TRADING REVIEW
The Board is pleased to report solid sales growth, improved profitability and an increased dividend distribution for the six month period ended 30 September 2006.
Revenue increased by 16.0% to R1 545 million. Merchandise sales grew by 15.2% to
R834 million supported by our strategic merchandise initiatives and a continued drive to regain settled customers as well as ongoing new customer promotional campaigns. Like for like sales growth was 11.5%. Insurance revenue earned grew by 14.0% despite additional statutory insurance provisions. Finance charges increased by 17.6% and services rendered increased by 19.7% due to strong sales.
Normalised operating profit grew by 19.2% to R369 million, with the normalised operating margin increasing from 23.2% to 23.9% reflecting improved operating efficiencies.
The lower doubtful debt provision at 12.9% of Debtors (2005: 14.2%) despite a substantial increase in debtors of R335 million for the year to September reflects the quality of the
debtor book.
The gross margin for the period was 34.3% as compared to 35.5%. This reduction is attributable to strong promotional activity to retain and recruit
new customers. During the past year, 25 000 new customers were activated.
The group continued to focus on enhancing the merchandise offering to attract new and settled customers while retaining existing customers through the re-serve system. Our merchandise procurement strategy, both locally and overseas, is to provide exclusivity of product and design, enhanced quality and genuine value-for-money.
A very pleasing shift during the six months was the change in product mix with furniture sales accounting for 51% of total sales (2005: 48%).
Earnings per share and return on equity have been enhanced by the share repurchase program initiated in September 2005. At 30 September 2006, 7.5% of shares in issue have been repurchased at an average market price of R48.37 per share. The group will continue to repurchase shares up to 10% of share capital, where appropriate. The weighted average shares in issue were 93 million this period compared to 99 million last period.
The interim dividend has increased by 31.8% to 116 cents as a result of a
reduction in the dividend cover implemented at year end.
DIVISIONAL REVIEW
The Lewis chain continued its solid sales performance with growth of 12.0% (10.8% on a like-for-like basis). Merchandise initiatives in selected product categories produced excellent results.
Best Electric experienced a 25.2% sales increase benefiting from new store openings. Like for like sales growth of 6.3% was as a result of a slowdown in home theatre sales off last year’s high base of 41% growth.
Lifestyle Living posted strong growth of 50.9% (36.3% on a like-for-like basis) as a result of its differentiated merchandise offerings.
The Board has approved the opening of a specialist bedding chain which leverages off the group’s competencies and infrastructure. A pilot store program will commence in November 2006.
A total of 24 stores covering all trading divisions will be opened on a phased basis this financial year.
DEBTORS
The debtor book has increased by R335 million in the year to September. The overall doubtful debt provision is R396 million compared to R390 million for September 2005. The doubtful debt provision at 12.9% of debtors
reflects an improvement on 14.2% for September 2005 and indicates the quality and strength of our credit scoring and debt collection processes.
The average age of the debtor book has improved to 14.0 months from 14.5 months. The full contractual arrear percentage has dropped to 22.5% (2005: 25%).
The group’s cash and short-term sales at 31.5% of total sales remains at a similar level to that of the previous period.
The continuous enhancements and improvements in our centralised credit granting and decision support systems assist us in our drive to further improve the quality of credit granted. The introduction of a behavioural scorecard this year has further enhanced our credit decision systems.
The National Credit Act will be implemented on 1 June 2007. The revenue effect of the Act is anticipated to be neutral. The group has advanced store and credit scoring systems which are in the process of being adapted to address the key requirements of the National Credit Act.
CASH FLOW
Lewis continues to generate significant operating cash flows which have funded the following:
- Increased working capital requirements of R100 million.
- Share repurchases of R213 million
- Dividends paid during the period of R127 million.
Borrowings have increased by R277 million and current gearing is 17% as compared to 7% last period.
OUTLOOK FOR THE GROUP
The recent interest rate increases will have a slow down effect on the overall economy. The group however continued to trade at satisfactory levels in October. We believe that the underlying strength and size of the middle income market will continue to afford growth opportunities. The Board is confident that the proven operational and merchandise strategies of the group will produce satisfactory returns.
For and on behalf of the Board
 |
 |
| David Nurek |
Alan Smart |
| Chairman |
Chief Executive Officer |
| Cape Town |
|
| 13 November 2006 |
|
| Executive director: |
AJ Smart (Chief Executive Officer) |
| Independent non-executive directors: |
DM Nurek (Chairman), H Saven, B van der Ross, Professor F Abrahams |
| Company secretary: |
PB Croucher |
| Registered office: |
53A Victoria Road, Woodstock, 7925 |
| Registration number: |
2004/009817/06 |
| Share code: |
LEW |
| ISIN: |
ZAE000058236 |
| Transfer secretaries: |
Computershare Investor Services 2004 |
| |
(Pty) Ltd, 70 Marshall Street, |
| |
Johannesburg, 2001 |
| |
PO Box 61051, Marshalltown, 2107 |
| Auditors: |
PricewaterhouseCoopers Inc. |
| Sponsor: |
UBS South Africa (Pty) Ltd |
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