CHAIRMAN'S REPORT
A PROUD TRACK RECORD OF SUSTAINED GROWTH, WITH OPERATING PROFIT HAVING INCREASED BY AN ANNUAL COMPOUND RATE OF 10.5% OVER THE PAST 18 YEARS.
INTRODUCTION
The Lewis Group model continued to show its resilience as the group delivered an admirable performance in the most demanding trading conditions experienced in the credit retail section for many years.
The Lewis Group has continued to reap the benefits of its customer-centric business model and performed admirably in the prevailing credit retail environment and also relative to its competitors.
While retrenchments, unemployment and reduced working hours continued to impact consumers in our target market, economic pressures started to ease during the year. Food price inflation has declined, fuel prices have stabilised, higher real wage increases have been granted and lower income earners benefited from further tax relief granted in the Budget in February 2010.
The further decline in interest rates over the past year has been positive for the country’s economic growth and has brought relief to debt-burdened consumers.
FINANCIAL PERFORMANCE
While the economic recovery is fragile, we do consider that there has been significant progress. This is reflected in the improving credit collections environment in the second half of the year and the group’s stabilising debtor costs.
It is encouraging to report that the operating margin improved from 21.9% last year to 22.1% in these difficult times, translating into a 9.0% growth in operating profit to R907 million. The group has a proud track record of sustained growth, with operating profit having increased by an annual compound rate of 10.5% over the past 18 years. The operating margin has only been below 21% on two occasions during this period.
Earnings per share increased by 5.6% to 672.0 cents per share and the total dividend was maintained at 323 cents per share for the year. Further detail on the group’s trading and financial performance is contained in the Chief Executive’s Report and the Chief Financial Officer’s Report.
BOARD AND MANAGEMENT
During the year our long-serving chief executive officer, Alan Smart, retired after 40 years with the group. In his 18-year tenure as chief executive officer Alan was instrumental in leading Lewis to its position as the country’s pre-eminent furniture retail group. We echo the tribute that was paid to Alan in last year’s annual report and on behalf of the group wish him a long and healthy retirement. Following his retirement Alan accepted the board’s invitation to serve as a non-executive director. Accordingly his invaluable expertise and experience will not be lost to the group.
Johan Enslin was promoted to chief executive officer and appointed to the board as an executive director from 1 October 2009. Johan has been with the group for over 16 years and has extensive experience in managing the group’s operations, having most recently served as chief operating officer. In the short time since his appointment Johan has already demonstrated his decisive leadership and strategic capability and my fellow directors join me in wishing him every success in leading the group.
The succession process in the chief executive’s office was well managed and allowed for a seamless transition when Alan retired.
We also welcomed Zarina Bassa and Sizakele Marutlulle as independent non-executive directors during the year, which has increased the non-executive component of our board to seven. Both Zarina and Sizakele have strong skill sets and insights which will add valuable contributions to our board deliberations.
The transformation profile of our board has also been enhanced and 57% of the non-executive directors are black and 43% are female.
GOVERNANCE AND SUSTAINABILITY
The group is committed to applying and complying with the King III code. An evaluation of King lll has been undertaken and governance processes will be aligned in the new financial year.
As part of the implementation of the new code, the board has already approved changes to the group’s governance structure. These include separating the current Audit and Risk Committee into specific committees for audit and for risk, as well as splitting the Remuneration and Nomination Committee into separate committees. This will allow these committees to devote more focused attention to their respective agendas.
We also recognise that sustainability management is a key component of corporate governance. The group supports the integrated sustainability reporting philosophy outlined in King lll and will endeavour to integrate these principles into its sustainability programme.
Further detail is contained in the Corporate Governance Report and the Sustainability Report.
PROSPECTS
While trading conditions are showing early signs of improvement, the environment is expected to remain challenging in the year ahead as the country emerges from recession and the recovery could take longer than expected. Unemployment and the working of short time remains a reality.
Job creation will be key to stimulating economic growth in the Lewis target market and the higher real wage increases granted to the public sector and several union groups in recent months should be positive for sales growth.
The group’s debtor costs should moderate as the credit collections environment continues to improve.
A more aggressive store expansion programme will see the group open 40 to 45 new stores in the year ahead. This expansion will create between 400 and 450 new jobs. The group plans to expand its store base to 700 over the next three to four years.
APPRECIATION
The performance over the past year was truly a great team effort. On behalf of the board I would like to compliment the leadership team under Johan for their disciplined approach in applying the group’s proven business model. I also thank our staff of almost 6 700 throughout the country for their commitment to meeting the needs of our customers. Thanks are also due to my board colleagues for their continued guidance and insight. I also extend my appreciation to our external stakeholders for their support, including our customers, suppliers and manufacturers, shareholders and the broader investment community, business partners and the media.
David Nurek
Independent non-executive chairman