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Notice of AGM

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Understanding who our customers are and what their needs and aspirations are, is a primary focus of the Lewis Group. By staying close to our customers and understanding their diverse lifestyles, we aim to retain them for life.

Introduction

It is indeed a pleasure to report to shareholders on the maiden financial results of the Lewis Group since becoming a listed company. We are extremely proud of what has been achieved on the financial, trading, operational and transformation fronts.

Positive trading environment

The current retail trading environment is one of the most positive experienced by furniture and appliance retailers in the past three decades. It is particularly encouraging that a combination of factors that have contributed to the buoyant trading environment are both structural in nature and cyclical. This means that the growth levels should be more sustainable.

Consumer confidence and expenditure has been stimulated by a decline in interest rates during the year, the ongoing reductions in income tax and above-inflation wage increases. Household debt in South Africa is currently at low levels.

The Minister of Finance is once again to be commended for his efforts to reduce the income tax burden of middle income South Africans, and we welcome the further tax relief of over R7 billion which was granted in the parliamentary budget in February this year.

Segments of the Company's target market have also benefited from the development of water and electricity infrastructure in previously under-serviced areas as well as the delivery of an increasing number of houses for first-time owners.

The rapid growth of the so-called emerging middle class and the related increase in spending power of this group is benefiting retailers like the Lewis Group operating in the middle income consumer market.

The growth of the emerging middle class also leads to more conspicuous consumption of status items, with newly-affluent consumers spending a large amount of their income on motor cars, clothing, furniture and appliances.

Price deflation has proved a challenge to manage owing to the continued strengthening of the Rand against the US dollar. While this has impacted Rand sales, it has also stimulated unit sales and the level of cash sales, notably in electrical goods. The value on offer has led to customers in higher income groups shopping in our stores for the first time.

The growth is continually creating new opportunities and we believe that this structural shift in the middle class together with the stable economic environment will maintain the current momentum in the industry and within the Lewis Group.

Trading performance

Financial and operational summary for the Lewis Group:

Revenue increased by 10.4% to R2 511.5 million, with a strong contribution from merchandise sales which grew by 13.6% to R1 351.9 million off last year's high base. Unit sales volumes increased by 17.9%. Existing store merchandise sales increased by 9.6%.

This robust growth in merchandise sales can be attributed to:

• the strongly differentiated merchandise range through the success of design and exclusivity programme with key suppliers;
• enhanced marketing and awareness of the value-for-money offering;
• constantly improving quality of merchandise; and
• customer focus and superior service levels.

The Lewis chain grew merchandise sales by 10.6% to R1 176.1 million; Best Electric by 26.2% to R125.0 million and Lifestyle Living, which was acquired in October 2003, posted merchandise sales of R50.8 million.

The business model is founded on a high proportion of credit-based sales. We believe that the trend of increasing cash sales will ease as price deflation slows with the Rand's strength working itself into the comparative base.

On a geographical basis, 89.3% (2004 - 89.1%) of revenue was generated from our South African operations, with the balance attributable to the operations in Botswana, Lesotho, Namibia and Swaziland.

Insurance premiums grew by 7.6% and finance charges were flat on last year. These revenue items were impacted by the increase in the ratio of cash versus credit sales and the lower interest rates which prevailed during the year.

Gross margins have reduced by 1.4% as a result of lower interest and insurance premiums earned.

Sector-leading operating profit margins increased from 22.2% to 23.5%, driven mainly by strong sales growth, further improvements in the quality of the debtors book, improved efficiencies and cost savings. A cost culture has been ingrained into the Lewis Group and efficiencies have been extracted consistently over several years.

The bad debt and impairment charge has declined from 4.4% of gross debtors in 2004 to 3.8% as a consequence of the improved credit environment, better collections and credit management focusing on profitable business at an acceptable level of risk. We are now benefiting from the implementation of improved credit management strategies developed over many years and this will continue to be a major focus of our business as new credit risk models are implemented. Cash generated from operations has increased by 22.9% as a result of the strong collections, improved efficiencies and cost controls.

In the year under review, the Group increased its number of stores from 465 to 475. Four new Lewis stores were opened, four were closed and six relocated, with the chain trading out of 400 stores at year-end.

Best Electric continued its aggressive store opening programme, increasing the number of stores by 11 to 58.

The Lifestyle Living store portfolio continues to be re-evaluated in line with the revised business model. During the year three stores were opened and four closed, bringing the total stores to 17.

Revenue and operating profit per square metre increased by 9.5% to R12 098 and 15.6% to R2 841 per square metre respectively over the previous year. Revenue and operating profit per employee increased by 8.6% to R427 853 and 14.8% to R100 460 per employee respectively.

Brand position and performance

Lewis is the largest furniture brand in South Africa with 400 stores and was ranked second in the Markinor report of 2004 in terms of weighted brand awareness among furniture retailers. Merchandise sales increased by 10.6% and comparable store growth growing by 10%. Further expansion in selected areas is planned.

Best Electric, our specialist electrical appliance and audio-visual retail chain, is progressing well with merchandise sales increasing by 26.2% and comparable store growth by 11.5%. Started in 1998, the store base of this chain has grown to 58 stores. Best Electric will continue to increase its footprint across South Africa in the coming years.

Lifestyle Living was acquired by the Group in October 2003. The Group is revising the business model to encourage more sales with the development of "new format" stores. Lifestyle Living has been successfully migrated into the Company's systems during the year and will benefit in future from this rationalisation of administration, improved logistics and access to capital for store expansion.

Black economic empowerment

The Lewis Group is committed to sustainable transformation across all aspects of the business, including share ownership, employment equity, procurement and social investment.

While acknowledging that we have some way to go in our quest to become a truly transformed organisation, we have nevertheless made steady progress in the past year.

Employment equity

Lewis is fully compliant with the Employment Equity Act and is currently on track to achieve its targets.

Procurement

Our procurement policy favours mainly medium-sized suppliers. More than 60% of lounge furniture, 19% of bedding, 9% of bedroom suites and more than 24% of other furniture lines are purchased from BEE suppliers. In addition, over 90% of our delivery fleet is also purchased from a BEE supplier.

Social investment

The Group contributes to the economic and social upliftment of the communities in which it operates.

Share ownership

The Company will explore broad-based empowerment opportunities which will ideally provide a direct business benefit to the Group. On listing, black employees were granted 77% of the shares made available to general staff.

Further details on BEE initiatives and social investments are outlined in the Corporate Governance Report.

Credit legislation

The much-debated National Credit Bill is due to be enacted during 2005, and the Company supports the Department of Trade and Industry (DTI) in its endeavours to regulate credit granting to protect consumer rights and to create a sustainable and responsible credit industry.

While any regulatory compliance is not without additional administration and related costs, this proposed legislation will seek to outlaw reckless credit granting and go a long way to further enhance the image of the South African credit industry.

We have made extensive submissions on the National Credit Bill to the DTI through the Furniture Traders Association of South Africa. As a responsible corporate citizen and credit provider, the Lewis Group welcomes these positive steps.

Industry rationalisation

Industry consolidation has become increasingly commonplace over the past decade as companies seek to grow their businesses by acquiring competitors rather than purely pursuing organic growth. The furniture and appliance industry in South Africa has not escaped this trend.

Following major consolidation in 2002 and 2003 when more than 300 stores were closed, the sector is facing further potential rationalisation as two large furniture retailers have been granted approval to merge their operations in March 2005.

Any further consolidation would create opportunities for Lewis to capitalise on its extensive store network.

Corporate governance

We are committed to an ongoing improvement in governance standards to ensure that the interests of the Group and its shareholders are never compromised. Our efforts in this regard are contained in the Corporate Governance Report.

We will further enhance disclosure on non-financial issues which provide shareholders with an assessment of the long-term sustainability of the business. Corporate citizenship issues have been addressed in the Corporate Governance Report and we plan to expand our reporting in this area in subsequent years.

Strategies for growth

The Group has identified the following key strategies to improve sales, margin, profitability and ultimately return on equity:

• Expand the store base

  • The growth in the emerging middle class has created opportunities to expand the chain in metropolitan areas, and relocate stores into better positions. We have identified some 25 additional towns where Lewis would like to establish a presence within the next three years, and expects to open eight stores in the year ahead.
  • The success of the Best Electric concept of having small stores in high traffic areas has created expansion opportunities, and it is anticipated that an additional 12 to 15 stores will be opened in 2005/2006. The brand has the potential to grow to over 120 stores in the long term.
  • Lifestyle Living was acquired to enable the Lewis Group to expand its customer base into a higher income market segment, leveraging off its experience in the furniture sector. While the business model of the brand is currently being re-evaluated, it is anticipated that a further selected expansion will occur in the year ahead.

• Increase turnover of existing stores

  • Constantly enhance the merchandise offering to ensure differentiation in style and value for money.
  • Maintain strategic alliances with key suppliers to ensure exclusivity of product, design features and margin opportunity.
  • The introduction of upgraded merchandise in key product categories to cater for the more expensive needs of some Lewis customers. This strategy has been in place for the past two years with encouraging results.
  • Expand merchandise ranging to include a variety of allied household items.

• Acquisitions

  • The Group will continue to evaluate related business acquisitions that add value.

• Develop ancillary services and products

  • Continue to explore all opportunities to maximise the customer footprint of the Lewis Group, either through strategic partnerships or independent ventures.

In conclusion it has been a momentous year for the Group with its listing on the JSE Securities Exchange and a successful year of trading. There are a number of challenges that lie ahead, but we believe that the Company has the management team and staff to meet these challenges. I would like to thank each staff member throughout the Company for their considerable contribution towards these results. My colleagues and I are proud to be associated with so many dedicated and committed individuals.

To our suppliers and manufacturers - thank you for your support and contribution to our results. Last but not least, I wish to thank members of the media and the investment community. Since listing in October 2004 it has been a pleasure interacting with you.

ALAN SMART
Group Chief Executive Officer