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Commentary
TRADING AND FINANCIAL PERFORMANCE
The improving trend in revenue growth experienced in the latter stages of the 2009 financial year has continued, with revenue for the six-month period increasing by 7.9% to R1 946 million and merchandise sales growing by 6.8% to R951 million. The group's business model has once again proved its resilience with operating profit increasing by 4.3%.
The credit environment remained challenging with increasing unemployment, retrenchments and reduced working time impacting on disposable income levels, resulting in increased debtor costs for the group.
In addition, the 22% strengthening in the value of the Rand during the period resulted in exchange losses on forward cover contracts of R30 million. This accounted for the 3.9% decline in headline earnings per share for the period.
Exclusive value for money offerings continue to differentiate Lewis in the market and during the period several new furniture ranges were successfully launched. Furniture and appliances, which contribute 80% of group sales, increased by 7.8%. Sales of the more discretionary electronic merchandise (20% of sales) increased by 2.8%.
The flagship Lewis brand, which accounts for 85% of merchandise sales, increased revenue by 7.9%. Best Home and Electric grew revenue by 10.2%. Revenue in Lifestyle Living was up 0.8%.
The group’s credit sales mix has increased to 68.5% (2008: 65.8%) on the back of strongly focused customer retention strategies.
Finance charges earned grew by R50.5 million as a result of extended credit terms forming a larger proportion of the base on which these charges are calculated. Insurance revenue declined slightly to R292 million and includes additional reserves required to cover the higher proportion of longer-term business. Ancillary services rose by 15.7% to R258 million as a result of monthly service and initiation fees charged in terms of the National Credit Act.
Gross margin improved from 33.1% to 33.5% as a result of innovative merchandise strategies.
The operating margin of 21.8% (2008: 22.6%) was impacted by the higher debtor costs, with Lewis at 23.0% (23.9%) and Best Home and Electric at 19.3% (20.7%).
The group continued to expand its store base, opening five Lewis stores and three Best Home and Electric outlets. The small store concept tested by Lewis in the previous financial year is proving successful. Lewis now has five stores in this format. These stores are all performing ahead of expectations.
An additional seven to ten stores are planned to be opened in the second half, including the opening of four small format Lewis stores in November.
DEBTOR MANAGEMENT
Debtor costs increased from 4.5% to 5.0% of net debtors in a tightening collections environment. The doubtful debt provision for the first half of the year was 17.9% (2008: 15.5%). This provision is calculated applying the net present value of the expected cash flows, discounted at the interest rate applicable to the contract. A detailed debtor payment analysis is shown here.
Credit scorecards are regularly reviewed to maintain acceptable credit risk levels. The potential credit loss is weighed up against the revenue potential using predictive behavioural models. Any variances from the level of risk that has been adopted is monitored and the credit-granting process aligned where necessary. The credit application decline rate is now 27.4% compared to 24.5% in the corresponding period last year.
CASH AND CAPITAL MANAGEMENT
The group has maintained its dividend and shareholders will again receive a payout of 144 cents per share for the period.
The increasing proportion of longer-term business necessitated further investment in the debtors book during the period under review. The level of funding required is expected to slow in the second half as the proportion of extended term business matures.
Gearing at 27.4% (2008: 24.2%) remains within management’s maximum target of 35%.
SEGMENTAL REPORTING
The basis for reporting segmental financial information has changed following the adoption of IFRS 8 (Operating Segments). Previously, segmental information was provided for the group’s retail, risk services and financial services operations. The group now discloses segmental information for Lewis, Best Home and Electric, and Lifestyle Living. This is the financial information regularly reviewed by the chief operating decision makers of the group and reflects the customer-centric nature of the operations based on the premise that the selling of furniture and the provision of credit are interdependent. The segmental report reflects revenue, operating profit and segment assets (inventory and net trade receivables) for each brand.
BOARD OF DIRECTORS
Alan Smart retired as the chief executive officer on 30 September 2009 after 40 years’ service and 18 years at the helm of the group. The board expresses its appreciation to Alan for his exceptional contribution. He will remain on the board in a non-executive capacity which will enable the group to retain his extensive knowledge and experience of the credit retail sector.
Johan Enslin was appointed chief executive officer and as an executive director with effect from 1 October 2009.
The board composition was further strengthened with the appointments of Zarina Bassa and Sizakele Marutlulle as independent non-executive directors with effect from 1 October 2009.
PROSPECTS
While lower interest rates, stabilising food prices and higher real wage increases are positive for consumers, short time and retrenchments remain a risk for sustained improvement. The festive season trading period will be strongly supported by merchandise and promotional campaigns to maximise sales opportunities.
DIVIDEND DECLARATION
Notice is hereby given that an interim cash dividend of 144 cents per share in respect of the six months ended 30 September 2009 has been declared payable to holders of ordinary shares.
The following dates are applicable:
| Last date of trade “cum” dividend | Friday, 15 January 2010 |
| Date trading commences “ex” dividend |
Monday, 18 January 2010 |
| Record date | Friday, 22 January 2010 |
| Date of payment | Monday, 25 January 2010 |
Share certificates may not be dematerialised or rematerialised between Monday, 18 January 2010 and Friday, 22 January 2010.
For and on behalf of the board
| David Nurek | Johan Enslin |
| Chairman | Chief Executive Officer |
| Cape Town | |
| 9 November 2009 |
CORPORATE INFORMATION
Executive directors: Johan Enslin (Chief Executive Officer), LA Davies (Chief Financial Officer)
Non-executive directors: DM Nurek (Chairman) (Ind.), H Saven (Ind.), BJ van der Ross (Ind.), Professor F Abrahams (Ind.), Z Bassa (Ind.), S Marutlulle (Ind.), AJ Smart
Company secretary: MG 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