COMMENTARY
INTRODUCTION
Lewis Group recorded solid growth in revenue and profitability for the year as the early signs of improving economic conditions started to benefit consumers. This is reflected in the recovering credit collections environment in the second half of the year and stabilising debtor costs.
TRADING AND FINANCIAL PERFORMANCE
Revenue increased by 8.0% to R4 111 million and merchandise sales by 6.5% to R2 046 million. The merchandise strategy of sourcing exclusive and differentiated furniture ranges has continued to benefit the group. Sales of the higher margin furniture and appliance category increased by 8.5%. Furniture now accounts for 55% (2009: 53%) of group sales.
Merchandise sales in Lewis, which comprise 83% of total sales, increased by 7.7%. Best Home and Electric grew sales by 7.8% and sales in Lifestyle Living declined by 10.4%. Credit sales supported by merchandise initiatives and local promotions increased to 68.5% from 64.3% of total sales.
Revenue from finance charges rose 9.7% and insurance revenue increased by 6% owing to the earn-out of longer term contracts. Ancillary services, which comprise the monthly service and initiation fees charged in terms of the National Credit Act, increased by 13.1% in line with the growth in credit sales.
Operating costs, excluding debtor costs, increased by 9.2%. The main contributors to this increase were union negotiated wage settlements, increases in variable remuneration on improved trading, IT system upgrades and Monarch insurance claims.
Gross profit margin improved from 31.3% to 34.9% fully recovering currency losses reported at the half-year. After adjusting for currency losses, which are shown separately, the net position improved from 31.9% to 33.4%.
Inventory turn improved from 5.8 to 6.0 times. Efficient stock management and successful product ranging contributed to this favourable result.
The group operating margin improved to 22.1% (2009: 21.9%), translating into a 9.0% uplift in operating profit to R907 million, once again reflecting the resilience of the business model. Earnings per share increased by 5.6% to 672.0 cents per share.
DEBTOR MANAGEMENT
The collection environment was difficult in the first six months. However, since half-year, collections have improved and debtor costs stabilised. Debtor costs for the year increased by 28% reflecting an improvement on the half-year position which was 32% higher.
Since half-year certain non-performing accounts, against which approximately 95% of the balance had been provided by way of an impairment provision, were written off. The release of the impairment provision in respect of these accounts compensated for the write-off and the effect on operating profit was minimal.
Debtor costs for the year are 10.9% of net debtors. This compares to 10% for last year.
The credit application decline rate at 27.5% is in line with first half experience, although up on last year's 25.4%. The group's centralised credit-granting process has been a core strength in a difficult credit environment.
The year-end impairment provision moved from 15.7% to 16.0%, improving on the level of 17.9% reflected at half year. An analysis of the debtors book, which is detailed in the accompanying table, reflects the improving trend in payment performance. Satisfactory paying customers now comprise 72.7% of net debtors compared to 72.0% last year
CASH AND CAPITAL MANAGEMENT
The total dividend has been maintained at 323 cents per share for the year, comprising an interim dividend of 144 cents and final dividend of 179 cents.
Gearing rose to 27.5% as a result of the additional investment in debtors and the insurance business arising from extended term business. The gearing ratio remains well below management’s maximum level of 35% and is expected to decline in the year ahead.
STORE EXPANSION
The store base increased to 548 following the opening of ten Lewis and six Best Home and Electric branches during the year. The smaller format Lewis outlets continue to show pleasing results based on sales, productivity and profitability. Lewis now has nine small format stores.
A new trading brand, My Home, will be launched in June 2010 and is targeted at aspirational customers in the LSM 7 – 8 categories. My Home will adopt the successful Lewis business model utilising the group’s well-established credit infrastructure. The focus will be on differentiating the merchandise offering through exclusive and innovative ranging to attract customers who would use in-store credit facilities. Thirteen Lifestyle Living stores will be converted to My Home and a conservative expansion plan followed based on the performance of the new chain.
PROSPECTS
While trading conditions are showing early signs of improvement, the environment is expected to remain challenging in the year ahead as the country emerges from recession. Job creation remains key to stimulating economic growth among the Lewis target market.
Debtor costs appear to have peaked and should moderate in the year ahead as the credit collections environment continues to improve.
A more aggressive store expansion programme will see the group open 40 to 45 new stores in the year ahead.
DIVIDEND DECLARATION
Notice is hereby given that a final cash dividend of 179 cents in respect of the year ended 31 March 2010 has been declared payable to holders of ordinary shares.
The following dates are applicable:
| Last date to trade “cum” dividend | Friday, 16 July 2010 |
| Date trading commences “ex” dividend | Monday, 19 July 2010 |
| Record date | Friday, 23 July 2010 |
| Date of payment | Monday, 26 July 2010 |
Share certificates may not be dematerialised or rematerialised between Monday, 19 July 2010 and Friday, 23 July 2010, both days inclusive.
For and on behalf of the board.
| David Nurek | Johan Enslin |
| Chairman | Chief Executive Officer |
Cape Town
19 May 2010
Executive directors: J Enslin (Chief Executive Officer), L A Davies (Chief Financial Officer)
Non-executive directors: D M Nurek (Chairman) (Ind.), H Saven (Ind.), B J van der Ross (Ind.), Professor F Abrahams (Ind.), Z
B M Bassa (Ind.), M S P Marutlulle (Ind.), A J Smart
Company secretary: M G McConnell
Registered office: 53A Victoria Road, Woodstock, 7925
Registration number: 2004/009817/06
Share code: LEW
ISIN: ZAE000058236
Transfer secretaries: Computershare Investor Services (Pty) Ltd,
70 Marshall Street, Johannesburg, 2001; PO Box 61051, Marshalltown, 2107
Auditors: PricewaterhouseCoopers Inc.
Sponsor: UBS South Africa (Pty) Ltd
