annual report
2007

chief executive's report

introduction

2007 has seen Lewis further entrench its position in the mass middle income furniture market, driven by strong merchandise sales growth, innovative merchandising strategies, continued expansion of the store base and prudent management of the growing debtors book.

trading environment

Despite increasing interest rates over the past year, consumer spending among the middle income group continues to be robust and confidence levels among South African consumers has generally remained high, although the buoyant trading conditions may slow slightly as higher interest rates take effect.

The enlarged size of the middle income market, government infrastructural spend, tax relief and real wage increases will continue to afford business opportunities to the Lewis Group.

operating performance

Total revenue increased by 15.6% to R3 323.5 million, bolstered by merchandise sales growth of 15.4% to R1 808.8 million. Comparable store merchandise sales grew by 11.3%. A pleasing feature of the performance was the consistent growth throughout the year and across all regions.

Merchandise procurement strategies implemented last year, together with the expansion of the furniture import programme in 2007, have offered new and current customers a range of exclusive and value-for-money products. Following the success of our merchandise initiatives, furniture now accounts for 50% of total sales (2006: 47%).

Lewis continues to generate a high percentage of repeat business as a result of its comprehensive re-serve scheme, together with local customer promotions. This has assisted in the attainment of merchandise sales growth.

The merchandise margin, adjusting for foreign exchange gains, remained relatively stable at 34.7% when compared to last year’s 34.5%.

The three trading divisions all showed solid growth off a high base. Lewis grew by 12.4% to R1 481.8 million, with improved sales in the furniture category. Like-for-like sales growth was 10.9%. New store openings lifted Best Electric sales by 23.6% to R203.1 million, with comparable store growth at 7.5%, reflecting a slowing of demand of certain electronic goods.

Lifestyle Living produced an outstanding performance and grew sales 43.9% to R122.9 million – like-for-like sales increased 23.7% – as the benefits of the brand’s differentiated merchandise strategies continued to reap dividends. The division is now firmly on a sustainable growth path.

In November 2006, a specialised credit bedding/bedroom concept branded “Best Bedding” was pilot tested and is progressing according to plan.

Operations in the neighbouring southern African countries of Botswana, Lesotho, Namibia and Swaziland contributed 10.2% (2006: 10.4%) of revenue. Currently, there are 46 stores in these countries.

The overall condition of the group’s debtors book continues to improve and our average debtor, as measured by our doubtful debt provision, is in a healthier state than last year. The doubtful debt provision at 11.4% of total debtors reflects an improvement on the 12.6% for last year. The debtors book increased by R395.6 million (13.5%). Actual bad debts written off only increased by 4.1%. The length of the book has also decreased to 14.1 months from 14.3 months.

Normalised operating profit increased by 18% to R859.9 million, with the normalised operating margin improving from 25.3% to 25.9% as a result of the strong sales growth.

Share repurchases of R213.5 million during the year improved our return on equity for the year to 24.8% compared to 23.2% and enhanced the increase in normalised headline earnings per share to 23%.

store expansion

There has been continued expansion in our store base in recent years and a notable milestone was achieved when the 500th store was opened in Atteridgeville near Pretoria in November 2006.

We opened 22 new stores during the year, spread across Lewis (8), Best Electric (7), Lifestyle Living (4) and a pilot project for the specialist bedding chain (3). The majority of new stores have been opened in the greater Gauteng area.

Lewis remains the single largest furniture brand in the country with 407 stores, giving it significant economies of scale. Best Electric has grown to 79 stores and Lifestyle Living now has a store base of 19.

national credit act

The National Credit Act (“NCA”) to be implemented in June 2007 is a welcome review of outdated credit legislation. The group supports the objectives of this legislation aimed at regulating credit granting and the protection of consumer rights, creating a sustainable and responsible credit industry.

Lewis will be fully compliant by the implementation date. Our systems have been easily adapted with minor changes necessary to the group’s credit granting processes.

The store-based collection process ensures that Lewis will continue to interface closely with its customers and be a major advantage in dealing with certain aspects of the NCA.

The overall impact of the legislation is expected to be revenue neutral and the group is well prepared for the introduction of the NCA.

growth strategy

Underlying the group’s strong performance has been the consistent application of our strategies by an experienced retail management team.

In the year ahead, the core focus will be increasing sales from existing stores, customer acquisition and retention initiatives and maintenance of the health of the debtors book. Further benefits of the merchandise procurement initiatives of the past two years are expected to be realised in the new year.

There are opportunities to expand the store network across all three chains and the group has a target of opening between 25 and 30 new stores each year.

While organic growth is the preferred means of expansion, the group will consider acquiring businesses that are aligned with its core strengths, as well as developing ancillary income opportunities through strategic partnerships.

outlook

The underlying strength and size of the middle income market will continue to afford growth opportunities. We remain confident that the group will deliver satisfactory growth in sales and earnings in the year ahead.

thanks

My thanks are due to our more than 6 000 staff across the country who have once again delivered a sterling performance. I would also like to extend my gratitude to our suppliers and manufacturers for your contribution, and thank our business partners, the investment community and the media for your ongoing support. At the heart of our business are the customers who make it all possible and we thank you for your loyal patronage.


Alan Smart

Group Chief Executive Officer