent and 15 percent for the same period. In the first half, the JD Group, which has reported at least six straight years of revenue growth, reported revenue growth of 17 percent – but Jeanine van Zyl, a retail analyst at Old Mutual Investment Group SA, estimated that in the second half, like-for-like revenue had fallen. Van Zyl stressed that overall revenue, including the Connection Group acquisition, would be higher compared with the second half of last year. Van Zyl said comparing the JD Group’s profit fall to Ellerine’s rise appeared to indicate a company-specific issue at the JD Group, as opposed to the poor state of the South African consumer. It might also be that the firm’s tax charge “is significantly higher than expected as a result of a tax settlement”. Van Zyl said the JD Group’s profit announcement was “worse than the whole market expected”. While the rest of the furniture sector had reported slower consumer debt repayments, these companies had not reported a significant escalation in debtors’ costs. Mark Ansley, a portfolio manager at Cadiz African Harvest, said it was likely the dramatic fall in profit was a JD Group-specific issue. In February 2002, after the JD Group had acquired the “reckless lending” Profurn group, its bad debts were only 8.4 percent of the book, as opposed to 6 percent in February this year. JD Group shares fell 6.46 percent on the JSE on Friday to R60.25. The general retail sector lost 2.14 percent.