Lewis Group continues recovery

Cape Town – Lewis Group [JSE:LEW] continued its recovery in the financial year to March 2018 with stronger merchandise sales, tight expense control and lower debtor costs, supported by a strong cash position and ungeared balance sheet, it said in a statement on Wednesday.
Merchandise sales increased by 9.9%, lifted by the inclusion of the recently acquired United Furniture Outlets (UFO) chain for the last two months of the year. Excluding the sales from UFO, merchandise sales showed growth of 7.3%.
CEO Johan Enslin said the performance for the year was negatively impacted by a decline in other revenue.

“The reduction in other revenue is largely due to declining annuity streams resulting from lower credit sales in prior years, compounded by the implementation of the prescribed maximum credit life insurance rates in August 2017 which capped credit life premium income,” said Enslin.

Headline earnings declined by 26.5% to R261m with headline earnings per share 24.3% lower at 302.6 cents. The total dividend has been maintained at 200c per share. Enslin said the group remains highly cash generative.

“Cash on hand totalled R580m at year end after paying for UFO and undertaking share repurchases. Over the past 18 months borrowings of R1.5bn have been repaid, resulting in the balance sheet being ungeared at year end,” he said.
Stores outside South Africa contributed 22.5% of total merchandise sales. Credit sales increased by 10.7% and cash sales by 8.2%, with group credit sales accounting for 65.7% of total sales.
The gross profit margin at 41.4% (compared to 42.4% in 2017) remains at the upper end of management’s target range of 38% to 42%.
Debtor collection rates improved to 74.9% from 73.8% last year, with debtor costs declining by 10.1%. The level of satisfactory paid customers at 68.4% is consistent with last year.

Store network

The group’s store network totalled 773 at year end, following the acquisition of 31 UFO stores and the net closure of 19 stores across the Lewis and Beares brands.
“The integration of UFO has been successfully completed. UFO allows the business to access higher income customers while increasing our cash-to-credit sales mix. We believe UFO is scalable with the potential to expand across South Africa and into neighbouring countries, and 5 to 10 new stores are planned for the year ahead,” said Enslin.
Earlier this month the group entered the home shopping market with the launch of Inspire, an omni-channel retail offering to be marketed through outbound call centres, agents and online shopping.

“Our strategy is to attract customers in the LSM 4 to 8 categories through our extensive product offering to extend the group’s reach in urban areas,” he said.  
The group welcomed the outcome of two long-standing legal cases after year end. In the first case the court ruled in favour of Lewis regarding an appeal by the National Credit Regulator (NCR) in relation to club fees and extended warranties. A settlement was reached in the second case between the NCR and Lewis Stores in relation to loss of employment and disability insurance.
On the outlook for the months ahead, Enslin said the current sales momentum is expected to continue.
“The favourable outcome of the clothing industry’s court challenge of the affordability assessment regulations will benefit credit sales. Prospective self-employed and informally employed customers are no longer required to supply bank statements or payslips,” he said. “The group will continue to extend credit in a responsible manner.”
The group plans to open a net 15 stores across all its brands in the new financial year, while continuing to close marginal stores.

By late afternoon the share price was down 1.57% at R36.96.

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