annual report
2007

chairman's report

introduction

It is pleasing to report to shareholders on another year of sustained financial and operational growth from the Lewis Group. We have also seen this performance translate into increased shareholder wealth.

In the 30 months since the group listed in October 2004, the share price at year-end has increased 145% from the R28.00 listing price, with a R4.1 billion growth in the value of the business.

As shareholders, the Lewis staff and management have also shared in this prosperity as all employees received an allocation of free shares at the time of the listing and have benefited directly from their endeavours.

business environment

The consumer spending boom of the last few years signalled increasing prosperity in the country. This has largely been fuelled by growth in the levels of employment, broader economic participation through black empowerment schemes where staff and broad-based groups are the beneficiaries, and tax relief, including further reductions for low income earners announced in the 2006 National Budget.

In an attempt to dampen consumer demand for credit, the Reserve Bank raised the prime lending rate four times from 10.5% to 12.5% over an eight-month period during 2006. While acknowledging that these increased rates will take some time to filter through into reduced spending, the overall impact on the economy has not yet been meaningful. Over time this may affect other credit-based retailers serving higher income target markets, but the Lewis Group is confident that consumers in our market will be less affected by increasing rates due to the fact that they have relatively low exposure to variable interest rates. However, the high oil price and higher food inflation does impact on our customers’ disposable incomes.

Spending within the Lewis target market is expected to be positive as employment levels increase, mainly as public sector infrastructure, electrification and transport projects gather momentum and other capital commitments kick off in the preparations for the 2010 Soccer World Cup.

financial performance

The group has continued to produce strong financial results and to capitalise on the positive trading environment. Revenue increased by 15.6% to R3 323.5 million, with merchandise sales rising by 15.4% to R1 808.8 million as all three chains in the group produced solid sales growth.

Shareholders will recall that last year the group elected to report results on a normalised basis to reflect the actual operational performance of the business and exclude a charge for share-based payments following the adoption of IFRS. This charge arose from shares being made available for no consideration by the former holding company at the time of the listing of the Lewis Group and have had no impact whatsoever on current shareholders.

Normalised headline earnings per share increased by 23% to 645.4 cents as a result of the higher sales growth, improved margins, strong cash flows and further improvements in the quality of the credit book.

As part of the capital management strategy aimed at improving returns to shareholders, the group initiated a share repurchase programme.

By year-end 7.5% of the shares in issue had been repurchased by a subsidiary of the group at an average market price of R48.37. This has enhanced earnings per share and the group’s return on equity. The group will continue to repurchase shares at levels which are earnings enhancing.

Shareholders will receive dividends of 266 cents per share for the year, an increase of 18.2% over 2006.

directorate and management

Chief executive Alan Smart (62) will continue in his position until his normal retirement date in three years’ time. This will ensure that the group continues to benefit from Alan’s proven leadership, but it will also allow for structured handover of responsibilities.

As part of the succession plan, chief financial officer Les Davies has been appointed as an executive director to the Board of the Lewis Group, and operations director Johan Enslin has been promoted to the newly-created position of chief operating officer. Both these executives have outstanding track records and extensive experience with the group. Les (51) has been finance director of Lewis Stores (Pty) Ltd for 18 years. Johan (33) has been responsible for the operations of Lewis and Best Electric for the past five years. The Board believes that appointing an internal candidate as successor to the chief executive will maintain the strong culture of the Lewis Group.

Lewis is fortunate to have an impressive depth of highly experienced management. The 12-person executive team has an average of 14 years’ experience with the group and an average age of 48. At an operational level, the 12 divisional managers responsible for the store operations have an average length of service of 15 years (average age 43), while the 12 divisional credit managers have been with the group for an average of 11 years (average age 44). Lewis has a strong philosophy of developing management talent and promoting from within its own ranks.

prospects

The group’s organic growth strategy is aimed at ensuring stable and consistent performance. Favourable trading conditions together with the growth in the store base should result in satisfactory growth in merchandise sales in the year ahead. Continued prudent credit management, our low cost base and a focus on extracting further operating efficiencies across the business will enhance profitability. In the absence of unforeseen factors in the macroeconomy, shareholders can expect satisfactory earnings growth in 2008.

thanks

Lewis Group has produced another year of consistent performance and Alan and his executive team are to be complimented for their leadership of the group. Thank you to my Board colleagues for their insight and wisdom in overseeing the affairs of the group. In closing I thank our shareholders for their vote of confidence in our business and the broader investment community for their insightful analysis of Lewis and the broader retail sector.


David Nurek

Independent non-executive chairman