chief executive officer's report

The ongoing focus on merchandise innovation remains a competitive advantage and the group continued to reap the benefits of its strong brands among a loyal customer base. Core to the group’s performance is the store-based business model which continues to differentiate Lewis in the marketplace and has proved sustainable through all market conditions.

TRADING PERFORMANCE

Revenue increased by 11.4% to R4 578 million and merchandise sales by 12.0% to R2 290 million.

Furniture and appliance sales increased by 12.1%. Sales of electronic goods grew by 11.9% which is a pleasing result as this more discretionary merchandise category showed slower growth during the downturn of the past few years.

Merchandise sales in the flagship Lewis brand, which comprise 84.2% of total sales, increased by 12.6% and Best Home and Electric grew sales by 17.9%. Furniture sales account for 31.7% of Best Home and Electric’s sales.

Credit sales as a percentage of total sales increased from 68.5% in 2010 to 71.4%, driven mainly by targeted customer promotions at store level and the launch of new furniture and appliance ranges. The group will continue to benefit from the annuity income from 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. This highlights the effectiveness of the store-based customer re-serve programme. The high level of repeat sales also reflects service satisfaction, with the group achieving consistently high scores in customer service performance evaluations.

Gross profit margin improved from 34.9% in 2010 to 36.3% this year, strongly supported by the launch of new merchandise ranging.

Inventory continues to be tightly managed through sophisticated planning systems supporting decentralised standalone storerooms. Stock turn for the year was 5.7 times.

Operating profit margin increased to 23.0% (2010: 22.1%) and resulted in a 16.0% growth in operating profit which reached the R1 billion mark this year.

Detail on the financial performance is contained in the Chief Financial Officer’s Report.

MERCHANDISING STRATEGY

The group’s merchandising strategy is to source quality, exclusive and differentiated furniture ranges, supported by the philosophy that customers are attracted into stores by the product offering and not the credit offering.

Management has continued to focus on increasing sales of the higher margin furniture and appliance product categories, which accounts for 82% of total sales. Traditionally the group has launched a new furniture range in May each year and has now extended this to introduce a second annual range in October to offer further newness to customers.

Innovative product sourcing both locally and offshore enables the group to offer customers exclusive and distinctive furniture ranges at affordable prices. The import programme ensures furniture ranges have the latest designs and manufacturing techniques. International factories accommodate a broader range of developmental designs and offer a wider variety of raw materials which allows for product differentiation. All products are supported by local and overseas after-sales service to ensure quality standards are maintained.

DEBTOR MANAGEMENT

The improving quality of the book is reflected in the decline in debtor costs from 10.9% to 10.2%. Collections gained momentum throughout the year as the economic health of consumers continued to improve.

Credit risk management strategies have been consistently applied and it remains policy to never reschedule existing contracts.

Longer credit terms, mostly 30 months, are offered to top credit-rated customers on new purchases. The payment performance of these customers has been better than the 24-month contracts. s

Further detail is contained in the Credit Report.

STORE EXPANSION

The group embarked on an expansion programme to open 150 stores in the next three to four years to bring the store base to 700. The group achieved its goal of opening 40 outlets across Lewis (21 stores), Best Home and Electric (15 stores) and My Home (4 stores) in the past year and increased the store footprint to 582.

Lewis remains the country’s largest furniture brand with 454 stores, Best Home and Electric has 107 outlets and My Home 21 stores.

Lewis now has 26 small format stores which average 200 to 250 m² compared to conventional stores which average 400 to 450 m². These smaller outlets are more profitable owing to the lower cost base and higher trading densities. Stores stock the core furniture lines with the balance of the range available on the electronic merchandise catalogue and display screens in store. This enables customers to view the complete merchandise range, as well as fabric and colour options, on a large touch screen.

The new trading brand, My Home, was launched in the first half of the year and is aimed at customers aspiring to more upmarket furniture while utilising in-store credit facilities. The trial of My Home is continuing.

PROSPECTS

There are encouraging signs of a sustainable improvement in spending in the Lewis target market. Consumer confidence is improving and demand for credit is growing, supported by higher real wage increases granted to the public sector and trade union groups, stabilising unemployment, continuing infrastructure spend and service delivery.

However, management remains cautious on the pace of the economic recovery in an environment where job creation is key to sustained growth and consumers are experiencing increasing fuel, electricity and utility costs.

The store expansion programme will continue and 40 new outlets are planned for the year ahead, with the focus on small stores with lower cost structures and higher sales densities. The extended store footprint together with lower debtor costs will contribute to the group achieving its medium-term operating margin target of 26%.

Appreciation

In closing I thank our chairman, David Nurek, for his leadership of the board and for his guidance during my first full year as chief executive. I also extend my appreciation to my fellow directors for their insight and independent thinking, and to my executive colleagues for their disciplined management of the business.

Johan Enslin
Chief Executive Officer