HOME

Contents

Downloads

Notice of AGM

Proxy

Lewis Group Limited is a listed investment holding company with two major wholly-owned subsidiaries, Lewis Stores and Monarch Insurance Company, and a number of smaller trading wholly-owned entities.

The Group's performance over the past year was particularly pleasing.

It is encouraging to have delivered strong growth for shareholders in our first year as a listed entity. The favourable trading environment for the retail sector - along with enhanced operating efficiencies, improved operating margins and good cash flow generation, contributed to our excellent performance.

Operating profit increased by 16.6% to R589.7 million (2004 - R505.6 million). Operating margins over the past five years have been steadily increasing from 15.4% in 2001 to 23.5% in 2005. Operating profit per store, operating profit per square metre and operating profit per employee have similarly increased every year since 2001. Attributable profit and headline earnings increased by 42.3% and 40.6% respectively.

The net asset value has more than doubled from R698.1 million in 2001 to R2 059.4 million in 2005. In addition after tax return on capital employed increased from 12.5% in 2001 to 18.6% in 2005.

In line with the dividend policy of three times covered adopted by the Board, a final dividend of 74 cents per share is proposed and together with the interim dividend of 61 cents per share amounts to a total dividend for the year of 135 cents per share. This is a dividend yield of 4.8% when compared to the listing price of R28.

This report should be read in conjunction with the annual financial statements.

Income statement analysis

Revenue comprising merchandise sales, finance charges, services and insurance premium income, grew by 10.4% to R2 511.5 million (2004 - R2 274.7 million).

Merchandise sales increased by 13.6% this year which compares favourably to last year considering the strong sales growth of last year. Sales growth in the second half of last year was particularly buoyant (27.6%). We experienced good growth in the value of furniture sales which grew by 18.5% with unit sales growth reflecting a 15.8% increase. Lower inflation together with volume growth improved operating margin in the furniture sector of the business.

The opposite was true in the electrical goods sector which includes appliances and audio-visual products. Price deflation placed margins under pressure with electrical sales value increasing by 10.1% and unit sales growing by 19.5%.

Cash sales increased to 25.1% of merchandise sales compared to 18.2% in the previous financial year. Higher cash sales can be ascribed to deflationary pricing in the electrical goods sector. The addition of Lifestyle Living has also impacted on the level of cash sales as a higher proportion of this brand's sales are for cash.

The lower gross profit margin of 58.2% (2004 - 59.6%) can be ascribed to a lower contribution from finance charges as a consequence of a reduction in interest rates and a higher proportion of cash sales. The merchandise margin of 32.9% reflects the effect of price deflation in the electrical goods category mentioned above.

The debtors book and bad debts and impairment charge continued to reflect an improving trend with bad debts and impairment charge decreasing to 3.8% (2004 - 4.4%) of the gross debtors book. Our focus on collection procedures at store level together with established credit risk systems and the favourable credit environment, contributed favourably to this performance.

Expense management and the drive for efficiency remains a priority in the business. Employment costs at 16.3% of revenue reflect higher commission earnings as a consequence of the improved trading environment. Occupancy costs at 3.6% of revenue reflect the benefit of high sales per square metre. Overall costs increased by 4.8% and include Lifestyle Living for a full year. The comparative year includes Lifestyle Living costs for six months. Excluding them, overall costs were flat on last year.

Investment income improved as a consequence of the higher market value of gilts held by Monarch Insurance Company, and accounted for in accordance with AC133. Currently, 66.1% (2004 - 67%) of Monarch's investments are held in interest-bearing instruments.

Net finance costs declined by R99 million as a result of the capital restructuring of the Group shortly before the listing and the good cash flow of this year. Prior to the restructuring, Lewis owed GUS Holdings BV R1 173.9 million. In July 2004 the loan and outstanding interest was repaid, with R376 million of the loan capitalised.

The Group's effective tax rate is currently 31% (2004 - 28%). We expect next year's tax rate to be at similar levels.

Balance sheet review

The increase in insurance investments has largely been driven by improved equity and bond markets.

Cash and cash equivalents declined with the repayment of the loan due to GUS Holdings BV. Interest-bearing borrowings reduced due to the repayment of the loan in July 2004 by capitalising R376 million into share capital and settling the outstanding balance by way of cash resources and bank facilities raised in substitution. Good cash collections has seen short-term borrowings move from R328 million at the date of restructuring to R172 million. Gearing at the end of the year was 6.1% compared to 60.9% in 2004.

Inventory levels increased marginally. Stock turn improved to 5.7 times (2004 - 5.1 times). Inventory management systems are in the process of being upgraded and further improvements are anticipated in the coming year.

This year the growth in the debtors book has been negligible despite the increase in revenue, due to good collections and the lower interest rate component in debtors. The current favourable debt environment together with prudent credit policies adopted by the Group has resulted in a reduction of the impairment provision of R23.7 million. Other debtor accounting provisions increased as a result of business volumes written during the current year.

Deferred taxation reflects as a net asset. Lower debtor tax allowances in the current year together with the adoption of AC133 in 2004, in particular in the area of debtor impairment provision, account for this. The current taxation liability has increased as a result of lower debtor tax allowances.

Cash flow

The Group continued to generate strong cash flows which can be attributed to good collections and tight working capital management.

Cash retained from operations declined as a consequence of settling the interest due to GUS Holdings BV, increased tax payments and the first dividend paid as a listed Group.

The net cash outflow from financing activities can be attributed to the repayment of the loan to GUS Holdings BV.

Net short-term borrowings of R116.7 million are well below our facilities of R900 million. Our medium-term target for the gearing ratio is 20% to 35%.

Changes in equity

The capitalisation of R376 million of the GUS Holdings BV loan has caused the change in share capital. In accordance with AC133, the movements in the fair value of available for sale investments is reflected in shareholders' equity.

Segmental reporting

Revenue from merchandising grew by 10.9% with insurance revenue growing by 7.6%. The lower increase in insurance revenue results from the increasing proportion of statutory insurance reserves required when volumes increase.

On a geographical basis, 89.3% (2004 - 89.1%) of Group revenue is generated within South Africa. The balance can be attributable to Botswana, Lesotho, Namibia and Swaziland (BLNS). Store expansion has mainly been in South Africa with 19 new stores opened this year.

Detailed segmental analysis of the Best Electric and Lifestyle Living divisions have not been provided as these divisions do not currently contribute significantly towards the Group's revenue and operating profit.

Accounting policies

There has been no change in accounting policy except for the following:

• Previously recognised negative goodwill has been treated in accordance with the transitional provisions of AC140 and derecognised to retained income on 1 April 2004. This change has had an insignificant impact on the reported profit for the year.
• In accordance with the requirements of the JSE Securities Exchange, the various management and employee share trusts have been consolidated. There has been no dilution of earnings resulting from this consolidation as GUS Holdings BV provide the shares and options to be awarded by the trust.

Lewis Group Limited will be required to prepare financial statements in accordance with International Accounting Statements for the year ending 31 March 2006, full details of which will be made available with the interim results in September 2005.

The year ahead

The Board and management as in the past have formalised detailed financial objectives for the 2006 financial year and will monitor progress against these targets.

There are several challenges for the new year, in particular identifying new business opportunities beyond organic growth and the introduction of the National Credit Bill. I am confident that the Company is well positioned to manage these challenges successfully.

Closing

My thanks to the finance team for their support and loyalty throughout a challenging year, in particular during the run-up to the listing.

LES DAVIES
Chief Financial Officer