CHIEF EXECUTIVE OFFICER'S REPORT
CONTINUE TO BENEFIT FROM OUR STRATEGY OF SOURCING QUALITY, EXCLUSIVE AND DIFFERENTIATED MERCHANDISE.
INTRODUCTION
It is a pleasure to report to shareholders for the first time since my appointment as chief executive officer and to reflect on the group’s progress in what has been a challenging time for the economy and the retail industry.
The resilience of our business model was severely tested during the domestic recession which followed the global downturn of the past two years. However, Lewis Group recorded solid growth in revenue and profitability for the year as the early signs of improving economic conditions started to benefit consumers.
TRADING PERFORMANCE
Improving market conditions and the increasing levels of disposable income of Lewis customers saw revenue rise by 8.0% to R4 111 million and merchandise sales by 6.5% to R2 046 million, aided by strong trading over the festive season.
The group continued to pursue its strategy of sourcing quality, exclusive and differentiated furniture ranges. Our merchandising philosophy is based on the belief that the product offering drives customers into our stores, not the financial offering. The benefit of this strategy is reflected in the 8.5% increase in sales of the higher margin furniture and appliance category. Furniture now accounts for 55% (2009: 53%) of group sales.
Merchandise sales in our flagship brand, Lewis, increased by 7.7%. Best Home and Electric grew sales by 7.8%, lifted by higher furniture sales which now comprise 28% of the brand’s total sales. Lifestyle Living sales declined by 10.4%.
Credit sales increased to 68.5% of total sales from 64.3% in the previous year, supported by merchandise initiatives and local promotions. The group will benefit from the annuity income from these higher credit sales into the future.
Customer loyalty remains a key driver of sales growth and in the past year 55% of credit-based sales were to existing customers, highlighting the effectiveness of the store-based customer re-serve programme.
Gross profit margin improved from 31.3% to 34.9% as the group recovered the currency losses reported at the half-year. After adjusting for currency losses, which are shown separately the net position improved from 31.9% to 33.4%.
Efficient stock management and successful product ranging resulted in the inventory turn improving from 5.8 to 6.0 times. The Lewis supply chain model is based on merchandise being delivered directly by suppliers to stores and Lewis does not operate distribution centres or central warehouses.
It is pleasing to report that the group improved its operating margin to 22.1% (2009: 21.9%) in the challenging trading and credit conditions of the past year.
DEBTOR MANAGEMENT
Debtor costs for the year increased to 10.9% of net debtors (2009: 10.0%) well within the target of 10% to 13% indicated at the half-year. The collection environment was difficult in the first six months. However, since half-year, collections improved and debtor costs stabilised. Debtor costs for the year increased by 28% reflecting an improvement on the half-year position which was 32% higher. Credit risk management strategies have been consistently applied and it remains company policy to never reschedule existing contracts. The impairment provision moved from 15.7% to 16.0%, improving on the level of 17.9% reflected at the half-year. Further detail is contained in the Credit Report.
Longer credit terms of mostly 30 months are only offered to top-rated customers on new contracts. Longer term contracts are now almost fully in the base. The payment performance of these contracts has generally been better than 24-month contracts.
While the credit application decline rate rose from 25.4% in 2009 to 27.5%, the decline rate remained stable between the first and second half and reflects the improving health of consumers. The group’s centralised credit-granting process has been a core strength in this tough credit climate.
The unemployment level among the group’s customer base is monitored monthly and has remained stable at around 3% over the past 18 to 24 months.
STORE EXPANSION
Our store footprint increased to 548 following the opening of ten Lewis and six Best Home and Electric stores and the closure of three stores during the year.
The smaller format Lewis outlets continued to show pleasing results. These small stores, which average around 250 m² compared to the average 400 m² of other stores, have a lower cost base and are more profitable. Lewis now has nine small format stores.
Our expansion target is to open 150 new stores in the next three to four years across Lewis and Best Home and Electric, with 40 to 45 outlets to be opened in the 2011 financial year.
Lifestyle Living, which is aimed at a higher income market than Lewis, has underperformed in recent years. Lifestyle Living which only accounts for 3% of group revenue, will be re-engineered. A new trading brand, My Home, has been launched to target aspirational customers in the LSM 7 – 8 categories. The new chain is aimed at attracting customers requiring more upmarket furniture, who have a need for in-store credit facilities.
My Home will adopt the successful Lewis business model and use the group’s well-established credit infrastructure. The focus will be on differentiating the merchandise offering through exclusive and innovative ranging of more aspirational yet still traditional furniture.
Thirteen Lifestyle Living stores that fit the location strategy and target profile have been converted to My Home. A further five new stores will be opened during the next 12 to 18 months and a conservative expansion plan will be followed based on the performance of the new chain. Lifestyle Living will cease trading during the second half of the new financial year.
OUTLOOK
We are encouraged by the improving collection and sales trend which has continued into the new financial year. However, we recognise that the economic recovery is still in its early stage. Our customer base faces the challenge of continuing unemployment and the working of short time and we therefore remain cautious for the months ahead. The prudent management of our debtors’ book remains a priority.
In the year ahead we look to maintain the momentum in merchandising and will continue to source exclusive products to increase the contribution of furniture as a percentage of the total sales mix. We believe the group is well positioned to benefit from a continued recovery in economic conditions.
The group is targeting to increase operating margin from the current 22% to 26% over the next three years. This increase in margin will be driven by the store expansion programme, improvement in gross profit and declining debtor costs.
APPRECIATION
I pay tribute to my predecessor, Alan Smart, for his contribution to the group in a career that spanned more than 40 years. I have worked closely with Alan over a number of years and thank him for his guidance, mentorship and for sharing the benefit of his considerable wisdom.
It is an honour and a privilege to lead a business of the stature of the Lewis Group.
Johan Enslin
Chief Executive Officer