Lewis revenue up 5.9%

Revenue was up 5.9% to R3.807 billion, while operating profit declined 9.7% to R840.3 million.

The group said its business model continued to demonstrate its resilience as the group generated strong cash flows and maintained its dividend in the most demanding trading conditions experienced in the credit retail sector for many years.

The financial stress on consumers has resulted in an increase in debtor costs which contributed to HEPS declining 7.6% for the year, it said.

While Lewis customers have limited exposure to the prevailing high interest rate environment, steep increases in food and transport costs have continued to limit discretionary spending in this target market, it added.

The group's merchandise sales grew by 1.6% to R1.920 billion.

Finance charges earned were R31.7 million higher due to increasing numbers of customers selecting longer-term payment options.

Insurance revenue no longer reflects the premium earn-out of insurance written in the buoyant trading period of 2007 and includes additional reserves required to cover the higher proportion of longer-term business.

Ancillary services rose by R131.6 million, benefiting from the monthly service and initiation fees on accounts opened post the introduction of the National Credit Act.

The group's merchandise strategy of sourcing quality, innovative products which offer real value for money has continued to be a competitive advantage. This strategy has resulted in a 4% increase in sales in the higher margin furniture product category which has grown to 53% of group sales. In the sub-categories, appliances (27% of sales) increased by 3.8% while the more discretionary sound and vision merchandise (20% of sales) slowed by 7%.

The Lewis division, which accounts for 82% of merchandise sales, increased revenue by 5.7%. Best Electric was boosted by the introduction of furniture ranges into stores and lifted revenue by 9.1%. The chain has been rebranded as Best Home and Electric to reflect this change in the merchandise offering.

Revenue in Lifestyle Living, which targets higher income earners, was the same as last year.

Lewis successfully piloted a small store concept which has enabled the chain to gain access to high traffic areas at lower rentals. This store concept offers customers key merchandise lines, with the balance of the range available in the electronic catalogues and display screens in-store. This store format will form part of the Lewis expansion plans, it said.

Credit risk management strategies have been consistently applied through the group's centralised credit granting process utilising the group's specifically designed application and behavioural scorecards. The decline rate of credit applications has increased from 22.5% in 2008 to 25.4%, evidence of the higher levels of consumer indebtedness.

The increase in debtors costs from 6.5% to 10.0% of net debtors reflects the impact of the tougher collections environment.

The doubtful debt provision for the year was 15.7% of net debtors from 13.5% in 2008. This is calculated applying the net present value of the expected cash flows from slow-paying and non-performing accounts.

A detailed debtors payment analysis is shown below. The movement in the doubtful debt provision was well contained in the second half of the year, increasing by R45 million relative to an increase of R92 million in the first six months.

In the current environment the group's store-based collections model is proving effective as the direct relationship through monthly contact with customers provides an early indication of payment difficulties, it said.

As previously advised, Alan Smart, the CEO, will be retiring in September 2009. Johan Enslin, the CEO designate, will succeed him with effect from October.

Looking ahead the group said continued government and private sector infrastructure spend bodes well for ongoing job creation and retention in several sectors of the Lewis target market. However, rising retrenchments and unemployment remains one of the major risks facing the South African economy in the year ahead.

The group's national store base and diverse customer profile should limit the impact of unemployment affecting a particular sector of the economy or geographic region.

While the group will continue to focus on organic growth from existing stores, a cautious expansion programme will see 20 to 25 stores opened across the three trading brands. Lewis is also well positioned to benefit from increased customer traffic as a result of store and brand consolidation among competitors.

Trading conditions are expected to remain difficult in the year ahead. However, the improving trend in revenue growth and the slowing bad debt provision in recent months provide encouraging signs. Sales for the first six weeks of the new financial year continued to improve on the positive trend of recent months, it said.

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