Bull case vs bear case: Lewis Group

Bull case vs bear case: Lewis Group

Unlike the famous racing driver with a similar name, Lewis Group (LEW) isn’t a household name among South African investors. This stock rarely features in the media or on lists of “hot stocks” to consider. 

Value investors have told me they like it this way, as it means the company tends to trade at a relatively low Price/Earnings multiple versus its peers. Growth investors would simply look elsewhere as a starting point, as Lewis doesn’t fit their idea of an “exciting” stock. As for momentum investors –- well, that depends on what the share price chart is doing!

This R4.7 billion market-cap retailer has strongly outperformed most other retailers on the JSE in the past year. The share price is up 10.5% over 12 months*, a figure that compares very favourably to other value-focused retailers, like Pepkor (down 22%) or Mr Price (down 19%). Even Shoprite, the belle of the ball in the local grocery sector, is only up 5% over 12 months. 

Thanks to the Price/Earnings multiple of 5x and a solid dividend payout ratio, Lewis is trading on a trailing dividend yield of around 10%. This is where the numbers get more interesting, as the total return over 12 months jumps to nearly 22%. If you look over three years, you’ll find share price growth of 128% and a total return of 206%.

Lewis may not have the most glamorous retail business around, but it has been one of the few success stories among local retailers. This makes it a worthwhile case study for learning purposes in the retail sector.

Could this performance continue, or is Lewis at risk of falling foul of a difficult South African consumer story?

The bull case 

On 14 July 2026, Lewis Group announced that Global Credit Ratings (GCR) upgraded the company’s long- and short-term national scale issuer ratings to AA-(ZA) and A1+(ZA) respectively. GCR noted a “stable” outlook as well. 

Although a credit ratings agency upgrade isn’t a direct reflection on the attractiveness (or otherwise) of a company’s equity, it does at least indicate how the underlying business is doing.

So, in GCR’s related commentary, we find several potential bull arguments stemming from the performance in the year ended March 2026.

The sales growth profile shows the business model. Merchandise sales were up by an inflation-beating 7.3%, but it was the financial services and ancillary income line that really stood out with 15.7% growth. 

Notably, Lewis’ credit sales were 69.4% of merchandise sales in FY26. Another important metric is that financial services and ancillary income contributed 47.2% of total revenue. These are clearly important elements of the Lewis model.

The way it works is that Lewis uses furniture sales to get customers through the door. The full economic value lies in what happens afterwards, with insurance and credit products being core to the model. Provided that Lewis manages the credit book carefully and keeps associated metrics within a healthy range, this creates a business that is capable of delivering a double-digit operating profit margin.

In fact, according to GCR’s methodology, operating profit margin actually improved from 12.4% to 12.6%. This is a direct result of the shift in sales mix, as financial services and ancillary income are more lucrative than merchandise sales (subject to the credit quality of the book, of course). 

Overall, the bull case for Lewis focuses on its strong positioning in the retail market and how the company generates returns from sales of furniture and related goods.

The GCR report is aimed at debt providers rather than equity investors, so it doesn’t make mention of another core element of the bull case: Lewis’ valuation.

For context, even after a huge slump that saw the share price more than halve over the past year, The Foschini Group is still trading on a P/E of 7.6x. Pepkor, currently trading close to 52-week lows, has a P/E of 12x. And Lewis? A P/E of 5x - significantly lower than these other names. 

Based on the underlying growth in the last financial year and the levels at which peers are trading, it’s not surprising that value investors point to the 5x multiple at Lewis and describe it as a “cheap” stock.

The bear case 

The market gets things wrong all the time, but it’s also not foolish. Lewis bears can argue that the “low” P/E multiple correctly reflects the underlying risk in the business model. In other words, the argument is that the stock’s pricing is correct, which means the multiple is unlikely to move higher towards the peer group.

To understand why this could be the case, we need to consider Lewis’ exposure to South African consumers. To be precise: lower-LSM consumers who are extremely vulnerable to inflation shocks like transport costs. 

With the South African Reserve Bank (SARB) electing to keep rates steady at the July MPC meeting despite inflation running ahead of target levels, a possible interpretation is that policymakers at the central bank are acknowledging risks in the South African consumer market.

Recent data points from Cashbuild and Mr Price corroborate this view, with comparable store sales being weak in recent months. Pressure has been mounting on South African consumers. This risk is highly relevant to Lewis.

In practice, there are actually two layers of risk here. The first relates to merchandise sales, which speaks to affordability for new transactions. The second deals with the credit book and the funding lines Lewis has. 

If the key metrics in the book deteriorate significantly, then the positive margin mix Lewis experienced in the last financial year can quickly turn against it. The other side of the coin to making money in two ways is that you can suffer in two ways!

There’s also a regulatory layer to the risk factors around the credit model. This is a tightly regulated space where changes to affordability assessments or even marketing practices could negatively impact the business model.

At this stage, we just don’t know how Lewis has performed during periods of higher fuel costs. Both merchandise sales and the book’s credit quality are difficult to estimate in such an environment.

The last set of reported numbers at Lewis was for the year ended March 2026. This leaves us in a scenario where there’s risk of a negative surprise when Lewis releases its next trading update. This could take the form of a trading statement (if earnings differ by more than 20%), or the release of detailed interim numbers in November. Technically, Lewis could also put out a voluntary trading update. There’s no way of knowing for sure if we will see an update before the release of earnings. 

Another point to raise is that top executives in the company have recently been selling their shares. For example, the CFO sold over R3 million worth of shares towards the end of July. Director dealings are merely one indication of value, especially where the directors still have significant exposure to the stock. Still, when the P/E multiple is lower than peers, investors would expect to see director purchases rather than sales.

Forming a conclusion 

The argument that Lewis could experience an increase in the P/E multiple is a risky investment thesis. This would require the market to pay more per unit of earnings, which would only happen if sentiment towards the sector and the company improves. Although not impossible, that’s a big ask in this environment.

There’s also the risk of the multiple moving lower. The law of small numbers is worth keeping in mind here. A dip in the multiple from 5x to 4x is actually a 20% negative move! It’s critical to note that the multiple can move in either direction.

Investors would need to weigh these risks against another factor: the change in underlying earnings. Although Lewis grew headline earnings per share by 18.3% for the year ended March 2026, that was in a very different global geopolitical climate.

Readers should consider both the opportunities and risks discussed above when evaluating the information presented. It’s also important to further research the performance of the company in forming a view, as there are many more bull and bear arguments that can be made. 

Disclosure: The Finance Ghost does not have any position in Lewis at the time of writing. 

Disclaimer: This article is provided for informational and educational purposes only and does not constitute financial advice, a recommendation, an offer, or a solicitation to buy, sell or hold any financial product. The views expressed are based on publicly available information and are intended to present a balanced discussion of potential opportunities and risks. Any forward-looking statements, expectations or opinions are subject to change and may not materialise. Past performance is not indicative of future results. Readers should conduct their own research and consider their individual objectives, financial circumstances and risk tolerance before making any investment decisions. Any investment decision remains the sole responsibility of the reader. 

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* Moneyweb data, 28 July 2025