Commentary 

COMMENTARY

The Lewis Group is pleased to announce its interim results for the six-month period ended 30 September 2005. The results have been prepared in compliance with International Financial Reporting Standards (IFRS). Earnings reflect the consequence of applying these accounting conventions.

TRADING ENVIRONMENT

The South African economy has matured appreciably and a solid platform has been laid for growth through government's disciplined fiscal stance. The stable interest rate and inflation environment as well as real wage increases have enhanced the disposable income of consumers.

The provision of infrastructure by the state and the announcement of the intention to intensify spending in this area should accelerate private sector activity and further stimulate growth.

The emerging black middle class, which forms the core of our target market, continues to grow at a rapid rate and while key economic factors remain stable, we expect consumer confidence and demand to continue to drive the current favourable retail cycle.

FINANCIAL PERFORMANCE

The first half's performance was shaped by the following major factors:

• Solid sales growth off a high base in the Lewis chain, combined with high sales growths in Best Electric and Lifestyle Living.
• New store openings in all three chains are on track.
• Improved gross profit margins mainly due to enhanced product sourcing and differentiation in the market.
• Maintaining the good quality of the credit book.
• Strong cash flow from trading. Gearing remains at low levels.

Income statement overview

Trading revenue increased by 12.3% to R1 332 million. This was driven by merchandise sales growth of 14.5% to R724 million (11.1% on a like-for-like basis). The Lewis chain grew merchandise sales by 10.6% to R617 million. Best Electric sales grew by 31.9% from R55 million to R72 million. Lifestyle Living posted strong growth of 75%, at R35 million.

Overall price deflation for the six months was 7.1% with an increase of 14.5% in value and volume increasing by 21.6%. Furniture sales, which account for 48% of total sales, increased by 7.8% in rand terms and 8.5% in unit sales. Sales of electronic and electrical appliances increased by 21.6% in value and 31.8% in volume.

Cash and short-term credit sales have settled at current levels (30.8%). Lewis chain reflected a 2% decline in cash business during the period. Lifestyle Living has a much higher percentage of cash sales versus credit mainly due to its market segment.

Net insurance revenue and finance charges earned grew by 10.3% and 7.3% to R187 million and R314 million respectively. The growth of both of these lines of revenue was slower than the growth in merchandise sales due to the low interest rate environment and the additional insurance reserves resulting from buoyant trade.

The merchandise margin increased to 35.5% from 33.8% driven by competitive supply chain initiatives.

Operating costs, excluding bad and doubtful debts and share-based payments increased by 9.7% to R505 million. Certain costs have been incurred earlier than anticipated, but it is envisaged that full-year costs will be in line with budget.

Bad debt charges at R46 million were R2 million lower than last year. The increase in the impairment provision of R4 million compares to a release of R11 million in the corresponding period. This is a consequence of the growth in the debtors book. The impairment provision as a percentage of gross instalment debtors decreased from 15.3% to 14.2%.

Normalised operating profit grew by 14.6% to R309 million with the Group's normalised operating margin increasing from 22.8% to 23.2%, aided by the strong sales growth and gross margin increases.

Finance costs declined by R25 million as a result of low gearing, low interest rates and the cessation of interest payments to the former holding company.

Headline earnings on an IFRS basis decreased by 10.8% from R178 million to R159 million as a result of the share-based payment charge in terms of IFRS 2. Normalised headline earnings increased by 22% from R178 million to R217 million.

Earnings per share and headline earnings per share presented on an IFRS basis decreased by 8.6% and 9.8% respectively. Fully diluted earnings per share and headline earnings per share decreased by 8.6% and 9.9%. This decline is attributable to the share-based payment charge in terms of IFRS 2.

On a normalised basis, earnings per share and headline earnings per share increased by 24.6% and 23.4% respectively. Similarly, fully diluted normalised earnings per share and normalised headline earnings per share increased by 24.4% and 23.2%.

Balance sheet

Inventory levels increased significantly as a consequence of our strategy to advance imported stock deliveries, to take advantage of new merchandise developments and buoyant trade. This was partly funded by an increase in trade and other payables.

Gross instalment sale receivables increased by 5.2% to R2 735 million. The increase in instalment sale receivables relative to revenue growth reflects the quality of our debt collection and the current favourable credit environment. Total debtors provisions have increased from 34.9% at September 2004 to 36.6% of gross instalment receivables. This increase is due to accounting provisions for unearned finance charges and insurance income that results from an increase in sales volumes.

Cash flow

Lewis continues to generate significant cash. Effective follow-up and a favourable credit environment were the main contributors to this position.

Following shareholder approval, the Group has commenced a general share repurchase. This will be, as expected, earnings enhancing and further improve our return on equity. To date, 2.1% of shares in issue have been repurchased at an average market price of R43.51 per share and at a total cost of R92 million.

OPERATIONAL REVIEW

The focus during the past six months has been on further enhancing the merchandise offering to attract new customers while continuing to retain existing customers through our Re-serve system. Upgraded merchandise ranges were added in response to customer demand and changing customer demographics.

Enhancements and improvements in credit granting and the behavioural scorecard were implemented in our drive to further improve the quality of debtors. A campaign to regain settled customers was introduced with very successful results.

Sales in both the furniture and electrical categories have been good. The electronics section (TVs, home theatre and DVDs) although achieving substantially more unit sales, is still being affected by price deflation, albeit at lower levels than last year.

The increased sales growth in all three chains is very encouraging.

During the period one Lewis store was opened and three small non-performing stores were closed resulting in 398 stores at period-end. Lewis will open six new stores in the second half of this financial year. Best Electric comprised 66 stores after opening eight new stores. A further four new stores will open this year. The Lifestyle Living chain ended on 14 stores after it closed four old-format stores and opened one new-format store.

The launch of the Lifestyle Living store card in June 2005 has been encouraging. The financial services division products were further enhanced with a funeral plan scheme being launched in July 2005.

Group trading revenue and normalised operating profit per square metre increased, from the corresponding six-month period, by 12.4% to R6 451 and 14.8% to R1 498 per square metre respectively.

The National Credit Bill was approved in parliament in October 2005. Draft regulations governing interest rates etc. are due to be published during the first quarter of 2006. Whilst the impact on the credit industry will be significant, the company is confident that its leading-edge credit granting and current IT systems will assist it in meeting the anticipated administrative requirements of the Bill.

STRATEGY

Our focus remains on the following key strategic business initiatives:

• Generating profitable revenue growth through:
  • increasing sales from existing stores using innovative merchandising and marketing strategies; and
  • expanding the store base;
• Driving operational efficiencies;
• Acquisitions that complement and add value to our business;
• Optimisation of the balance sheet; and
• Developing ancillary products through strategic partnerships.

PROSPECTS

The Lewis Board remains confident, based on the current momentum in the business, that furniture, electrical and appliance sales will continue to grow in real terms in the coming year.

Productivity will be enhanced further through economies of scale from the inclusion of new stores and a continued focus on operational efficiencies. Consequently, share owners can expect meaningful earnings growth.

DIRECTORATE

David Nurek, Alan Smart, Hilton Saven and Ben van der Ross remained directors during the period. David Tyler resigned on 5 August 2005 and we are pleased to announce the appointment of Professor Fatima Abrahams with effect from 1 September 2005.

DECLARATION OF INTERIM DIVIDEND NO. 3

The Board has approved an interim dividend which represents a two-and-a-half times dividend cover (previously 3 times covered). The dividend has been calculated on normalised earnings attributable to shareholders.

Notice is hereby given that an Interim dividend of 88 cents per share in respect of the period ended 30 September 2005 has been declared payable to the holders of ordinary shares recorded in the books of the company on Friday 27 January 2006. The last day to trade cum dividend will therefore be Friday 20 January 2006 and Lewis shares will trade ex-dividend from Monday 23 January 2006. Payment of the dividend will be made on Monday 30 January 2006. Share certificates may not be dematerialised or rematerialised between Monday 23 January 2006 and Friday 27 January 2006, both days inclusive.

For and on behalf of the Board

David Nurek Chairman	Alan Smart Chief Executive Officer

Cape Town
14 November 2005