Johannesburg - Fashion retailer Edcon is looking to African Bank Investments Limited’s (Abil’s) interest in its debtors book to boost credit offerings as it struggles with waning consumer confidence and fewer credit customers.
Edcon’s chief executive, Jurgen Schreiber, said yesterday that Abil was the best choice for a second credit provider. “Just like Absa it understands the unsecured lending market and both Edcon and Abil could benefit from each other’s customer base.”
Barclays subsidiary Absa bought the retailer’s book for R10 billion in 2012 and Abil will provide credit to customers who do not meet Absa’s criteria.
The retailer concluded the financial year with 130 000 fewer credit customers than the previous year.
On a 12-month rolling basis, credit sales decreased from 51.1 percent of total retail sales to 47.3 percent, as cash sales increased by 15.3 percent in the year to March.
Schreiber said there had been a “massive” increase in credit applications “but the approval rate is pretty much half what it was in the past when we had our own book”.
The retailer, whose brands include Edgars, Jet Mart, Jet and Legit, said it was finalising its agreement with Abil.
Schreiber stressed that Edcon had gone through a vigorous process of evaluating this deal and it was in its final stage.
“We will implement information technology integrations and other things. We are working to implement Abil as a second provider at the end of the second quarter.”
The retailer recorded a 5.1 percent rise in retail sales to R27 billion, with the gross profit margin slightly decreasing from 36.7 percent to 36.5 percent.
Pro forma adjusted earnings before interest, tax, depreciation and amortisation slipped by 2.6 percent to R2.7bn.
However, Edcon managed to halve its net losses to R2.5bn in the period under review from R5bn in the previous period.
Equity analyst Jean Pierre Verster at 36One Asset Management said Edcon hoped to gain customers from the venture.
From Edcon’s perspective, “this move makes a lot of sense because the retailer makes its money from the margin on the sale of goods”, Verster said. “So the more store credit is granted to customers, the more they are in a position to buy goods from Edcon and Edcon makes the margin immediately.”
Verster said it was Abil that would be taking the credit risk.
He said the success of the deal would depend on how Abil priced the credit. “Abil might offer credit at a higher interest rate to some customers that Absa had said no to, and be compensated for the additional risk by a higher yield.”
He pointed out that in Abil’s current model it extended credit to customers who had been turned down by the four major banks.
Abri du Plessis, the chief investment officer at Gryphon Asset Management, said it seemed Edcon had been able to improve its numbers this year. “They were in such big trouble before but looking at these numbers it does look like there is a better trend developing.”
Du Plessis said the strain in credit sales was being felt by all credit retailers and that in most cases it was “self-inflicted”.