Audited Results
for the year ended 31 March 2008

Commentary


TRADING REVIEW

The past year has seen difficult trading conditions testing the resilience of our business model both in terms of sales and debtor management. 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. Furthermore, there has been no significant deterioration in the quality of the debtors book.

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 a sales growth of 5.0%.

REVENUE RECOGNITION

Insurance Revenue
The group defers insurance revenue over the period of the contract.

Monarch, the group’s wholly-owned short-term insurance company, provides insurance products to customers purchasing merchandise on credit to cover the outstanding debt and other insurable risks.

Monarch reinsures 40% of its insurance book with an independent third-party reinsurer with the risk transferring to the reinsurer. Monarch retains a premium reserve of 40% of the ceded premiums which has had the effect of deferring reinsurance revenue. At 31 March 2008, this reserve totalled R102 million.

The group accounts for the insurance revenue in terms of its contractual relationship with the parties. Over a two-year contract, the application of this policy results in 55% of the gross insurance revenue being recognised in the first year.

The accounting policies relating to insurance and reinsurance revenue is consistent with prior reporting periods.

Initiation Fees
Initiation fees and directly related costs are recognised over the period of the contract on an effective yield basis.

OPERATING PROFIT

Operating profit increased by 8.2%. Operating margin at 25.9% has been maintained at the same level as last year under challenging conditions.

SHAREHOLDER RETURNS

Earnings per share and headline earnings per share rose by 10.3% and 6.9% respectively. The return on equity is 24.4% (2007: 24.8%) and the return on assets managed is 18.9% (2007: 19%).

DIVIDENDS

The dividend cover which was improved in November 2007, has been maintained. The total dividend for the year is 323 cents per share, an increase of 21.4% over the prior year.

DEBTOR COSTS

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 fully provided for accounts.

The introduction of the National Credit Act 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. Extended terms provide additional revenue opportunities.

A detailed analysis of debtors based on payment performance is shown here.

SEGMENTAL REPORT

The group has enhanced its segmental reporting to provide shareholders with a greater understanding of retail, risk services (insurance) and financial services divisions. Details are shown here.

The board remains committed to the group’s customer-centric business model which is based on the premise that the selling of furniture and the granting of credit is inter-dependent.

CASH FLOW

Operating cash flow during the period funded the following:

Borrowings increased by R243 million and current gearing is 23.3% compared to 15.6% last year. This is in line with the board’s objectives in regard to the capital structure of the group.

PROSPECTS

Trading conditions are expected to remain tough while external factors such as oil prices and food inflation affects the group’s target market. On the positive side, however, there are no signs of increased unemployment. In addition, infrastructural spend and job creation in certain sectors remains encouraging.

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