Chairman’s report

Against this challenging trading environment it is pleasing to report that the group delivered double digit revenue and merchandise sales growth for the second half, maintained its gross margin in an environment of unsustainable discounting by competitors, and continued to manage expenses tightly.

Introduction

The 2015 financial year was a tale of two halves for the Lewis Group, with a significantly stronger performance in the second half reflecting a turnaround in the group's fortunes.

The improved performance also reflected the acquisition of Beares, one of the most recognisable furniture brands in the country with a history dating back to 1930. The Beares chain offers exciting expansion opportunities and will enable the group to create its presence in the higher income target market.

Weak consumer economy

Negative political and socio-economic issues, load shedding and rising living costs have weighed on consumer confidence and created general uncertainty in the country in recent months.

Consumer sentiment as measured by the Consumer Confidence Index deteriorated notably in the first quarter of 2015 and remains in negative territory, well below the average level of the past 20 years.

High levels of indebtedness have continued to impact consumers in the lower to middle income market, which is the Lewis Group's target market. The average ratio of household debt to disposable income of Lewis customers has increased from 47% in 2013 to 51% in 2014 and 52% in 2015.

The labour market stabilised following widespread industrial action in 2014, with the protracted platinum mining strike having a significant impact on Lewis customers.

South Africa's unemployment levels reached 26.4% in the first quarter of 2015, the highest level since 2005. It also appears that prospects for job creation are limited given the muted GDP growth forecasts for the country.


Improving financial performance

Against this challenging trading environment it is pleasing to report that the group delivered double digit revenue and merchandise sales growth for the second half, maintained its gross margin in an environment of unsustainable discounting by competitors, and continued to manage expenses tightly.

At the same time the group continued to invest in future growth by expanding the store footprint and prudently investing in the debtors' book.

While debtor cost growth has slowed with stronger collection rates, higher debtor costs and increased expenses relating to the Beares acquisition resulted in the operating profit for the year declining by 1.2% to R1 140 million.

Headline earnings were 4.2% lower at R784 million with headline earnings per share 38 cents down at 883 cents.

However, despite the slower earnings growth and the continued headwinds in the trading environment, the directors have shown their confidence in the group's prospects and maintained the total dividend at 517 cents per share, equating to a payout ratio of 60.4%.

The trading and financial performance is covered in the chief executive officer's report and in the chief financial officer's report.

Regulatory environment

The proposed capping of credit life insurance discussed in last year's integrated report has not been finalised. The industry response to the technical report on the consumer credit insurance market submitted in September 2014 is still awaiting regulatory feedback.

Lewis Group remains committed to engaging with all industry regulators to resolve this long outstanding matter and end the current uncertainty in the credit market.

The National Credit Regulator published affordability assessment regulations for credit providers in March 2015. These regulations are aimed at formalising responsible credit granting and ensuring customers have the ability to pay the necessary credit instalments.

Regrettably no implementation period was allowed for these regulations. The credit industry has made submissions to the regulator requesting reasonable time to comply with the regulations to reconfigure systems and train staff in order to comply with the administrative requirements of the new regulations.

Lewis has been conducting thorough affordability assessments for several years and management does not expect the new regulations to have any material financial impact on the group.

Corporate governance

The group's governance processes are reviewed on an ongoing basis to ensure compliance with legislation and regulation, and to reflect best practice. The board confirms that the group has in all material respects applied the King lll principles during the year.

Two of our non-executive directors, Zarina Bassa and Sizakele Marutlulle, resigned from the board and we thank them for their contribution over several years.

The independence of the non-executive directors is reviewed annually and all five non-executive directors, including the chairman, are classified as independent in terms of King lll and the JSE Listings Requirements. The annual board evaluation indicated that the board, committees and governance processes are functioning effectively.

Our governance standards are independently evaluated each year as part of the assessment for inclusion in the JSE Socially Responsible Investment (SRI) Index, and the group qualified for the Index for the fourth consecutive year.

Prospects

The retail trading and credit environment is not expected to show any marked improvement in the short to medium term as the consumer economy remains weak and unemployment remains high. In this environment the group will focus on driving quality credit sales, containing costs and further improving collections rates.

The group continues to invest for future growth and plans to open 30 stores in the year ahead, with 20 across the Lewis brand and 10 new outlets for Beares. Capital expenditure of R100 million has been budgeted for 2016.

We believe Beares is a scalable brand which offers sustainable organic growth prospects. Management will continue to refine the merchandise offering for the higher LSM market to maximise the potential growth of the brand.

Through its decentralised customer focused business model the group is well positioned for further market share gains within the shifting competitive landscape.

Appreciation

Our CEO Johan Enslin and his executive team are to be congratulated on the group's competitive performance in the challenging consumer and regulatory environment, and for the successful acquisition and integration of the Beares chain.

Thank you to our management and staff of over 7 800 across South Africa and in the neighbouring countries for their commitment to meeting the needs of our customers.

My board colleagues provide valuable guidance and governance oversight and I thank them for their ongoing support.

Thank you to our external stakeholders, including our shareholders, customers, suppliers and manufacturers, industry regulators and business partners, for their continued support.

David Nurek
Independent non-executive chairman