Lewis (LEW) – Same lounge suite, different price

We were rather perplexed as to how LEW was able to expand its GP margins from 38% to 40.5% within a 6 month period. While management attributed most of it to better sourcing, we find that a large product range in its current catalogue is the same as a year ago, but on average 11.7% more expensive.

Its non-SA operations are performing better than its SA operations and we think the recent investments into non-SA stores could provide a much needed 5.2% boost to LEW’s profits.

We look at the negative impact of the drought on rural provinces where LEW has a high store base, and believe LEW can further rationalize its rural store footprint. We estimate a 15% reduction in rural stores could reduce store-related expenses by 8.6%.