commentary: chief executive's report

Over the past year Lewis has continued to focus on its core strategies to ensure sustained profitability while minimising risk in the current downturn. The continuing support from our loyal customer base of close to 700 000 middle income South Africans has enabled Lewis to produce a creditable performance for the year.

Trading performance

Revenue increased by 5.9% to R3 807.1 million and merchandise sales grew by 1.6% to R1 919.9 million, a pleasing result in the economic climate. Revenue has shown an improving trend towards the latter stages of the financial year and increased by 6.6% in the second half relative to 5.0% in the first six months.

The group’s merchandise strategy of sourcing quality, innovative product which offers real value for money has continued to be a competitive advantage. This strategy has resulted in a 4% increase in sales in the higher margin furniture product category which has grown to 53% of group sales. In the sub-categories, appliances (27% of sales) increased by 3.8% while the more discretionary sound and vision merchandise (20% of sales) slowed by 7%.

The Lewis division, which accounts for 82% of merchandise sales, increased revenue by 5.7%. Best Electric was boosted by the introduction of furniture ranges into stores and lifted revenue by 9.1%. The chain has been rebranded as Best Home and Electric to reflect this change in the merchandise offering. Revenue in Lifestyle Living, which targets higher income earners than the Lewis market, was the same as last year.

We have seen the benefit of customer loyalty in tough trading conditions and our store-based customer re-serve model resulted in a high level of repeat business. Store promotions were increased to achieve this objective, while marketing activity was increased to attract new customers.

Gross margin inclusive of foreign currency gains was impacted by the strengthening of the Rand late in the reporting period. Excluding this currency movement, margins were relatively stable but remain under pressure owing to higher levels of promotional activity.

The group operating margin was 22.1% (2008: 25.9%), comprising retail at 12.9% (2008: 14.4%), risk services (insurance) 31.4% (2008: 31.1%) and financial services 36.7% (2008: 50.2%).

Stock was well managed and the inventory turn improved from 5.5 to 5.8 times.

Debtor management

Our credit risk management strategies have continued to be consistently applied through the group’s centralised credit-granting process which use proprietary application and behavioural scorecards.

Increasing levels of consumer indebtedness can be seen in the growing decline rate of credit applications, which has risen from 22.5% in 2008 to 25.4% this year.

The increase in debtor costs from 6.5% to 10.0% of net debtors reflects the impact of the tougher collections environment.

The doubtful debt provision for the period was 15.7% of net debtors (2008: 13.5%). This is calculated applying the net present value of the expected cash flows from slow-paying and non-performing accounts.

The movement in the doubtful debt provision was well contained in the second half of the year, increasing by R45 million relative to an increase of R92 million in the first six months. Further disclosure is contained in our credit report and a detailed analysis of the debtors’ payment experience appears here.

The extended credit terms of 30 to 36 months offered to our top-rated customers on big ticket items offers increased affordability with regard to monthly instalments.

Store expansion

Our national store base has increased to 535 following the opening of 13 new stores.

Lewis successfully piloted a small store concept which has enabled the chain to gain access to high traffic areas at lower rentals. The stores average 200 m² to 250 m² and offer customers key merchandise lines, with the balance of the range available in the electronic catalogues and display screens in-store. This store format will form part of the Lewis expansion plans.

While the group will continue to focus on organic growth from existing stores, a cautious expansion programme will see
20 to 25 stores opened across the three trading brands.

Outlook

Lewis has a youthful leadership team, but a team with many years’ experience in the business. It is particularly pleasing that we have been able to appoint a new chief executive of Johan Enslin’s calibre from within our ranks. I have worked closely with Johan over the past 10 years and believe he has the leadership skills, strategic insight, experience and energy to take the business to new heights.

The appointment of a new chief executive does not signal any change in strategy or direction in the business. Johan has been a key member of the Lewis executive team for several years and is committed to the business model and strategy.

Our priorities in the new year include a continued focus on sourcing innovative merchandise to grow furniture sales, as well as managing the debtors book through this tough credit cycle.

While trading will remain challenging it must be recognised that Lewis provides customers with access to basic household furniture which will always be in demand.

Lewis is well positioned to benefit from increased customer traffic as a result of store and brand consolidation among competitors and will look to gain market share in this environment of limited growth.

Appreciation

As I close off on my last report to shareholders ahead of my retirement in September this year, I would like to thank the many people who have influenced my career at Lewis over the past 40 years. My time at Lewis has been extremely fulfilling and rewarding. I look forward to a continuing relationship with the group as a non-executive director.

Thank you to my board colleagues, management and staff of Lewis past and present for making Lewis the great business that it is today. I have had the honour and privilege of working with many fine people and would also like to acknowledge our suppliers and manufacturers, business partners, the media, as well as the investment community for their support.

Alan Smart
Group Chief Executive Officer