![Lewis Group Ltd [logo]](../i/logo_lewis.gif "Lewis Group Ltd"){kind=logo}
The 2008 financial year was characterised by a rapidly deteriorating trading environment (particularly in the second half) as a result of declining economic conditions. The Lewis Group experienced one of its most difficult trading periods in recent years, but that notwithstanding, the group has produced positive results and performed admirably.
South African consumers are under growing pressure as a result of the 500 basis points increase in interest rates since 2006, including the most recent hike announced in April. This has seen the prime lending rate soaring from 10.5% to 15.5% in just two years. There are now expectations of further increases to follow.
These further rate hikes have taken their toll on consumers who are also battling against extremely high food price inflation and rapidly rising fuel and transport costs. These factors have all contributed to a decline in consumer confidence during the year under review.
The past year has also seen the introduction of the National Credit Act and was successfully implemented without disruption to the business.
Plans by competitors to separate their furniture retail and financial services businesses has attracted significant comment in the financial media.
Lewis’ customer-centric business model is based on the premise that the selling of furniture and the provision of credit are inter-dependent. This store-based model enables the group to develop strong relationships with its customers over the entire contract period when customers visit stores to pay their accounts. This not only improves credit collection rates but also results in a high level of repeat sales.
This model has proved most effective in Lewis’ middle income target market and the board and management have no plans to deviate from this formula.
The group has enhanced its disclosure this year to provide shareholders with a greater understanding of the performance of its retail, risk (insurance) and financial services segments.
The slowdown in consumer spending in South Africa has impacted our financial performance. Revenue increased by 8.2% to R3 596.4 million, with merchandise sales growing by 4.5% to R1 889.7 million.
Earnings for the year grew 10.3% to 717.0 cents and headline earnings per share up 6.9% at 689.8 cents per share.
The board has taken a decision to reduce the dividend cover from 2.25 times to 2.0 times earnings cover. Accordingly, shareholders will receive dividends of 323 cents per share for the year, an increase of 21.4% over 2007.
A further 2.6% of shares in issue were repurchased during the financial year, bringing total repurchases to 10.1% of shares in issue. The group’s balance sheet remains strong and the level of gearing is comfortably within the parameters determined by the board.
Maintenance of dividend cover and share repurchases remain key elements of the group’s capital management strategy.
We believe the group has performed well in adverse market conditions.
Lewis has a strong philosophy of developing management talent and promoting from within its own ranks to sustain the powerful culture that exists within the group.
As part of succession planning and to maintain that culture, Les Davies (21 years’ service) was appointed to the board as an executive director and Johan Enslin (15 years’ service) was promoted to chief operating officer of the group on 1 April 2007.
The group is committed to maintaining a high standard of corporate governance. New committees have been established (refer Corporate Governance report) and refinements to existing practices implemented to assist the board in discharging its responsibilities and to monitor the various business risks and challenges facing the group.
Corporate social responsibility is integral to the business strategy with the group committed to uplifting the communities which we serve. During the year, support has been focused on education and training as well as on health and social development.
While the trading environment is expected to remain tough in the year ahead, the continued growth of the middle income market is expected to afford sustained opportunities for the group. The board and management remains positive on the outlook for 2009/10 and beyond as growth should be supported by ongoing infrastructure spending by the public sector, employment creation and real wage increases in the Lewis target market. In the absence of any further deterioration in the economic environment, shareholders can expect continued earnings growth in 2009.
On behalf of the board I would like to compliment Alan and the executive management team on the manner in which they have led the business in a very difficult environment. Thank you to my fellow directors for their guidance and active contribution to the board process.
David Nurek
Independent Non-executive Chairman