commentary: chairman's report

The Lewis Group business model continued to show its resilience as the group delivered an admirable performance in the most demanding trading conditions experienced in the credit retail sector for many years.

Food prices have remained stubbornly high while transport costs have not dropped in line with lower international oil prices. These factors continued to impact discretionary spending in our target market. Lewis customers have limited exposure to asset-based finance and have therefore not been as severely affected by the current interest rate environment as higher income earning consumers.

We have seen some positive signs emerge later in the year as inflation started to slow, interest rates declined and political stability has returned following the general election. However, consumers remain under pressure, while the threat of wide-scale job losses remains a major factor in the economy.

Financial performance

The group has remained focused and adopted strategies which have delivered sustainable performance. Revenue increased by 5.9% and the group has generated strong cash flows. The financial stress on consumers has, however, translated into an increase in debtor costs and this has contributed to headline earnings per share declining 7.6% for the year.

The group's balance sheet remains strong and gearing at 23% is consistent with last year.

Importantly, the group has maintained its dividend and shareholders will again receive a total payout of 323 cents per share for the year.

It is interesting to note that cash returned to shareholders in dividends and share buy-backs has been R1.6 billion since listing on the JSE in 2004. This is equivalent to 57% of the group’s market capitalisation of R2.8 billion at the time of listing. The market capitalisation of the group was R4.2 billion at year-end.

Business model

Our business model is a competitive advantage and a key differentiator in a market where our peers have separated their furniture retail and financial services businesses and centralised credit collections.

The customer-centric model followed by Lewis is based on the premise that the selling of furniture and the provision of credit are entirely inter-dependent. Our store-based model ensures that long-term relationships are developed with customers and this, together with integrated credit and marketing strategies, results in a high level of repeat business.

In the current environment, the group’s store-based collections model is proving effective as the direct relationship through monthly contact with customers provides an early indication of payment difficulties.

We believe that this model is the most appropriate for our market and is integral to the sustainability of our consistent performance over many years.

Directorate and management

Alan Smart, the group chief executive officer, will be retiring in September 2009 and I am pleased to advise that he will be succeeded by Johan Enslin, the chief executive officer designate, from 1 October 2009. Johan will be appointed to the board as an executive director.

Alan has served Lewis with great distinction over the past four decades, including 18 years as chief executive. Under his leadership, Lewis has grown into the market-leading furniture retail group with 535 stores nationally and an enviable track record of financial and operational performance. Alan steered the group through its transition to a public company and the successful listing on the JSE.

We are extremely pleased that Alan has accepted our invitation to serve on the board in a non-executive capacity. He is regarded as a doyen in the furniture industry and we are delighted to retain his extensive knowledge of the business and the credit retail sector.

On behalf of the board and the people of Lewis, we wish Alan a healthy and fulfilling retirement, and look forward to his continued contribution to the business.

Prospects

Continued government and private sector infrastructure spend bodes well for ongoing job creation and retention in the Lewis target market.

However, rising retrenchments and unemployment remains one of the major risks facing the South African economy in the year ahead. The group’s national store base and diverse customer profile should limit the impact of unemployment affecting a particular sector of the economy or geographic region.

Trading conditions are expected to remain difficult in the year ahead. However, the improving trend in revenue growth and the slowing bad debt provision in recent months provide some encouraging signs.

Appreciation

On behalf of the board I would like to thank every one of our 6 480 staff in the Lewis Group for their unwavering commitment during these uncertain times. Alan and his management team have continued to show decisive leadership and our staff at head office and at stores across the country have remained focused on meeting the needs of our customers. Thank you to my fellow directors for their active participation in the company and for sharing their business insights.

David Nurek
Independent Non-executive Chairman