CHIEF FINANCIAL OFFICER'S REPORT
FOCUS ON DELIVERING COMPETITIVE RETURNS TO SHAREHOLDERS WITH THE DIVIDEND BEING MAINTAINED AT 323 CENTS PER SHARE.
INTRODUCTION
Lewis Group has continued to focus on delivering competitive returns to its shareholders and it is pleasing to report solid growth in revenue, an enhanced operating margin and stabilising debtor costs for the year under review.
The board has again shown its confidence in the group’s long-term prospects and maintained the total dividend at 323 cents per share.
FINANCIAL PERFORMANCE
The review of the performance for the period should be read in conjunction with the annual financial statements here.
INCOME STATEMENT ANALYSIS
The group’s revenue, comprising merchandise sales, finance charges, insurance income and ancillary services, increased by 8.0% to R4 111 million (2009: R3 807 million). Merchandise sales grew by 6.5% to R2 046 million (2009: R1 920 million), with comparable store sales growth at 4.5% and price inflation averaging 3% for the period.
Revenue from finance charges rose 9.7% and insurance revenue increased by 6.0% owing to the earn-out of longer term contracts. Ancillary services, which comprise the monthly service and initiation fees charged in terms of the National Credit Act, increased by 13.1% in line with the growth in credit sales.
Gross profit margin improved from 31.3% to 34.9% fully recovering currency losses reported at the half-year. After adjusting for currency losses, which reflect in finance costs, the net position improved from 31.9% to 33.4% as shown below:
| 2010 | 2009 | |
| Gross profit | 34.9% | 31.3% |
| Exchange gains/(losses) | (1.5%) | 0.6% |
| All in gross | 33.4% | 31.9% |
Operating costs, excluding debtor costs, increased by 9.2%. The main contributors to this increase were union negotiated wage settlements, increases in variable remuneration on the improved trading results, IT system upgrades and higher volumes of loss of employment claims in Monarch. Operating costs as a percentage of revenue moved from 34.6% in 2009 to 35.0% for the reporting period.
Debtor costs for the year were 10.9% of net debtors (2009: 10.0%). Debtor costs comprise bad debts and repossession losses net of recoveries and the movement in the impairment provision. During the year certain non-performing accounts, against which impairment provisions of approximately 95% had been raised on the outstanding balances, were written off. The release of the impairment provision against these accounts compensated for the write-off and the effect on operating profit was minimal.
Debtor costs have shown a steadily improving trend as the collection environment started to recover, increasing by 25% for the second half following an increase of 32% for the first half. The debtor cost increase for the previous financial year was 78%. This declining trend is expected to continue and debtor costs should normalise at around 8% of net debtors over the next three years.
| OPERATING PROFIT PER EMPLOYEE | OPERATING PROFIT PER SQUARE METRE |
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The operating profit margin improved to 22.1% (2009: 21.9%) which translated into a 9.0% increase in operating profit to R907 million (2009: R832 million).
Investment income of R78 million comprises interest income, dividend income on investments held by Monarch and includes realised equity gains of R24 million.
Earnings per share increased by 5.6% to 672 cents per share and headline earnings per share were 1.9% higher at 643 cents. The calculation of headline earnings per share excludes investment equity gains of R24 million in Monarch.
SEGMENTAL PERFORMANCE
Following the adoption of IFRS 8 (Operating Segments), the basis of disclosing segmental financial information has changed. The group now discloses segmental information for Lewis, Best Home and Electric and Lifestyle Living. This is the financial information regularly reviewed by the chief operating decision makers of the group and reflects the customer-centric structure of the operations based on the premise that the selling of furniture and the provision of credit are interdependent. Segmental information was previously provided for the group’s retail, risk services and financial services operations.
| Best | |||||
| Home | |||||
| and | Lifestyle | ||||
| Group | Lewis | Electric | Living | ||
| Revenue (Rm) | 4 111 | 3 470 | 504 | 137 | |
| Revenue growth (%) | 8.0 | 8.3 | 10.8 | (7.7) | |
| Operating profit (Rm) | 907 | 809 | 96 | 2 | |
| Operating margin (%) | FY:10 | 22.1 | 23.3 | 19.1 | 1.7 |
| FY:09 | 21.9 | 23.0 | 20.1 | 2.8 | |
- Lewis increased revenue by 8.3% and accounted for 84% of the group’s total revenue. Operating margin increased from 23.0% to 23.3%.
- Best Home and Electric grew revenue by 10.8% with furniture being a higher proportion of the mix. Operating margin contracted to 19.1%.
- Lifestyle Living reported a less favourable performance in terms of revenue and profitability. As outlined by the chief executive officer this business will cease trading during the second half of the new financial year. A new trading brand, My Home, will be launched in the first half of the new financial year to target aspirational customers in LSM 7 – 8 categories who have a need for in-store credit facilities.
BALANCE SHEET REVIEW
Insurance investments increased by R160 million to R894 million. These investments are managed on behalf of Monarch by Sanlam with the portfolio asset allocation being 35% blue-chip listed equities and 65% cash and bonds.
Inventory levels were well controlled. The stock turn improved from 5.8 to 6.0 times through efficient stock management and successful product ranging.
Trade and other receivables grew by 18% over the year owing to a higher number of longer term contracts. The group has now reached the targeted level of longer term business. As this is now in the base we do not expect debtor growth to exceed sales growth on a like-for-like basis for next year.
| NET ASSET VALUE PER SHARE |
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The group’s net asset value per share increased by 12.6% to R37.19. The return on average assets managed (pre-tax) was 21.9% and the return on average equity (after tax) 19.2%. These balance sheet ratios remain well above the group’s weighted average cost of capital of 12%.
CASH AND CAPITAL MANAGEMENT
Shareholders will note that the total dividend for the year has been maintained at 323 cents per share, comprising an interim dividend of 144 cents and a final dividend of 179 cents.
The gearing ratio increased to 27.5% (2009: 23.5%) as a result of the additional funding required for the debtors’ book and the insurance business arising from the longer term credit business on the book. The gearing ratio remains well below management’s maximum level of 35% and is expected to decline over the next two years.
At year-end the group was effectively ungeared, holding insurance investments to cover interest-bearing borrowings as follows:
| 2010 | 2009 | |
| Rm | Rm | |
| Insurance investments and cash | 956 | 789 |
| Interest-bearing borrowings | 961 | 737 |
| Net cash position | (5) | 52 |
The group is currently focusing its resources on the more aggressive store expansion plan and no share repurchases are planned for the year ahead. Management is also mindful of the liquidity in the Lewis Group share.
YEAR AHEAD
Capital expenditure of R80 million has been budgeted for the 2011 financial year, with the majority to be invested in the ongoing replacement of delivery vehicles and computer equipment. The planned store expansion programme will not significantly impact capital expenditure requirements.
The store footprint is expected to increase by the opening of 40 new stores across Lewis and Best Home and Electric and a further five for the new chain, My Home.
We would like to thank our shareholders and the broader investment community both locally and internationally for their ongoing interest in the group.
Les Davies
Chief Financial Officer