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LEW
LEW
LEW - Lewis Group Limited - Unaudited Interim Results for the six months ended
30 September 2007
LEWIS GROUP LIMITED
Registration number: 2004/009817/06
Share code: LEW
ISIN: ZAE000058236
Unaudited Interim Results
for the six months ended 30 September 2007
Highlights
- Revenue up 11.2%
- Operating profit up 14.6%
- Operating margin 24.6% (2006: 23.9%)
- Earnings per share up 13.1%
- Headline EPS up 11%
- Dividend per share up 24.1%
- Debtors book quality maintained
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:
Increased working capital requirements of R201 million.
Share repurchases of R162 million.
Dividends of R134 million.
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.
DECLARATION OF INTERIM DIVIDEND NO. 7
Notice is hereby given that an interim dividend of 144 cents per share in
respect of the six months ending 30 September 2007 has been declared payable to
holders of ordinary shares.
The following dates are applicable:
Last date of trade "cum" dividend Friday, 18 January 2008
Date trading commences "ex" dividend Monday, 21 January 2008
Record date Friday, 25 January 2008
Date of payment Monday, 28 January 2008
Share certificates may not be dematerialised or rematerialised between Monday,
21 January 2008 to Friday, 25 January 2008, both days inclusive.
For and on behalf of the Board
David Nurek Alan Smart
Chairman Chief Executive Officer
Cape Town
12 November 2007
INCOME STATEMENT
6 months
ended
30 Sept 2007
Rm %
Notes Unaudited Change
Revenue 1 717.6 11.2
Merchandise sales 896.8
Finance charges earned 397.5
Insurance premiums earned 249.7
Ancillary services 173.6
Cost of merchandise sales 2 (590.6)
Operating costs (704.4)
Employment costs (265.0)
Administration and IT (83.7)
Debtor costs 3 (82.7)
Marketing (62.0)
Occupancy costs (65.0)
Transport and travel (60.7)
Depreciation (25.4)
Other operating costs (59.9)
Operating profit 422.6 14.6
Investment income 29.9
Profit before finance costs 452.5 16.4
Net finance (costs)/income 4 (25.2)
Profit before taxation 427.3 8.9
Taxation (142.1)
Net profit attributable to
ordinary shareholders 285.2 9.4
Reconciliation of
headline earnings
Net profit attributable
to ordinary
shareholders 285.2
Adjusted for
Profit on disposal
of property,
plant and equipment (2.4)
Disposal of available-
for-sale assets (6.7)
Taxation effect 1.7
Headline earnings 277.8 7.3
Number of ordinary
shares (`000)
In issue 99 158
Weighted average 90 056
Fully diluted weighted
average 90 488
Earnings per share (cents) 316.7 13.1
Headline earnings per
share (cents) 308.5 11.0
Fully diluted earnings
per share (cents) 315.2
Fully diluted headline
earnings per share (cents) 307.0
6 months 12 months
ended ended
30 Sept 2006 31 Mar 2007
Rm Rm
Unaudited Audited
Revenue 1 545.1 3 323.5
Merchandise sales 834.4 1 808.8
Finance charges earned 369.0 776.7
Insurance premiums earned 212.8 464.7
Ancillary services 128.9 273.3
Cost of merchandise sales (548.2) (1 194.0)
Operating costs (628.1) (1 269.6)
Employment costs (238.5) (485.6)
Administration and IT (79.7) (162.3)
Debtor costs (70.7) (147.9)
Marketing (52.9) (106.9)
Occupancy costs (55.5) (116.7)
Transport and travel (54.8) (109.2)
Depreciation (23.0) (38.9)
Other operating costs (53.0) (102.1)
Operating profit 368.8 859.9
Investment income 20.1 42.7
Profit before finance costs 388.9 902.6
Net finance (costs)/income 3.3 (12.4)
Profit before taxation 392.2 890.2
Taxation (131.4) (291.9)
Net profit attributable to
ordinary shareholders 260.8 598.3
Reconciliation of
headline earnings
Net profit attributable
to ordinary
shareholders 260.8 598.3
Adjusted for
Profit on disposal
of property,
plant and equipment (2.4) (3.8)
Disposal of available-
for-sale
assets (0.3) (1.6)
Taxation effect 0.7 1.3
Headline earnings 258.8 594.2
Number of ordinary
shares (`000)
In issue 100 000 100 000
Weighted average 93 100 92 062
Fully diluted weighted
average 93 421 92 458
Earnings per share (cents) 280.1 649.9
Headline earnings per
share (cents) 278.0 645.4
Fully diluted earnings
per share (cents) 279.2 647.1
Fully diluted headline
earnings per share (cents) 277.0 642.7
BALANCE SHEET
30 Sept 2007
Rm
Notes Unaudited
ASSETS
Non-current assets
Property, plant and equipment 183.6
Investments-insurance business 492.8
Deferred taxation 68.4
744.8
Current assets
Investments-insurance business 187.1
Inventories 310.6
Trade and other receivables 5 2 327.9
Taxation 26.1
Cash on hand and deposits 57.8
2 909.5
Total assets 3 654.3
EQUITY AND LIABILITIES
Capital and reserves
Shareholders` equity and reserves 2 511.2
Non-current liabilities
Deferred taxation 22.3
Retirement benefits 69.3
91.6
Current liabilities
Trade and other payables 6 357.8
Taxation -
Overdrafts and short-term interest-bearing
borrowings 693.7
1 051.5
Total equity and liabilities 3 654.3
30 Sept 2006 31 Mar 2007
Rm Rm
Unaudited Audited
ASSETS
Non-current assets
Property, plant and equipment 174.4 182.9
Investments-insurance business 495.9 461.1
Deferred taxation 98.7 102.9
769.0 746.9
Current assets
Investments-insurance business 133.9 199.3
Inventories 243.8 230.3
Trade and other receivables 1 989.1 2 187.7
Taxation - -
Cash on hand and deposits 33.9 35.7
2 400.7 2 653.0
Total assets 3 169.7 3 399.9
EQUITY AND LIABILITIES
Capital and reserves
Shareholders` equity and reserves 2 247.4 2 527.2
Non-current liabilities
Deferred taxation 16.7 25.4
Retirement benefits 77.6 67.6
94.3 93.0
Current liabilities
Trade and other payables 334.8 287.7
Taxation 75.9 61.7
Overdrafts and short-term interest-bearing
borrowings 417.3 430.3
828.0 779.7
Total equity and liabilities 3 169.7 3 399.9
STATEMENT OF CHANGES IN EQUITY
Share
capital and Other
premium reserves
Rm Rm
Balance at 30 September 2006 311.5 111.7
Net profit attributable to ordinary shareholders - -
Fair value adjustments of
available-for-sale investments, net of tax - 43.4
Profit on disposal of available-for-sale
investments recognised, net of tax - (1.1)
Share-based payment - 2.6
Transfer of share-based payment
reserve to retained income on vesting - (1.7)
Treasury shares purchased (0.1) -
Profit on sale of own shares - -
Transfer to contingency reserve - 2.7
Foreign currency translation reserve movement - (1.1)
Dividends paid - -
Balance at 31 March 2007 311.4 156.5
Net profit attributable to ordinary shareholders - -
Fair value adjustments of available-
for-sale investments, net of tax - (3.5)
Profit on disposal of available-for-sale
investments recognised, net of tax - (6.7)
Share-based payment - 3.1
Treasury shares purchased (162.4) -
Profit on sale of own shares - -
Transfer to contingency reserve - 3.3
Foreign currency translation reserve movement - (1.0)
Dividends paid - -
Balance as at 30 September 2007 149.0 151.7
Distributable
reserves Total
Rm Rm
Balance at 30 September 2006 1 824.2 2 247.4
Net profit attributable to ordinary shareholders 337.5 337.5
Fair value adjustments of
available-for-sale investments, net of tax - 43.4
Profit on disposal of available-for-sale
investments recognised, net of tax - (1.1)
Share-based payment - 2.6
Transfer of share-based payment
reserve to retained income on vesting 1.7 -
Treasury shares purchased - (0.1)
Profit on sale of own shares 3.7 3.7
Transfer to contingency reserve (2.7) -
Foreign currency translation reserve movement - (1.1)
Dividends paid (105.1) (105.1)
Balance at 31 March 2007 2 059.3 2 527.2
Net profit attributable to ordinary shareholders 285.2 285.2
Fair value adjustments of available-
for-sale investments, net of tax - (3.5)
Profit on disposal of available-for-sale
investments recognised, net of tax - (6.7)
Share-based payment - 3.1
Treasury shares purchased - (162.4)
Profit on sale of own shares 3.4 3.4
Transfer to contingency reserve (3.3) -
Foreign currency translation reserve movement - (1.0)
Dividends paid (134.1) (134.1)
Balance as at 30 September 2007 2 210.5 2 511.2
ABRIDGED CASH FLOW STATEMENT
6 months
ended
30 Sept 2007
Rm
Notes Unaudited
Cash generated from operations 8 299.0
Dividends and interest received 25.8
Finance costs (27.8)
Taxation paid (195.4)
Cash retained from operating activities 101.6
Net cash outflow from investing activities (49.8)
Net cash outflow from financing activities 9 (294.1)
Net movement in cash and cash
equivalents (242.3)
Cash and cash equivalents at the
beginning of the period (393.6)
Cash and cash equivalents at the
end of the period (635.9)
6 months 12 months
ended ended
30 Sept 2006 31 Mar 2007
Rm Rm
Unaudited Audited
Cash generated from operations 326.6 591.5
Dividends and interest received 30.0 58.7
Finance costs (6.9) (30.0)
Taxation paid (224.3) (403.2)
Cash retained from operating activities 125.4 217.0
Net cash outflow from investing activities (65.3) (66.6)
Net cash outflow from financing activities (337.0) (439.3)
Net movement in cash and cash
equivalents (276.9) (288.9)
Cash and cash equivalents at the
beginning of the period (104.7) (104.7)
Cash and cash equivalents at the
end of the period (381.6) (393.6)
SEGMENTAL REPORT
6 months 6 months 12 months
ended ended ended
30 Sept 2007 30 Sept 2006 31 Mar 2007
Rm Rm Rm
Unaudited Unaudited Audited
BUSINESS GROUPING
Revenue
Merchandise 1 467.9 1 332.3 2 858.8
Insurance 249.7 212.8 464.7
Total 1 717.6 1 545.1 3 323.5
Operating profit
Merchandise 345.1 279.8 676.5
Insurance 77.5 89.0 183.4
Total 422.6 368.8 859.9
GEOGRAPHICAL
Revenue
South Africa 1 534.5 1 382.4 2 982.9
Botswana, Lesotho,
Namibia and Swaziland 183.1 162.7 340.6
Total 1 717.6 1 545.1 3 323.5
NOTES TO THE INTERIM FINANCIAL STATEMENTS
1. Basis of accounting
These consolidated interim financial statements are prepared in accordance with
International Financial Reporting Standards ("IFRS"), specifically IAS 34 on
interim financial reporting, and are consistent with those applied for the year
ended 31 March 2007 and the six months ended 30 September 2006.
30 Sept 2007 30 Sept 2006 31 Mar 2007
Rm Rm Rm
Unaudited Unaudited Audited
2. Cost of merchandise sales
Purchases 670.9 579.4 1 211.7
Movement in inventory (80.3) (31.2) (17.7)
Cost of merchandise sales 590.6 548.2 1 194.0
Merchandise gross profit 306.2 286.2 614.8
3. Debtor costs
Bad debts, bad debt recoveries
and repossession losses 41.6 42.6 138.4
Movement in doubtful debts
provision 41.1 28.1 9.5
82.7 70.7 147.9
4. Net finance costs/(income)
Interest paid:
- Bank and loans 23.4 6.9 26.9
- Other - - 2.7
23.4 6.9 29.6
Interest received:
- Bank (2.6) (1.3) (2.7)
- Other - - (1.3)
(2.6) (1.3) (4.0)
Forward exchange contracts 4.4 (8.9) (13.2)
25.2 (3.3) 12.4
5. Trade and other receivables
Instalment sale and loan
receivables 3 368.7 3 069.8 3 317.0
Provision for unearned
finance charges (213.1) (354.4) (389.3)
Provision for unearned
maintenance income (186.8) (174.4) (183.4)
Provision for unearned
insurance premiums (245.0) (192.5) (214.3)
Unearned insurance premiums (393.9) (311.8) (346.7)
Less: re-insurer`s share of
unearned premiums 148.9 119.3 132.4
Net instalment sale and loan
receivables 2 723.8 2 348.5 2 530.0
Provision for doubtful debts (418.6) (396.1) (377.5)
2 305.2 1 952.4 2 152.5
Other receivables 22.7 36.7 35.2
2 327.9 1 989.1 2 187.7
The credit terms of instalment sale and loan receivables range from 6 to 36
months ( 2006: 6 to 24 months). Amounts due from instalment sale and loan
receivables after one year are reflected as current, as they form part of the
normal operating cycle.
6. Trade and other payables
Trade payables 131.6 129.2 91.6
Accruals and other payables 110.9 109.6 94.0
Due to reinsurers 86.9 71.4 76.1
Insurance provisions 28.4 24.6 26.0
357.8 334.8 287.7
7. Material capital commitments
There were no material capital commitments contracted for or authorised and
contracted for at the end of the period under review.
8. Cash generated from operations
Operating profit 422.6 368.8 859.9
Adjusted for:
Depreciation and amortisation 25.4 23.0 38.9
Share-based payment 3.1 1.4 4.0
Surplus on disposal of
property, plant and
equipment (2.4) (2.4) (3.8)
Movement in provision for
doubtful debts 41.1 28.1 9.5
Movement in retirement
benefits provision 1.7 1.8 (8.2)
Movement in other provisions 9.1 5.1 11.1
Changes in working capital: (201.6) (99.2) (319.9)
Increase in inventory (82.1) (31.8) (20.1)
Increase in trade and other
receivables (182.3) (114.2) (295.3)
Increase in trade and other
payables 62.8 46.8 (4.5)
299.0 326.6 591.5
9. Net cash outflow from
financing activities
Purchase of treasury shares (162.4) (213.4) (213.5)
Dividends paid (134.1) (126.7) (231.8)
Other 2.4 3.1 6.0
(294.1) (337.0) (439.3)
KEY RATIOS
6 months 6 months 12 months
ended ended ended
30 Sept 2007 30 Sept 2006 31 Mar 2007
Returns
Return on average equity 22.6% 23.0% 24.8%
Return on average capital
employed 19.6% 20.2% 22.5%
Margins
Merchandise gross profit % 34.1% 34.3% 34.0%
Operating margin % 24.6% 23.9% 25.9%
Productivity ratios
Number of stores at period-end 517 493 508
Revenue per store (average)
(R`000s) 3 348 3 140 6 687
Operating profit per store
(average) (R`000s) 824 750 1 730
Number of employees (average) 6 654 6 126 6 310
Revenue per employee
(average) (R`000s) 258 252 527
Operating profit per employee
(average) (R`000s) 64 60 136
Trading space (sqm) 217 215 211 362 215 076
Revenue per sqm (R) 7 908 7 310 15 453
Operating profit per sqm (R) 1 946 1 745 3 998
Stock turn (annualised) 4.0 4.5 5.2
Credit ratios
Cash and short-term credit
sales % of total sales 32.0% 31.5% 30.7%
Debtor costs as a % of the
net instalment and
loan receivables 3.0% 3.0% 5.8%
Doubtful debts provision as a
% of net instalment and loan
receivables 15.4% 16.9% 14.9%
Credit applications decline rate 21.6% 20.7% 20.1%
Solvency and liquidity
Dividend cover 2.00 2.25 2.25
Gearing ratio 25.3% 17.1% 15.6%
Current ratios 2.8 2.9 3.4
Net asset value per share
(cents) 2 834 2 470 2 774
Notes:
1.All ratios are based on figures at the end of the period unless otherwise
disclosed.
2.Debtors costs and doubtful debt provision are calculated on the net
instalment and loan receivables as a consequence of the introduction of the
National Credit Act. Comparatives have been restated on the new basis.
3.Revenue and operating profit per store are calculated on the average number
of stores in the period. Accordingly, comparatives have been restated.
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
These results are also available on our website: www.lewisgroup.co.za
Date: 12/11/2007 09:00:09 Produced by the JSE SENS Department.
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