chief financial officer's report

We extend our thanks to shareholders and analysts both locally and internationally for your continued interest and welcome those shareholders who invested in the group for the first time this year.

The following review of the group’s financial performance for the year ended 31 March 2011 should be read in conjunction with the annual financial statements here.

STATEMENT OF COMPREHENSIVE INCOME

The group’s revenue increased by 11.4% to R4 578 million (2010: R4 111 million) and comprised the following:

• Merchandise sales grew by 12.0% to R2 290 million (2010: R2 046 million), with comparable store sales growth at 8.6%.
• Revenue from finance charges earned by the group increased by 1.4%, reflecting the impact of lower interest rates.
• Insurance revenue grew by 22.2% owing to the higher proportion of longer term contracts in the debtor base.
• Revenue from ancillary services, comprising monthly service and initiation fees on credit sales, increased by 13.5% in line with the growth in net debtors.

Gross profit margin improved from 34.9% to 36.3%.

Operating costs, excluding debtor costs, increased by 11.8%. Costs were impacted by the higher performance-related employment costs linked to the improved results, the launch of My Home and the higher occupancy and employment costs associated with the opening of 40 new stores during the period. Operating costs as a percentage of revenue at 35.1% is well within management’s target range of 35% to 36%.

Debtor costs as a percentage of net debtors reduced from 10.9% to 10.2%. Debtor costs include bad debts and repossession losses net of recoveries and the movement in the impairment provision.

The increase in debtor costs has declined steadily over the past two years and is expected to normalise at around 8% of net debtors in the medium term.

The impairment provision increased from 16.0% to 16.8% of net debtors owing to the higher capital investment in longer term contracts which is expected to be fully in the base by the second half of 2012.

Operating profit margin improved to 23.0% (2010: 22.1%) and resulted in a 16.0% growth in operating profit to R1 053 million (2010: R907 million).

Investment income of R82.0 million comprises interest income, dividend income on investments held by Monarch and includes realised equity gains of R20 million.

Earnings per share increased by 20.1% to 807.2 cents per share and headline earnings per share were 21.6% higher at 781.1 cents.

SEGMENTAL PERFORMANCE

				BEST HOME AND
		GROUP	LEWIS	ELECTRIC	MY HOME
Revenue (Rm)		4 578	3 854	589	136
Revenue growth (%)		11.4	11.0	16.9	(0.9)
Operating profit (Rm)		1 053	920	126	7
Operating margin (%)
	2011	23.0	23.9	21.4	5.0
	2010	22.1	23.3	19.1	1.7

• Lewis increased revenue by 11.0% and accounted for 84.2% of the group’s total revenue. Operating margin increased from 23.3% to 23.9%.
• Best Home and Electric grew revenue by 16.9% and increased operating margin from 19.1% to 21.4%.
• My Home/Lifestyle Living is in transition following the closure of the Lifestyle Living brand and the trial launch of My Home during the year.

STATEMENT OF FINANCIAL POSITION

Insurance investments increased by R203 million to R1 097 million. The group’s investment portfolio is managed by Sanlam Investment Management and at year-end 33% of the assets were held in listed equities and 67% in cash and bonds.

The increase in inventory levels supported the extended store base.

Credit sales increased by 16.7% whilst net debtors only grew by 13.8% as a result of improved cash collections and the longer term business settling in the base.

CASH AND CAPITAL MANAGEMENT

Shareholders will receive a total dividend for the year of 363 cents per share, comprising an interim dividend of 156 cents and a final dividend of 207 cents. The group has resumed its dividend policy of a 50% payout of earnings to shareholders.

Cash generated from operations increased by R300 million through improved trading and strong debtor cash collections.

The group’s gearing ratio reduced to 26.8% from 27.5%, well below management’s maximum level of 35%.

YEAR AHEAD

No share buy-backs are planned in 2012 as management will continue to invest in the growth of the credit and insurance business.

Capital expenditure of R93 million is planned for the 2012 financial year with the lion’s share allocated to ongoing renewal of the delivery fleet.

The planned opening of 40 new stores across Lewis and Best Home and Electric will add significant value to the trading performance of the group.

Les Davies
Chief Financial Officer