JD Group bright despite earnings plunge

FURNITURE retailer JD Group's long-term outlook remains positive, but of more immediate and pressing interest to the group is when the consumer demand cycle will turn.

The group yesterday reported a 51 percent slump in full-year diluted earnings per share compared with a year ago, due to a decline in consumer spending and stiffer price competition.

The group, which operates through several brands including Electric Express, Hi-Fi Corporation, Incredible Connection and Joshua Doore, reported a 2.4 percent decline in revenue to R12.6-billion, as its business was dampened by consumers' shrinking discretionary income.

The gross profit margin also shrank to 28.6 percent from 30.1 percent, thanks to "a highly competitive trading environment in the second half of the year".

Revenue from the traditional retail division, which includes Barnetts, Price 'n Pride, Joshua Doore, Russells, Bradlows, Morkels and Electric Express, slid 11.6 percent.

"In order to preserve market share, the furniture chains were forced to cut prices and this significantly affected margins - by 2.8 percent - year-on-year," the groups explained.

JD Group had warned of less-than-rosy results in a trading update on November 4, when it forecast that earnings per share for the year were expected to be between 47 percent and 57 percent lower than the previous financial year.

One analyst said any improvement in JD Group's results would depend on a pick-up in demand for durables, or an improvement in the repayment profile of the group's debtors book.

Meanwhile, the group is involved in several disputes with the taxman. The SA Revenue Service is claiming in the region of R450-million outstanding tax. But JD Group said directors were "confident that the group would be able to defend any actions and that the probability of significant outflow or settlement is remote."

The retail sector as a whole has been hit hard this year by consumers' dwindling spending, which has been eroded by high levels of consumer inflation, coupled with tighter interest rates.

Macquarie First South economist Gina Schoeman said that, with consumer debt levels still at all-time highs, several interest rate cuts were needed to consolidate debt before consumer spending was likely to revive.

"We are going to need to see a series of cuts for consumers to start feeling some easing on their pockets," Schoeman said.

We expect consumer pain to bottom in the fourth quarter, but it doesn't mean it [consumer spending] is going to bounce out any time soon.

"We expect real retail sales growth to remain negative for the next six months."

Macquarie First South forecasts the first interest rate cut will come in June 2009.

Despite the disappointing results the group's share price was not much worse than other stocks in the retail sector, ending 4.18% percent lower at R28.