Commentary

We are pleased to report record annual sales and profitability. This result is particularly gratifying and builds on the key strengths of the company and the positive trading environment. The result has been prepared in compliance with International Financial Reporting Standards (IFRS) for the first time. The effect of this adoption is presented under the section “Compliance of International Financial Reporting Standards”.

TRADING ENVIRONMENT

The increased number of middle income earners continue to drive the consumer economy and revenue growth. The South African Advertising and Research Foundation recently released their 2005 All Market and Product Statistics (AMPS), which records that between 2001 and 2005, consumers in the middle Lifestyle Measurement Categories (ie. LSM 4 to 7) increased by 2.5 million people which represents – 19.5% increase.

In addition, there has been a general upward trend in consumer confidence over the last two years indicating that consumers are very much more optimistic about the outlook for the economy and their finances.

The Lewis Group has been a beneficiary of these positive developments in the South African economy, the growth of which has been bolstered by low inflation and interest rates, improvements in employment and higher than expected tax relief.

The Government’s intention to intensify infrastructural spending has supported private sector activity and stimulated growth.

FINANCIAL PERFORMANCE

The financial year’s performance was shaped by the following major factors:

• Solid sales growth in the Lewis chain, combined with high sales growths in Best Electric and Lifestyle Living.
• Strong second-half sales performance. (H2: 17.3%; H1: 14.5%).
• Significant improvement in operating margin from 23.6% to 25.3%.
• 23 new store openings.
• Improved gross margin as a result of product sourcing initiatives.
• Improving quality of the debtor’s book.
• Strong cash flow from trading.

Income statement overview

Revenue increased by 14.5% to R2 874.5 million. This was mainly driven by merchandise sales growth of 16.0% to R1 567.8 million (12.6% on a like-for-like basis). This growth was as a result of merchandise initiatives, a strong drive to regain settled customers as well as successful new customer promotional campaigns.

The Lewis chain produced solid merchandise sales growth of 12.1% to R1 318.1 million (11.3% on a like-for-like basis). Best Electric experienced a 31.4% sales increase from R125.1 million to R164.3 million (10.8% on a like-for-like basis) benefiting from new store openings and revised merchandise ranging, despite the effects of deflation. Lifestyle Living posted strong growth of 68.1% at R85.4 million (58.4% on a like-for-like basis), albeit off a low base.

Overall price deflation for the financial year was 5.6% with an increase of 16% in value and volume increasing by 21.6%. Furniture sales, which account for 47% of total sales, increased by 11.3% in Rand terms and 11% in unit sales. Sales of electronic and electrical appliances increased by 20.6% in value and 29.4% in volume.

Cash and short-term credit sales stabilised at 30% within the group.

Insurance revenue earned grew by 12.0% to R400.4 million with a larger charge for the unearned premium reserve due to the higher levels of current trade. Finance charges increased by 11.5% to R674.4 million with lower arrear interest income as a result of the improving debtors book.

The merchandise margin increased to 34.9% from 34.5% driven by product sourcing and supply chain initiatives.

Operating costs, excluding bad debts, the debtors impairment provision and share-based payments increased by 8.4% to R1 009.5 million well below the level of sales growth of 16%.

The increase in bad debts was 6% over last year. The impairment provision reflects a release of R17.4 million in the current year as compared to R23.7 million last year, which is attributable to the increase in the debtors book of R244.3 million. The impairment provision has decreased from 14.4% to 12.6% of gross debtors. The overall bad debt charge amounts to 4% of gross debtors (2005: 3.8%).

Normalised operating profit grew by 22.8% to R728.6 million, with the normalised operating margin reflecting a most gratifying increase from 23.6% to 25.3%, aided by the strong sales growth, improved gross margin, a relatively low bad debt charge and 8.4% increase in operating costs.

Finance costs declined by R29.9 million mainly as a result of the cessation of interest payments to the former holding company.

The increase in earnings can be summarised as follows:

Earnings per share and return on equity have been enhanced by the share repurchase programme initiated in September 2005.

Balance sheet

Inventory levels increased as a consequence of 23 new stores and our strategy to carry higher levels of stock to support sales promotional initiatives. This is evidenced by a strong second-half sales performance of 17.3%. Inventory levels are partly funded by an increase in trade and other payables.

Gross debtors increased by 9.1% to R2 921.4 million well below revenue growth, reflecting the quality of our debt collection process. The average age of the debtors book has improved to 14.3 months from 14.8 months. Total debtors provisions increased from 35.6% at March 2005 to 36.3% as a result of accounting provisions for unearned finance charges, insurance income and maintenance contract revenue.

Cash flow

Lewis continues to generate significant operating cash flows which have funded the following:

• Share repurchase of R151.9 million.
• Dividends paid during the year of R156.9 million.
• Increased working capital of R160.5 million.

At year-end, 3.36% of shares in issue have been repurchased at an average market price of R44.86 per share. The group will continue to repurchase shares up to 10% of share capital when suitable opportunities arise.

OPERATIONAL REVIEW

The focus during the past year has been on enhancing the merchandise offering to attract new customers while continuing to retain existing customers through our re-serve system. Our merchandise strategy, both locally and overseas, is to provide exclusivity of product and design, enhanced quality and genuine value-for-money.

Enhancements and improvements in credit granting and the behavioural scorecard were implemented in our drive to further improve the quality of debtors. The introduction of the behavioural scorecard enables guaranteed credit offers to our existing and settled customer base.

Sales in both the furniture and electrical categories have been encouraging. The electronics section (TVs, home theatre and DVDs) although achieving substantially more unit sales, continues to be affected by price deflation.

During the year, six Lewis stores, 14 Best Electric and three new-format Lifestyle Living stores were opened and eight non-performing stores were closed, including four old-format Lifestyle stores.

Normalised operating profit per square metre increased by 21.2% from R2 859 to R3 466. Normalised operating profit per employee increased by 19.2% to R124 000.

The National Credit Act will be implemented on 1 June 2007. The draft regulations are still to be approved. However, the overall effect of the Act is anticipated to be neutral. The group has advanced store and credit scoring systems which are in the process of being adapted to address the key requirements of the National Credit Act.

CORPORATE GOVERNANCE

The group 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 Limited Listings Requirements.

PROSPECTS

The strong second half of the year and the current sales impetus indicate that the trading environment will remain buoyant. The quality of the debtors book continues to improve. Our outlook remains positive.

DIRECTORATE

David Nurek, Alan Smart, Hilton Saven and Ben van der Ross remained directors during the year. David Tyler resigned on 5 August 2005 and we were pleased to announce the appointment of Professor Fatima Abrahams with effect from 1 September 2005.

DECLARATION OF FINAL DIVIDEND NO. 4

The Board has approved a final dividend which represents a 2.25 times dividend cover (previously 3 times covered). The dividend has been calculated on normalised earnings attributable to shareholders and represents a 67% increase in total dividends declared for the year.

Notice is hereby given that a final dividend of 137 cents per share in respect of the year ended 31 March 2006 has been declared payable to the holders of ordinary shares recorded in the books of the company on Friday, 21 July 2006. The last day to trade cum dividend will therefore be Friday, 14 July 2006 and Lewis shares will trade ex-dividend from Monday, 17 July 2006. Payment of the dividend will be made on Monday, 24 July 2006. Share certificates may not be dematerialised or rematerialised between Monday, 17 July 2006 and Friday, 21 July 2006, both days inclusive.

For and on behalf of the Board

David Nurek Chairman	Alan Smart Chief Executive Officer

Cape Town
22 May 2006

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 2006 and a copy of their unqualified reports are available on request at the company's registered office.

 

Executive director:	AJ Smart (Chief Executive Officer)
Independent non-executive directors:	DM Nurek (Chairman), H Saven,  B van der Ross, F Abrahams
Company secretary:	PB Croucher
Registered office:	53A Victoria Road, Woodstock, 7925
Registration number:	2004/009817/06
Share code:	LEW
ISIN:	ZAE000058236
Transfer secretaries:	Computershare Investor Services 2004 (Pty) Ltd, 70 Marshall Street, Johannesburg, 2001 PO Box 61051, Marshalltown, 2107
Auditors:	PricewaterhouseCoopers Inc.
Sponsor:	UBS South Africa (Pty) Ltd