Introduction
The highlight of the year was clearly the debut of the Lewis Group on the Securities Exchange South Africa (JSE) on 4 October 2004. This was truly a momentous event in the Group's 70 year history.
The response from the investment community locally and abroad to the initial public offering (IPO) and subsequent listing was most favourable. The share listed at R28.00 and reached a high of R41.50 in mid-November, closing the year at R33.51. This resulted in an increase of over R500 million in the Group's market capitalisation.
Subsequent to the year-end GUS disposed of its remaining interest in Lewis through a bookbuilding procedure. This has improved the free float and liquidity of Lewis shares, answering the demand of institutional shareholders since listing and removing the uncertainty as to GUS' intentions in relation to its residual stake.
It has been encouraging to see how the business has managed the transition to a listed environment, which brings with it an increased market profile, greater external scrutiny, enhanced disclosure and more demanding reporting. At the time of listing, all staff received an allocation of shares funded by GUS. Many of these people now not only own shares for the first time but were also given the opportunity to hold an equity stake in the company for which many of them have worked for several years.
It has been rewarding to see how this has both empowered and motivated the staff.
The economic climate during the year was characterised by low interest and inflation rates, relatively low household debt and a strong currency. This led to buoyant consumer and retail confidence. It laid the foundation for a strong performance from the retail sector, particularly credit-based retailers, and the furniture sector and the Lewis Group were no exception.
Financial review
In the year under review, revenue increased by 10.4% to R2 511.5 million (2004 - R2 274.7 million), with merchandise sales growing by 13.6% to R1 351.9 million (2004 - R1 190.4 million).
Operating profit rose 16.6% to R589.7 million (2004 - R505.6 million).
Headline earnings increased by 40.6% to R404.3 million. This increase can be attributed to positive trading conditions, lower bad debt and impairment charges flowing from further improvements in the quality of the debtors book and lower finance costs due to the capital restructuring shortly before the IPO.
A dividend policy of three times covered has been adopted, and accordingly shareholders received a total dividend of 135 cents per share for the year.
Lewis is a highly cash-generative business, with efficient working capital management and a strong balance sheet resulting in gearing being at 6.1% (2004 - 60.9%).
The investment case
The Company has a proven customer-focused business model which is based on convenience, choice, credit and loyalty. These strengths, together with the operating efficiency of the business, make a compelling investment case. As this is the maiden annual report, I believe it is appropriate to summarise the key strengths of the business - which were outlined in detail in the pre-listing prospectus - to highlight the features that make the business attractive to existing and potential investors alike.
Convenience
Lewis is an established credit-based furniture retailer with an extensive store network covering metropolitan and rural areas, backed by an efficient delivery process handled at store level.
Choice
Lewis has a well-established supply chain and offers its differentiated and exclusive merchandise range to attractive, growing target markets.
Credit
The advanced credit management systems and well-managed debtors book are core to the Company's success, with a range of credit and loan products offered to customers. The Group is also able to sell financial products to its extensive customer base.
Loyalty
Repeat sales of approximately 61% (2004 - 61%) indicate the high level of customer loyalty.
Operational efficiency
Lewis has a strong trading record, a culture of cost efficiency, a continual focus on generating high operating margins and has a highly experienced management team.
Corporate governance
Regulatory, accounting and disclosure requirements have intensified for listed companies in recent years. The focus on corporate governance has also heightened, along with increasing pressures for companies to report on non-financial performance.
Following the appointment of the newly-constituted Board, the directors have focused on implementing formal governance processes. The Group complies in all material respects with King ll and the governance practices and policies that have been adopted are outlined in the Corporate Governance Report.
We have an experienced Board of directors, with extensive knowledge of the Company and the retail sector. Importantly, they are also experienced as directors of listed companies and we are committed to continually enhancing governance standards.
Directorate
Alan Smart, David Tyler and I who were previously board members of the wholly-owned operating company, Lewis Stores (Pty) Ltd, were appointed to the Lewis Board along with Hilton Saven and Ben van der Ross. The Board consists of three independent non-executive directors, one non-executive director (David Tyler representing GUS) and one executive director, reflecting a balance in line with best corporate governance practice.
Prospects
Consumer confidence is expected to remain buoyant in the year ahead as the economy currently shows little sign of slowing down. The interest rate and inflation environment are expected to remain stable and the social and economic climate prevailing in South Africa in recent years has, and will continue to contribute to the buoyant retail sector. The transformation process in South Africa over the past 10 years has increased the size of the middle income market and Lewis is ideally positioned to service that market. The government's large-scale capital expenditure on infrastructure development that is planned over the next few years is also expected to directly benefit middle income South Africans who form a significant part of the Lewis Group's target market.
These factors, coupled with continued focus on its business model should result in real growth in revenue and merchandise sales. The Board believes that meaningful real growth in headline earnings will be achieved in the year ahead, although not necessarily at the same high rate experienced in 2005.
Thanks
This year was particularly challenging for the senior management team who not only ensured that the Company produced a strong financial performance, but also had the additional pressure of listing the Company. Alan and his team are to be congratulated for what they have achieved on all fronts. We also thank the advisers and professional team that steered us through the listing process.
To our shareholders, we say thank you for your support and trust that the confidence you have shown in the Group will be rewarded. Thanks are also due to my fellow directors for the counsel you have provided. I would also like to acknowledge the contribution of the head office and store staff around the country and thank you all for a job well done.
At the core of our business are our loyal customers who make it all possible, and to each an every one of you we extend our gratitude. You give new meaning to our slogan - "Lewis - we are family".
![David Nurek [signature]](../i/d_nurek_sign.gif){kind=small}
DAVID NUREK
Independent Non-executive Chairman