Unaudited Interim Results
for the six months ended 30 September 2008

Commentary


TRADING REVIEW

The board is pleased to report that, despite extremely difficult trading conditions, headline earnings per share declined marginally by 0.9%, cash generated from operations has increased by 27.8% and the interim dividend of 144 cents per share has been maintained.

Revenue increased by 5.0% to R1 803.4 million, with merchandise sales declining by 0.7% to R890.3 million. Finance charges earned were impacted by the fact that the National Credit Act excluded the levying of finance charges on insurance premiums. Insurance revenue reflect the earn out of premiums written in the buoyant trading period of 2007. The increase in ancillary service is due to monthly service fees applicable to accounts opened after June 2007 following the introduction of the National Credit Act.

Our core retail business of furniture and appliances (80% of total sales) grew by 2%. The sound and vision section (20% of total sales), which is a consumer discretionary spend, declined by 11%.

Lewis division grew revenue by 4.8%, Best Electric’s revenue increased by 11.6% and Lifestyle Living’s declined by 10.1%.

The group’s prime strategy continues to be that of sourcing exclusive merchandise which offers the customer genuine value for money. This strategy has resulted in encouraging increases in the furniture product category, constituting 54% of group sales. Best Electric has similarly benefited from the introduction of furniture lines and following a store revamp programme, additional furniture ranges are displayed and the name changed to Best Home and Electric. A pilot test under the Lewis brand of a small store concept utilising electronic catalogues and compact displays has produced encouraging results and will form part of future expansion plans in high traffic areas.

Lewis will continue to expand cautiously and should benefit from the consolidation in the industry.

Improved customer segmentation allowed us to target our re-serve strategies and promotional offers more effectively, enabling our stores to interface with the most creditworthy current and settled customers.

Gross margin declined from 34.1% to 33.1%, but after adjusting for forward exchange gains which are reflected under finance costs, the margin declined from 33.7% to 33.4%.

Operating costs, excluding debtor costs, only increased by 5.2% as a result of the continued drive for operational efficiency in the business. In particular, employment costs have increased by 1.2%, reflecting lower staff levels and the impact of variable remuneration.

DEBTORS

Debtors costs increased from 3% to 4.5% of net debtors in a tightening collection environment.

Credit scorecards are regularly updated in order to maintain the credit risk levels. The credit application decline rate is now 24.5% compared to 21.6%.

The doubtful debt provision at 15.5%, compared to 15.4%, is calculated applying the net present value of the expected cash flows from slow-paying and non-performing accounts. A detailed analysis of debtors based on payment performance is shown below.

Extended terms of 30 and 36 months are offered to our top-rated customers. The performance of these extended-term accounts is better than that of shorter-term accounts.

SEGMENTAL REPORT

The group operating margin was 22.8%. The segmental analysis of this is:

Whilst we account separately for retail and financial services, the board believes that operationally the selling of furniture and the provision of credit are interdependent. This business model is founded on developing customer relationships both at the time of the sale and throughout the whole of the contract period when customers visit stores.

CASH FLOW AND CAPITAL MANAGEMENT

Cash generated from operations for the period under review was R382 million, an increase of 27.8% over the corresponding period. Good cost control and inventory management supported the increased cash flow.

Gearing at 23.9% (2007: 25.3%) is within our maximum target of 35%. In terms of treasury management, we have converted portion of our borrowings from floating rates to fixed rates and have secured committed long-term finance.

During the period, a further 1.5% of shares were repurchased and dividends paid increased by 17.7%.

SUCCESSION PLANNING

The board advises that Alan Smart, CEO of the Lewis Group, will retire in September 2009 at normal retirement age. Alan has agreed to remain on as a non-executive director and the group will accordingly continue to enjoy the benefits of his extensive experience in the furniture retailing industry.

Johan Enslin, currently Chief Operating Officer, has been appointed as Chief Executive Officer designate with immediate effect. Johan has 15 years’ experience with Lewis, holding various operational positions. Since 2002, he has been responsible for all facets of the group’s store operations.

The board is also pleased to confirm the appointment of Les Davies, Chief Financial Officer of the group, as Chief Executive Officer of Monarch Insurance Company Ltd and he will continue as Chief Financial Officer of the group. Les has 22 years’ service with the group and has been a director of Monarch for 14 years.

PROSPECTS

Whilst trading is expected to remain difficult, the upcoming peak trading season will be supported by strong promotions and inventory to maximise sales opportunities.

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