Retail power gives Steinhoff muscle

BEFORE Steinhoff CEO Markus Jooste presented the furniture group's annual results this week, Eric Ellerine went up to shake hands and congratulate the team on the hefty rise in dividends - up 88% to R1.50 a share.

BEFORE Steinhoff CEO Markus Jooste presented the furniture group's annual results this week, Eric Ellerine went up to shake hands and congratulate the team on the hefty rise in dividends - up 88% to R1.50 a share.

Ellerine congratulating the owner of the biggest rival of the group he founded may appear odd. But there are long-standing bonds and close friendships between some of the top operators in the industry.

Ellerine and his brother Syd founded the furniture retail chain Ellerines. It is a direct competitor of the JD Group, of which Steinhoff holds 86% and which it is working hard to fix.

Eric, who is also a big shareholder in Steinhoff, and Jooste, who credits the Ellerine brothers with teaching many about the furniture business, have been firm friends for decades - ever since Ellerines became a big customer of Steinhoff when it owned furniture manufacturing interests in South Africa.

Jooste also has a close relationship with David Sussman, who started JD Group in the 1980s. The two planned a merger in 2007, but shareholders put it on ice. Sussman was Steinhoff's biggest customer when Steinhoff owned local manufacturing. Sussman went on compassionate leave in February. It is not clear what role he will continue to play in the business.

Now, as Steinhoff repositions itself as an integrated retailer with manufacturing, sourcing and logistics, there is a sense of a changing of the guard.

Steinhoff presented strong results with nearly a one-third rise in full-year profit, assisted by positive currency swings. Turnover growth in Europe was fairly muted amid tough trading conditions, but margins have widened as benefits start to flow from work in logistics as well as increased volumes, driving down costs.

Revenue from continuing operations jumped 20% to R117-billion while operating profit before capital items rose 29% to R12.6-billion.

Cash generated from operations jumped 68% to R21-billion. As it stands, 74% of revenue and more than 85% operating profit are earned outside South Africa.

Steinhoff, which is about 50% foreign owned, is preparing its listing prospectus for the Frankfurt bourse after raising R18.2-billion in a rights offer. It is now the second-largest furniture retailer in Europe, after Ikea.

Steinhoff has put together 100 common products it will sell in all its retail outlets, and plans to increase this to 20% of its total range in the next five years.

Jooste drove a lot of corporate action over the past year - acquiring the entire Fly store network in Switzerland, Kika Leiner and about 10 Atlas stores in France, and purchasing properties.

The share trades at R53 or 11 times earnings.

Independent analyst Dean Ginsberg said Steinhoff had realigned its entire business model from manufacturing with no pricing power to being a vertically integrated furniture business offering manufacturing, sourcing, logistics and retail across Europe, the UK, South Africa and Asia Pacific, with pricing power.

This will enable it to further maximise its margins in a similar fashion to Ikea, while at the same time improving its return on equity.

Ginsberg said the business had massive scale as a result of its retail presence, and that the endgame was to source and manufacture globally and obtain economies of scale by being the second-largest fully integrated global furniture business outside the US. "They've been the corporate financiers of the furniture market across the whole of Europe," he said.

It's also about controlling property. In all likelihood it would list its property portfolio separately, said Ginsberg. After the capital raising in July, the company had gearing of only 12% and with an imminent Frankfurt listing it gives the company plenty of fire power for acquisitions.

The plan was to remain focused on the EU , as the company has low market share in Germany, Eastern Europe and the Benelux countries. It is strong in France, Switzerland and Spain, where it owns Conforama, and in the UK with Harveys.

JD Group reported a full-year loss and put the brakes on its dividend. Jooste said the company would return to profit in the year ending June 2015. CEO Peter Griffiths this week spoke of the sale of the debt-laden consumer finance book to an international finance group, leaving it virtually debt free.