Lewis Group [Part 2]
Revenue Streams, Revenue Drivers and Business Risks
Revenue Streams and Revenue Drivers
Lewis Group generates revenue through the sale of furniture, household appliances, and electronics. The company's business model relies on both cash sales and credit sales, which enable customers to purchase products on instalment payment plans. This credit offering is a significant revenue driver for Lewis Group, allowing it to tap into a wider customer base and increase sales volumes whilst earning interest income. Typically, 50-60% of the group sales are made on credit. Looking at the 2023 financial statements revenue can be broken down into the following streams with the percentage contribution show in brackets:
- Merchandise Sales (59.38%)
- Ancillary Services (11.02%)
- Insurance Revenue (11.77%)
- Interest Income (17.83%)
From the above we can see that interest income makes up a large chunk of Lewis revenue. The % contribution interest income has made to total revenue is larger in recent years due to the hiking of interest rates resulting in Lewis earning more for every sale made on credit. It should however be noted that in the current economic environment there is a greater risk of customers defaulting on instalments and bad debts having to be written off.
Key Business Risks
While Lewis Group has demonstrated resilience in the past, there are several key business risks that investors should consider:
Economic Factors: The company's performance is closely tied to economic conditions, including consumer sentiment, interest rates, and unemployment levels. Downturns in the economy could lead to reduced consumer spending and creditworthiness, impacting Lewis Group's sales and profitability. Given the nature of Lewis products being furniture and household appliances these are mainly discretionary purchases and not goods a consumer needs to survive. Thus when customers have less disposable income they are likely to postpone the purchase of a new couch or a new TV cabinet. A food retailer however is more defensive in that when times are tough you are still going to have to buy groceries.
Competitive Landscape: Intense competition from both traditional retailers and online platforms could erode Lewis Group's market share. The company must continue to innovate and adapt to changing consumer preferences to maintain its competitive edge. Lewis however is an established basis that has been able to carve out a niche in the market by providing affordable furniture offering on credit to a lower LSM consumer than most other retailers offer.
Credit Risk: As a provider of instalment credit, Lewis Group faces the risk of customer defaults and bad debt. Strict credit assessment processes and effective debt collection strategies are crucial to mitigate this risk. However from an assessment of the groups historical cash flow versus accounting earnings it is apparent that they apply very conservative bad debt provisions which often then reflects in cash flows exceeding accounting earnings.