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After one of the most protracted retail booms in recent history, consumers have come under increasing pressure over the past year which has led to a slowing down of performance in the retail sector. In the face of the deteriorating environment, Lewis has continued to focus on the basics of retailing in the knowledge that our business model is robust, our strategies are appropriate and that our franchise is sustainable.
The challenges faced by the furniture retail sector over the past year have been compounded by continually rising interest rates, spiralling food prices and higher transport and fuel costs.
In response to these difficult trading conditions, the group implemented several trading strategies, including increasing the volume of local and store promotions, maximising the re-serve programme and incorporating customer valuation models into the re-serve strategies allowing for better customer segmentation and targeting of promotional offers. Top-rated customers have received additional benefits with their purchases, including extended credit terms of 30 and 36 months. This promotional tool supported sales momentum at no additional charge for risk.
Revenue increased by 8.2% to R3 596.4 million, with merchandise sales increasing 4.5% to R1 889.7 million. Lewis grew its revenue by 7.8% and merchandise sales by 4.1%. Best Electric’s revenue increased by 11.9% and merchandise sales by 7.4%. Lifestyle Living’s revenue has grown by 9.1% with sales growth of 5.0%.
product range
It is positive to note that our core business namely furniture (52% of the business) and appliances (26% of the business) reflected merchandise sales increases of 9% and 8.9% respectively. The sound and vision section of the business (22% of the business) is traditionally a discretionary spend during difficult times and was most affected, reflecting an 11% decrease.
The furniture import programme was further enhanced during the year to secure more exclusive lines offering genuine value-for-money for customers. The strong focus on furniture procurement had the desired impact on the product mix, with furniture accounting for 52% of total merchandise sales compared to 47% a number of years ago.
An electronic merchandise catalogue was introduced into all stores during the year to showcase the group’s entire range of product, colour and fabric options which are not always available in all stores. This user-friendly, touch screen catalogue is expected to improve sales efficiencies and reduce costs.
Increased promotional and discount campaigns aimed at retaining and attracting new customers impacted the gross margin which declined from 34.0% in 2007 to 32.7%. More than 40 000 new and settled customers were activated during the year.
Operating profit rose by 8.2% to R930.4 million. Operating margin at 25.9% has been maintained at the same level as last year under challenging conditions and is reflecting the group’s continued focus on its core disciplines.
The debtors book is the core asset of the group and the maintenance of the health of the debtors book is a prime focus of management.
Debtor costs of 6.5% of net debtors (2007: 5.8%) illustrates the group’s core strength of debtor management in challenging conditions. Independent centralised credit granting and a decentralised store-based collection process has contributed to the quality of the debtors book. The doubtful debt provision percentage has shown an improvement to 13.5% as compared to 14.9% last year. The lower doubtful debt provision percentage (calculated on the same basis as last year) is due to the write-off of older provisioned accounts.
The group operates a system whereby individual payment ratings are assigned to each customer, based on the payment performance over the lifetime of the account. Using these payment ratings, the percentage of satisfactory paid customers (being those who paid 70% or more of accounts due over the contract period) was 75.1% as compared to 76.4% in the prior period. The slight decline represents only 7 856 customers out of total base of 711 588 customers. This underlines the continued quality of the debtors book.
The introduction of the National Credit Act (“NCA”) enabled the business to extend credit terms for top-rated customers. The condition of the extended term accounts is similar to that of shorter-term accounts, being 24 months or less. Extended term accounts do provide additional ancillary revenue opportunities as well as making “big-ticket” purchases more affordable.
The group has enhanced its segmental reporting to provide shareholders with a greater understanding of retail, risk (insurance) and financial services segments.
Lewis is a high margin business and this is illustrated by the performance of all three segments with retail operating margins at 14.4%, risk services (insurance) 31.1% and financial services at 50.2%.
The store base has continued to expand across the three retail chains, opening 22 new stores in Lewis (11), Best Electric (8) and Lifestyle Living (3) to increase the national store base to 525.
Lewis remains the single largest furniture brand in the country with 417 stores, with Best Electric growing to 87 stores in less than ten years and Lifestyle Living operating 21 stores.
The NCA was successfully integrated into the group’s operations on the implementation date of 1 June 2007. For the past three years Lewis has used an affordability test for all credit applications which is very similar to the calculation required under the NCA. The changes in our credit granting processes were therefore minimal and the transition to the NCA proceeded without any disruptions to the business.
Our strategic objectives remain unchanged, and the group will strive to increase sales from existing stores, drive customer acquisition and retention, and maintain the quality of the debtors book. Merchandising underlies the success of the sales effort and product sourcing will be expanded as we try to maximise this competitive advantage.
Continued growth in the Lewis target market will create opportunities for further store expansion, and we anticipate opening between 15 and 20 stores in the new financial year.
Organic growth has always been the preferred strategy for Lewis but the group is constantly evaluating growth opportunities within its areas of competency which are broader than furniture retailing. A joint venture to market African Life/Sanlam products is in operation.
Further consolidation is expected in the furniture sector and this will be positive for Lewis.
There has been a steady growth in Lewis’ target market of LSM 4 – 7 consumers in recent years as more South Africans have entered formal employment and opportunities have been afforded to the previously disadvantaged. Based on the 2007 AMPS survey, our target market accounts for 53% of the country’s population or 16.5 million people, up from 44.6% of the population in 2001. This reflects the potential of the middle income segment which we serve.
Trading conditions are expected to remain tough while external factors such as oil prices and food inflation affects our target market. On the positive side, there are no signs of increased unemployment. Infrastructural spend and job creation in certain sectors remains encouraging.
Lewis has an experienced management team that has traded successfully in periods of downturn in the past and we have every confidence in their ability to lead the business in the current environment.
Brand loyalty also plays an increasing role in tough times and the group has a portfolio of well-established brands with a loyal customer base of over 700 000 people.
In closing I would like to pay tribute to the contribution of our staff and management at head office and at our stores countrywide who take so much pride in belonging to the Lewis Group. Thank you to our suppliers and manufacturers both locally and abroad as well as our business partners, the investment community and media for your support. We are committed to serving our customers and thank them for the loyalty they continue to show to our brands.
Alan Smart
Group Chief Executive Officer