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chief financial officer's report

introduction

The results for the year has been shaped by another strong trading performance, further improvements in the debtors book and an enhanced operating margin. Normalised operating profit increased by 18.0% to R859.9 million (2006: R728.6 million). Headline earnings per share on a normalised basis increased by 23.0% and return on equity has increased to 24.8% from 23.2%, both of these increases benefiting from our capital management programme.

We have placed 49% more cash back in the hands of shareholders this year, by continuing with the share repurchase programme and through dividend payouts. To date, 7.5% of the company’s share capital has been repurchased and the dividend for the year amounts to 266 cents per share.

income statement analysis

Revenue comprising merchandise sales, finance charges, services and insurance income, grew by 15.6% to R3 323.5 million (2006: R2 874.5 million) with the revenue mix at similar levels to that of last year.

Merchandise sales increased by 15.4% to R1 808.8 million with like-for-like sales growth at 11.3%. We continue to benefit from our merchandising initiatives and the sustained growth from the middle income market. Insurance revenue, finance charges and ancillary services grew in line with merchandise sales.

The merchandise gross margin this year has been maintained.

The overall condition of the debtors book has improved as a result of our group credit risk management and the strength of the decentralised collection process. Bad debts written off during the year reflected an increase of 4.1%, notwithstanding the 13.5% increase in gross debtors.

Operating expenses (excluding bad debts, provision for doubtful debts and share-based payments), as a percentage of revenue, improved from 35.1% last year to 33.6% this year. The drive for operational efficiency remains a priority in the business. The main trends in the expenditure are as follows:

• Marketing increased in support of growing sales, additional stores and the launch of the Best Bedding brand.
• Occupancy costs reflect the effect of lease averaging required under IFRS on the current year’s renewals.
• Transport and travel increased as a consequence of rising petrol costs.

Investment income consists mainly of interest and dividend income on listed investments held by Monarch Insurance Company. The investments are held for the long term and traded when there is a need to rebalance the portfolio. The increase in investment income is due to an impairment of an available-for-sale asset of R12.3 million in the prior year.

Net finance costs remained level with last year. In terms of IFRS, exchange gains and losses on forward contracts have been accounted for under interest income. Interest paid increased from R12.7 million to R29.6 million as a result of higher gearing in line with our capital management programme. Interest rate exposure is managed via interest rate hedges to ensure the group is protected against adverse interest rate movements.

The effective tax rate is currently 32.8%. Adjusting the prior year for share-based payments, the prior year effective tax rate would have been 32.6%. The marginal increase is due to higher STC payments on an improved dividend distribution.

balance sheet review

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

Inventory levels increased by 8.3% and have been well managed against a growth in merchandise sales of 15.4%. Inventory turn improved to 5.2 from 4.8 last year, benefiting from sales growth and improved distribution logistics.

Gross debtors increased by 13.5% to R3 317.0 million, below the revenue growth of 15.6%. The average age of the debtors book has improved to 14.1 months from 14.3 months and the provision for doubtful debts has reduced to 11.4% of gross debtors (2006: 12.6%), reflecting the continued good health of our debtors book.

cash flow

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

• Increased investment in working capital of R319.9 million (mainly debtors).
• Share repurchases of R213.5 million.
• Dividends paid during the year of R253.0 million.

Borrowings have increased by R295.7 million in line with long-term capital management planning and gearing has now increased to 15.6% (2006: 4.6%).

changes in equity

The increase in other reserves is the result of rising market values of equities held by Monarch Insurance Company.

The reduction in capital results from share repurchases of 4.1% during the year at a cost of R213.5 million. The shares have not been cancelled, but held by subsidiary, Lewis Stores (Pty) Ltd. To date, a total of 7.5% of own shares have been repurchased.

segmental reporting

On a geographic basis, 89.8% (2006: 89.6%) of revenue is generated within South Africa. The balance is attributable to Botswana, Lesotho, Namibia and Swaziland (BLNS).

The sale of customer protection insurance products accounts for 14% of group revenue and 21% of group operating profit.

international financial reporting standards

This is the second year of presenting the group’s financial statements under International Financial Reporting Standards. No new standards were effective for the current year. The notes to the financial statements have been expanded in accordance with the disclosure requirements of the revised IAS 19.

Les Davies

CFO