Commentary

The Lewis Group is pleased to announce its maiden final results as a listed entity for the financial year ending 31 March 2005.

TRADING ENVIRONMENT

The 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 the factors that have contributed to the buoyant trading environment are not only cyclical but also structural in nature increasing the likelihood of sustainable levels of growth. The rapid growth of the emerging middle class and the related increase in spending power of this class, which is the main target market of Lewis Group, has significant benefits for the Group.

Consumer confidence and expenditure have been stimulated by the favourable macroeconomic environment as a result of a decline in interest rates during the year, the ongoing reductions in income tax and above-inflation wage increases. Household debt continues to remain at its lowest levels in recent history. 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. Furthermore, segments of the Lewis Group'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.

FINANCIAL PERFORMANCE

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

The Group's revenue grew by 10.4% to R2 512 million (2004: R2 275 million). Merchandise sales increased by 13.6% compared to last year while volumes increased by 17.9%. Like for like merchandise sales increased by 9.6%.

Furniture sales, which account for 49% of total sales, increased by 19% in Rand terms and 16% in unit sales. Sales of electronic and white appliances increased by 10% in Rand terms and 20% in unit sales. The overall price deflation for the year was 4%.

Cash sales have increased to 25% of total merchandise sales as compared to 18% in the previous financial year. Cash sales have been stimulated by price deflation in electronic and white appliances. Higher income earners who were not traditionally customers of the Group are now buying goods for cash owing to the competitive pricing of branded goods.

The gross profit margin was 58.2% compared to 59.6% in 2004 mainly as a result of lower finance charges and insurance premiums written as a consequence of the higher proportion of cash sales and lower interest rate environment.

The bad debts and impairment charge in the year continued to improve and decreased to 3.8% (2004: 4.4%) of the gross debtors book. Our efficient collection procedures and advanced credit risk systems, combined with the current favourable credit environment, contributed to this performance.

The Group continued to manage costs tightly during the year with total costs increasing by only 5%. Employment costs grew by 11% and reflects higher commissions and incentives paid on increased turnovers. The inclusion of Lifestyle Living for a full year also contributed to the increase in overall costs. The management of costs will continue to be one of the priorities of the Group.

Operating profit margin increased to 23.5% (2004: 22.2%) and continues to demonstrate the benefits of management's focus on sustained revenue growth, operating efficiencies, credit management and cost control. This is in keeping with the high sustainable operating margins achieved over many years.

Investment income has increased as a consequence of the higher market value of gilts held by the insurance subsidiary, Monarch Insurance Company Limited, which have been accounted for at fair value through the income statement in accordance with AC133.

Finance costs declined by R99 million owing to the capital restructuring of the Group in anticipation of the listing and excellent cash collections. Prior to the restructuring, Lewis had an inter-company loan with GUS Holdings BV (GUS) of R1 174 million. In July 2004 the loan and the interest accruing was repaid from available cash resources and third party debt. The balance of the loan to GUS of R376 million was capitalised.

The taxation charge is R184 million (2004: R112 million). The Group's effective tax rate is currently 31% (2004: 28%).

Attributable profit and headline earnings per share have increased by 42.3% and 40.6% respectively.

In line with the dividend policy of three times cover adopted by the Group's Board, a final dividend of 74 cents per share has been declared and together with the interim dividend of 61 cents per share resulted in a total dividend for the year of 135 cents per share.

Balance Sheet review

Current assets have declined by R262 million, mainly as a consequence of cash and cash equivalents being utilised for the repayment of the loan to GUS. Current insurance investments increased by R38 million, mainly due to the cash generated by the insurance subsidiary and the increasing market value of gilts resulting from the buoyant bond market.

Inventory turn has improved to 5.7 times (2004: 5.1 times). Further improvements in inventory management are anticipated in the 2006 year as the benefits of the implementation of a new inventory management system begin to be realised.

The gross debtors book has remained flat, despite the increase in revenue due to strong cash collections and lower credit sales. The continued improvement of the debtors book has resulted in a reduction of the impairment provision. Unearned finance, premium and maintenance reserves have increased as a result of the increased revenue from these categories during the current year.

Long term interest-bearing borrowings declined by R682 million due to the repayment of the loan to GUS. The Group's gearing has declined substantially from 60.8% in 2004 to 6.1% at year end.

Current liabilities have decreased by R241 million, mainly as a consequence of the repayment of the GUS loan.

Cash Flow

The Group continued to generate strong cash flow from operations which increased by 23% to R625 million. The increase can be attributed to good debt collections and tight working capital management.

OPERATIONAL REVIEW

The focus during the past year has been on improving the merchandise offering and more targeted marketing to attract new customers while continuing to retain existing customers through the Re-serve system. Upgraded merchandise ranges were added in response to our customers' demands and the changing customer demographics. Further improvements in our credit granting/scorecard were implemented.

During the year 4 new Lewis stores were opened and 4 closed resulting in 400 stores at year end. Best Electric comprised 58 stores after opening 12 new stores and closing 1. The Lifestyle Living chain was successfully migrated into the Lewis systems. During the year 3 stores were opened and 4 closed with a total of 17 stores at year end. The Lifestyle portfolio of stores is currently being evaluated, in line with the strategy at acquisition.

Operating profit per square metre increased by 15.6% to R2 841 per square metre and operating profit per employee increased by 14.7% to R100 460 per employee underlying the benefits of Lewis' business model.

The annual 'Markinor and Sunday Times top brand review' placed the Lewis brand in second position, in the category of consumer awareness of furniture retail brands. This rating was the same as that in the prior year.

In addition, Lewis was rated number one by manufacturers and suppliers in the category 'White/electrical goods retailers/wholesalers' in the Professional Management Review award (PMR) for 2004.

STRATEGY

Lewis has continued to focus on its key strategic business initiatives of:

• Generating sustainable revenue growth through:
  • Increasing sales from existing stores using innovative merchandising and marketing strategies; and
  • Expanding the store base;
• Acquisitions that complement and add value to our business;
• Optimisation of our balance sheet; and
• Developing ancilliary products through strategic partnerships.

CORPORATE GOVERNANCE

The Group, at all levels, subscribes to the values of good corporate governance and substantially complies with the Code of Corporate Practices and Conduct as set out in the King II Report on Corporate Governance and the JSE Securities Exchange South Africa Listings Requirements.

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 fairly stable in the year ahead and the social and economic climate prevailing in South Africa in recent years has contributed to the overall retail sector and we expect this to continue. 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 expected to directly benefit the Lewis Group's target market.

These factors, coupled with the Group's continued focus on its business model should result in real growth in revenue and merchandise sales. The Board believes that real growth in headline earnings should be achieved in the year ahead, although not necessarily at the same high levels experienced in 2005.

Declaration Of Final Dividend No. 2

In terms of the Board's dividend policy of three-times-cover, a final dividend of 74 cents per share has been declared for the twelve months ended 31 March 2005. In accordance with settlement procedures of STRATE, the following dates will apply to the final dividend:

Share certificates may not be dematerialised or rematerialised between Monday, 18 July 2005 and Friday, 22 July 2005 both dates inclusive.

For and on behalf of the board
David Nurek	Alan Smart
Chairman	Chief Executive Officer
Cape Town
16 May 2005

EXTERNAL AUDITORS' REVIEW

The external auditors, PricewaterhouseCoopers Inc, have audited the Group annual financial statements and the abridged financial statements contained herein for the 12 months ended 31 March 2005 and a copy of their unqualified reports are available on request at the company's registered office.