Unaudited Interim Results

for the six months ended 30 September 2007

Commentary

TRADING REVIEW

The Board is pleased to report that for the six months ended September 2007, the Group has once again experienced sustained growth and improved profitability.

Whilst there has been some slowing in household spending in response to the lagged effect of higher interest rates and petrol price increases, the Board believes that the long-term outlook remains positive, with overall growth supported by ongoing infrastructure spending by the public sector, employment growth and real wage increases.

The past six months have seen many developments affecting the retail furniture sector. Recent disclosures by industry players announcing the separation of retail and financial services has attracted significant comment.

Against this background the Board wishes to reaffirm one of the Group’s strategic strengths – its customer centric business model. This business model is founded on a store-based customer focus where customer relationships are developed both at the time of the sale and throughout the whole of the contract period when customers visit stores to pay their accounts. This enables the Group to develop long-term relationships with its customers, resulting in a high level of repeat sales.

Whilst it is possible to account separately for retail and financial services, the Board believes that operationally the selling of furniture and the provision of credit are interdependent. Accordingly, the Lewis customer centric business model will be maintained in our stores.

The Group’s prime merchandise strategy is to enhance the merchandise offering, attracting new customers and retaining existing customers through the re-serve scheme. This requires constant review of product and sourcing of new exclusive lines both locally and overseas that provide genuine value for money. This strategy has resulted in a change in the product mix over the last two years, with furniture sales accounting for 53% of total sales (2005: 48%).

Extended terms of 30 and 36 months have been offered to our top rated customers. This promotional tool will be used as circumstances dictate.

Cash sales at 32% of total sales have shown no material increase over the past three years, indicating that our customers’ use of other credit facilities for big ticket items is unchanged.

The customer valuation models that were developed last year have been incorporated into the re-serve strategies, allowing for better customer segmentation and targeting of promotional offers. Initial results are very encouraging.

Stock levels are up on last year due to 24 new stores opening since 1 October 2006 and forward ordering of imported stock in anticipation of higher sales volumes. This has been corrected in the forward ordering for the second half of the year.

A further eleven new stores will open in the period October to December 2007, bringing the total of new stores for the current financial year to 22.

An electronic merchandise catalogue has been developed and is in the process of being installed in all stores. This user-friendly electronic catalogue will enable customers to view and particularly salespersons to offer the entire range of product, colour and fabric options together with pricing, terms, etc. This is an exciting development for the Group as we seek to improve sales efficiencies and contain costs.

FINANCIAL PERFORMANCE

Revenue increased by 11.2% to R1 718 million, with merchandise sales growth reflecting a 7.5% increase.

The Lewis chain (82% of Group sales) produced revenue growth of 10% and merchandise sales increase of 6%.

Best Electric (11% of Group sales) increased revenue by 17% and merchandise sales by 11%.

Lifestyle Living (7% of Group sales) increased revenue by 18% and merchandise sales by 12%.

Other revenue grew by 15.5%, with ancillary services increasing due to the recently introduced initiation fees and monthly service fees charged in terms of the National Credit Act (“NCA”). Finance charges earned reflects an increase of 7.7% as the NCA prohibits the levying of finance charges on insurance premiums.

The gross margin for the period was 34.1% (2007: 34.3%). This slight reduction is attributable to costs relating to strong promotional activity to retain and recruit new customers. During the six month period, 40 000 new and settled customers were activated.

Debtor costs at 3% of net debtors is at the same level as the prior period. This highlights the benefits of our stringent credit approval systems, decentralised debt collection process and the underlying quality of the debtors’ book.

Operating expenses (excluding debtor costs) as a percentage of revenue is 36.2% compared to 36.1% last period. Operating profit grew by 14.6% to R423 million, with the operating margin increasing from 23.9% to 24.6%.

The financial performance has resulted in an increase of 13.1% in earnings per share and 11% in headline earnings per share. Return on equity and return on capital employed were 22.6% and 19.6% respectively.

Share repurchases remain a key component of the capital management strategy of the Group and at 30 September 2007, an additional 2.5% of shares in issue had been repurchased, bringing total repurchases to 10% of shares in issue at an average market price of R52.16 per share. The weighted average shares in issue are 90 million compared to 93 million last period.

The Board has resolved to reduce the dividend cover from 2.25 times to 2.0 times cover. Accordingly, an interim dividend of 144 cents per share has been declared, representing an increase of 24.1%. It is noteworthy that the Group, since listing three years ago, has returned R1.1 billion to shareholders in the form of dividends paid and share repurchases.

NATIONAL CREDIT ACT (“NCA”)

The introduction of the NCA on 1 June 2007 has been successfully implemented.

The Group has for the past three years granted credit utilising an affordability calculation which almost exactly met the requirements of the NCA. The changes to the credit granting process were therefore minimal.

DEBTORS

The NCA requires finance charges and insurance to be charged on a monthly basis. Historically, the full amount for the period of the contract was included in debtors. Gross debtors’ books are, therefore, not comparable. The Group now calculates its debtors’ book percentages on the net debtors’ book for the purposes of a meaningful comparison.

The overall debt provision of R419 million compares to R396 million for September 2006, an increase of 5.8%. The doubtful debt provision at 15.4% of net debtors reflects an improvement on the 16.9% for September 2006. In addition, when compared to March 2007, there has been no significant deterioration in the quality of the debts. A summary of the position is as follows:

  Sept 07 Sept 06 March 07 March 06
Doubtful debts as a percentage of net debtors 15.4% 16.9% 14.9% 16.5%

The provision increased by 0.5% since March 2007 from 14.9% to 15.4%. From March 2006 to September 2006, the movement was 0.4% (from 16.5% to 16.9%). This reflects the underlying quality of the book under more demanding conditions.

In anticipation of the NCA, information at the credit bureau has improved, enhancing our ability to make consistently accurate credit decisions. There has been no noticeable deterioration in the quality of customers applying for credit with Lewis.

Second generation behavioural scorecards have been developed for existing customers and will be implemented in November 2007, improving our risk decisions and related credit policies for repeat business.

CASH FLOW

Operating cash flows during the period have funded the following:

Borrowings have increased by R242 million and the current gearing is 25.3% as compared to 17.1% in the last period. Gearing has increased in line with the Group's capital management program.

PROSPECTS

Trading conditions in the medium term are expected to be tough, with food and transport inflation affecting the Group’s target market. However, public infrastructural spend, overall job creation and real wage increases are encouraging.

The Board is confident that the Group's proven operational and merchandise strategies will continue to produce satisfactory results.

Executive directors: AJ Smart (Chief Executive Officer),
LA Davies (Chief Financial Officer)
Independent non-executive directors: DM Nurek (Chairman), H Saven, BJ 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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