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LEW - Lewis Group Limited - Unaudited Interim Results for the six months ended

Release Date: 10/11/2008 09:00
Code(s): LEW
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LEW - Lewis Group Limited - Unaudited Interim Results for the six months ended 30 September 2008 LEWIS GROUP LIMITED (Incorporated in the Republic of South Africa) Registration number: 2004/009817/06 Share code: LEW ISIN: ZAE000058236 Unaudited Interim Results for the six months ended 30 September 2008 * Revenue increased by 5.0% * Headline earnings per share marginally lower by 0.9% * Cash generated from operations up by 27.8% * Interim dividend maintained at 144 cents per share 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 R 1 803.4 million, with merchandise sales declining by 0.7% to R 890.3 million. Finance charges earned were affected by the fact that the National Credit Act excludes the levying of finance charges on insurance premiums. Insurance revenue reflects the earn out of premiums written in the buoyant trading period of 2007. The increase in ancillary services 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: - retail 12.1% - risk services (insurance) 36.3% - financial services 36.9% 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. DIVIDEND DECLARATION Notice is hereby given that an interim cash dividend of 144 cents in respect of the six months ended 30 September 2008 has been declared payable to holders of ordinary shares. The following dates are applicable: Last date of trade "cum" dividend Friday 16 January 2009 Date trading commences "ex" dividend Monday 19 January 2009 Record date Friday 23 January 2009 Date of payment Monday 26 January 2009 Share certificates may not be dematerialised or rematerialised between Monday 19 January 2009 and Friday 23 January 2009, both days inclusive. For and on behalf of the board David Nurek Alan Smart Chairman Chief Executive Officer Cape Town 10 November 2008 INCOME STATEMENT 6 months ended 30 Sept 2008 Rm
Notes Unaudited % Change Revenue 1 803.4 5.0% Merchandise sales 890.3 Finance charges earned 394.8 Insurance premiums earned 295.7 Ancillary services 222.6 Cost of merchandise sales (595.8) Operating costs (796.6) Employment costs (268.1) Administration and IT (84.9) Debtor costs 2 (142.6) Marketing (67.2) Occupancy costs (71.8) Transport and travel (71.1) Depreciation (27.5) Other operating costs (63.4) Operating profit 411.0 (2.7%) Investment income 32.4 Profit before finance costs 443.4 Net finance costs 3 (38.4) Profit before taxation 405.0 Taxation (131.7) Net profit attributable to ordinary shareholders 273.3 (4.2%) Reconciliation of headline earnings Net profit attributable to ordinary shareholders 273.3 Adjusted for Surplus on disposal of property, plant and equipment (2.0) Surplus on disposal of available- for-sale assets (1.2) Taxation 0.7 Headline earnings 270.8 (2.5%) Number of ordinary shares (000) In issue 98 058 Weighted average 88 595 Fully diluted weighted average 88 880 Earnings per share (cents) 308.5 Headline earnings per share (cents) 305.7 (0.9%) Fully diluted earnings per share (cents) 307.5 Fully diluted headline earnings per share (cents) 304.7 (0.8%) 6 months 12 months
ended ended 30 Sept 2007 31 Mar 2008 Rm Rm Unaudited Audited
Revenue 1 717.6 3 596.4 Merchandise sales 896.8 1 889.7 Finance charges earned 397.5 794.9 Insurance premiums earned 249.7 564.2 Ancillary services 173.6 347.6 Cost of merchandise sales (590.6) (1 272.1) Operating costs (704.4) (1 393.9) Employment costs (265.0) (504.2) Administration and IT (83.7) (167.0) Debtor costs (82.7) (190.4) Marketing (62.0) (107.1) Occupancy costs (65.0) (135.1) Transport and travel (60.7) (127.3) Depreciation (25.4) (40.9) Other operating costs (59.9) (121.9) Operating profit 422.6 930.4 Investment income 29.9 71.7 Profit before finance costs 452.5 1 002.1 Net finance costs (25.2) (56.8) Profit before taxation 427.3 945.3 Taxation (142.1) (303.0) Net profit attributable to ordinary shareholders 285.2 642.3 Reconciliation of headline earnings Net profit attributable to ordinary shareholders 285.2 642.3 Adjusted for Surplus on disposal of property, plant and equipment (2.4) (4.5) Surplus on disposal of available- for-sale assets (6.7) (22.1) Taxation 1.7 2.2 Headline earnings 277.8 617.9 Number of ordinary shares (000) In issue 99 158 99 158 Weighted average 90 056 89 583 Fully diluted weighted average 90 488 89 803 Earnings per share (cents) 316.7 717.0 Headline earnings per share (cents) 308.5 689.8 Fully diluted earnings per share (cents) 315.2 715.2 Fully diluted headline earnings per share (cents) 307.0 688.1 BALANCE SHEET 30 Sept 2008 30 Sept 2007 31 Mar 2008 Rm Rm Rm
Notes Unaudited Unaudited Audited ASSETS Non-current assets Property, plant and equipment 210.7 183.6 200.6 Investments - insurance business 529.1 492.8 505.4 Deferred taxation - 68.4 - 739.8 744.8 706.0 Current assets Investments - insurance business 178.0 187.1 159.5 Inventories 269.2 310.6 230.4 Trade and other receivables 4 2 752.0 2 327.9 2 615.6 Taxation 11.2 26.1 29.6 Cash on hand and deposits 98.8 57.8 66.8 3 309.2 2 909.5 3 101.9 Total assets 4 049.0 3 654.3 3 807.9 EQUITY AND LIABILITIES Capital and reserves Shareholders` equity and reserves 2 787.9 2 511.2 2 730.0 Non-current liabilities Interest-bearing borrowings 100.0 - - Deferred taxation 21.1 22.3 14.4 Retirement benefits 60.5 69.3 57.7 181.6 91.6 72.1
Current liabilities Trade and other payables 5 415.0 357.8 302.4 Overdrafts and short-term interest-bearing borrowings 664.5 693.7 703.4 1 079.5 1 051.5 1 005.8
Total equity and liabilities 4 049.0 3 654.3 3 807.9 STATEMENT OF CHANGES IN EQUITY 6 months 6 months 12 months ended ended ended
30 Sept 2008 30 Sept 2007 31 Mar 2008 Rm Rm Rm Unaudited Unaudited Audited Share capital and premium 97.8 149.0 149.1 Opening balance 149.1 311.4 311.4 Cost of own shares acquired (51.3) (162.4) (162.4) Share awards to employees - - 0.1 Other reserves 123.4 151.7 128.4 Opening balance 128.4 156.5 156.5 Fair value adjustments of available-for-sale investments,net of tax (11.7) (3.5) (27.5) Disposal of available-for-sale investments recognised (1.0) (6.7) (21.3) Share-based payment 4.6 3.1 6.7 Transfer of share-based payment reserve to retained income on vesting - - (0.9) Transfer of contingency reserve from retained earnings 2.4 3.3 9.0 Foreign currency translation reserve 0.7 (1.0) 5.9 Retained earnings 2 566.7 2 210.5 2 452.5 Opening balance 2 452.5 2 059.3 2 059.3 Net profit attributable to shareholders 273.3 285.2 642.3 Profit on sale of own shares 1.1 3.4 21.8 Transfer of share-based payment reserve on vesting - - 0.9 Cost of share awards to employees - - (0.1) Transfer to contingency reserve (2.4) (3.3) (9.0) Distribution to shareholders (157.8) (134.1) (262.7) Balance at end of the period 2 787.9 2 511.2 2 730.0 ABRIDGED CASH FLOW STATEMENT 6 months 6 months 12 months ended ended ended
30 Sept 2008 30 Sept 2007 31 Mar 2008 Rm Rm Rm Notes Unaudited Unaudited Audited Cash generated from operations 6 382.0 299.0 556.2 Dividends and interest received 35.4 25.8 61.0 Finance costs (42.6) (27.8) (68.2) Taxation paid (105.4) (195.4) (290.4) Cash retained from Operating activities 269.4 101.6 258.6 Net cash outflow from investing activities (90.5) (49.8) (97.3) Net cash outflow from financing activities 7 (108.0) (294.1) (404.3) Net increase/(decrease) in cash and cash equivalents 70.9 (242.3) (243.0) Cash and cash equivalents at the beginning of the period (636.6) (393.6) (393.6) Cash and cash equivalents at the end of the period (565.7) (635.9) (636.6) SEGMENTAL REPORT Risk Financial Retail services services Total Rm Rm Rm Rm
Primary Segments Unaudited Unaudited Unaudited Unaudited For 6 months ended 30 September 2008: Revenue 1 019.7 295.7 488.0 1 803.4 Operating profit 123.8 107.2 180.0 411.0 Operating margin % 12.1% 36.3% 36.9% 22.8% Total assets 456.0 729.6 2 863.4 4 049.0 Total liabilities 235.4 166.1 859.6 1 261.1 For 6 months ended 30 September 2007: Revenue 1 017.6 249.7 450.3 1 717.6 Operating profit 140.4 77.3 204.9 422.6 Operating margin % 13.8% 31.0% 45.5% 24.6% Total assets 483.2 698.2 2 472.9 3 654.3 Total liabilities 220.6 152.1 770.4 1 143.1 South Africa BLNS* Total
Rm Rm Rm Geographical Unaudited Unaudited Unaudited For 6 months ended 30 September 2008: Revenue 1 589.9 213.5 1 803.4 For 6 months ended 30 September 2007: Revenue 1 534.5 183.1 1 717.6 *Botswana, Lesotho, Namibia and Swaziland ABRIDGED NOTES TO THE FINANCIAL STATEMENTS 1. Basis of accounting These consolidated financial statements are prepared in accordance with International Financial Reporting Standards, specifically IAS 34 Interim Financial Reporting, and the accounting policies applied are consistent with the prior year. 30 Sept 2008 30 Sept 2007 31 Mar 2008 Rm Rm Rm Unaudited Unaudited Audited
2. Debtor costs Bad debts, bad debt recoveries and repossession losses 50.7 41.6 172.1 Movement in doubtful debts provision 91.9 41.1 18.3 142.6 82.7 190.4 3. Net finance costs Interest paid 45.2 23.4 68.2 Interest earned (4.2) (2.6) (6.5) Forward exchange contracts (2.6) 4.4 (4.9) 38.4 25.2 56.8
4. Trade and other receivables Instalment sale and loan receivables 3 738.1 3 368.7 3 539.8 Provision for unearned finance charges and initiation fees (74.6) (213.1) (119.0) Provision for unearned maintenance income (191.4) (186.8) (191.6) Provision for unearned insurance premiums (318.4) (245.0) (290.5) Net instalment sale and loan receivables 3 153.7 2 723.8 2 938.7 Provision for doubtful debts (487.7) (418.6) (395.8) 2 666.0 2 305.2 2 542.9 Other receivables 86.0 22.7 72.7 2 752.0 2 327.9 2 615.6
The credit terms of instalment sale and loan receivables range from 6 to 36 months (2007: 6 to 36 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. 5. Trade and other payables Trade payables 152.3 131.6 59.6 Accruals and other payables 119.7 110.9 107.3 Due to reinsurers 108.6 86.9 102.7 Insurance provisions 34.4 28.4 32.8 415.0 357.8 302.4 6. Cash generated from operations Operating profit 411.0 422.6 930.4 Adjusted for: Share-based payment 4.6 3.1 6.7 Depreciation 27.5 25.4 40.9 Surplus on disposal of property, plant and equipment (2.0) (2.4) (4.5) Movement in provision for doubtful debts 91.9 41.1 18.3 Movement in retirement benefits provision 2.8 1.7 (9.9) Movement in other provisions 3.4 9.1 14.0 539.2 500.6 995.9
Changes in working capital (157.2) (201.6) (439.7) Increase in inventories (39.0) (82.1) (1.9) Increase in trade and other receivables (227.6) (182.3) (440.3) Increase in trade and other payables 109.4 62.8 2.5 382.0 299.0 556.2 7. Net cash outflow from financing activities Purchase of own shares (51.3) (162.4) (162.4) Dividends paid (157.8) (134.1) (262.7) Proceeds on sale of own shares 1.1 3.4 21.8 Increase in long-term interest-bearing borrowings 100.0 - - Repayment of finance lease liability - (1.0) (1.0) (108.0) (294.1) (404.3) KEY RATIOS 6 months 6 months 12 months ended ended ended
30 Sept 2008 30 Sept 2007 31 Mar 2008 Operating efficiency ratios Merchandise gross profit % 33.1% 34.1% 32.7% Operating margin % 22.8% 24.6% 25.9% Number of stores 529 517 525 Number of employees (average) 6 420 6 654 6 696 Trading space (sqm) 221 284 217 215 220 236 Inventory turn 4.7 4.0 5.5 Current ratios 3.1 2.8 3.1 Credit ratios Cash and short-term credit sales % of total sales 34.2% 32.0% 33.1% Debtors costs as a % of the net debtors book 4.5% 3.0% 6.5% Doubtful debt provision as a % of net debtors book 15.5% 15.4% 13.5% Arrear instalments on satisfactory accounts as a percentage of net debtors 10.2% 10.7% 10.6% Arrear instalments on slow paying and non-performing accounts as a percentage of net debtors 21.7% 20.7% 19.3% Doubtful debt provision on non-performing accounts 70.4% 78.0% 69.6% Credit applications decline rate 24.5% 21.6% 22.5% Shareholder ratios Net asset value per share (cents) 3 175 2 834 3 058 Gearing ratio 23.9% 25.3% 23.3% Dividend cover 2.0 2.0 2.0 Return on average equity 19.8% 22.6% 24.4% Return on average capital employed 17.2% 19.6% 21.4% Return on average assets managed (after-tax) 15.4% 17.2% 18.9% Notes: 1. All ratios are based on figures at the end of the period unless otherwise disclosed. 2. The net asset value has been calculated using 87 819 000 shares (2007: 88 604 000). ACCOUNTS RECEIVABLE ANALYSIS The company applies a payment rating assessment to each customer individually, which categorises customers into 13 payment categories. This assessment is integral to the calculation of doubtful debts. The 13 payment categories has been summarised into four main groupings of customers. An analysis of the debtors book based on the payment ratings is set out below: Number of Customers Sept Sept Debtors` Payment Analysis 2008 2007 Satisfactory paid Customers fully up to date including those who have paid 70% or more of No 515 471 544 864 amounts due over the contract period % 72.5% 75.2% Slow payers Customers who have paid between 70% and 65% of amounts due over No 52 899 47 920 the contract period % 7.4% 6.6% Non-performing customers Customers who have paid between 65% and 55% of amounts due over No 48 683 45 545 the contract period % 6.9% 6.3% Non-performing customers Customers who have paid 55% or less of amounts due over the No 93 497 86 508 contract period % 13.2% 11.9% 710 550 724 837
Doubtful Debt Provision % Sept Sept Mar Debtors` Payment Analysis 2008 2007 2008 Satisfactory paid Customers fully up to date including those who have paid 70% or more of amounts due over the contract period 0% 0% 0% Slow payers Customers who have paid between 70% and 65% of amounts due over the contract period 18% 17% 17% Non-performing customers Customers who have paid between 65% and 55% of amounts due over the contract period 42% 46% 42% Non-performing customers Customers who have paid 55% or less of amounts due over the contract period 85% 95% 86% 15.5% 15.4% 13.5% 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: 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. These results are also available on our website: www.lewisgroup.co.za 10 November 2008 Sponsor: UBS South Africa (Pty) Ltd Date: 10/11/2008 09:00:01 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.

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