Some companies have more complicated business models than their peers within the same industry. With Courts Asia Ltd (SGX: RE2), we might have one such example.
Courts Asia is predominantly understood to be a retailer of home appliances and IT products. Thus, its competitors can include Challenger Technologies Limited (SGX: 573). But unlike Challenger, which earns a profit by simply selling technological products in its stores, Courts Asia’s income stream is markedly different.
In fact, it’s my opinion that Courts Asia seems more like a financial company than a traditional retailer.
How does Courts Asia make its money?
Like I mentioned earlier, Courts Asia retails home appliances and IT products. In fact, it should be a familiar sight for Singaporeans given that it’s one of the largest retailers of its kind in the region. With its stronghold in Singapore and Malaysia, the company earned revenue of more than S$830 million in its latest financial year ended 31 March 2014.
For investors (as well as customers who have shopped there), it’s also perhaps well-known that Courts Asia provides a credit service for its customers that allows them to pay for purchases via different types of instalment plans. But, what’s not commonly known here is the importance of Courts Asia’s credit service in generating a profit for the company.
As the company does not provide a breakdown of the contribution to its bottom-line that comes from its cash-based sales and its credit-based sales, investors might have a hard time understanding where its profit comes from.
On that front, a recent meeting that my colleague Ser Jing and I had with Courts Asia’s management might shed some light on the issue. The following is how Courts Asia views its credit-based sales, according to Ms. Tammy Teo, the company’s Regional Head of Strategy Planning & Communications:
“[W]hilst credit is a bigger profit contributor compared to merchandise sales, we do not construct separate P&Ls [profit & loss statements] for retail and credit as it is a hybrid model. E.g., if we were to open a store in somewhere like Kuantan [in Malaysia], P&L from cash sales may be negative, but given the high credit mix, it will be net positive.”
In other words, credit-sales carries a lot more weight in Courts Asia’s bottom-line than its roughly one-fifth share of the company’s total top-line suggests. But, the company sees no need to break down its profit-lines into more granular detail given its hybrid model.
I agree with management’s take that Courts Asia has a unique business model where cash-based and credit-based sales come under one roof and where one segment supports the other (and vice-versa) in helping the company earn a profit. But, from my vantage point as an investor, I still feel that a clearer segmental breakdown in its reporting for each segment’s contribution to the bottom-line will allow the public to better understand the complete picture with the company. That way, investors can be prevented from making a mistake of comparing Courts Asia to other predominantly cash-based retailers (like Challenger) when perhaps a credit-leasing outfit might make for a better comparison.
Companies that offer credit along with retail are not new. Car manufacturers often give out car loans when you purchase a vehicle; even supermarket chains such as Tesco PLC from the UK used to have a large credit business as well.
However, investors have to understand that the nature of a credit business is very different from that of traditional retailing. Therefore, the next time you are thinking of comparing Courts Asia with cash-based retailers such as Challenger or Hour Glass Ltd (SGX: E5P), perhaps you should reconsider the comparison options.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above.