Financial Review

Income statement

Total sales growth for the year to June 2009 was 10,7% and comparable sales growth was 8,2%. Group sales inflation for the year was 11,4%. During the year sales inflation increased due to high food inflation, now declining, and we saw inflation returning to the general merchandise category caused by imported Chinese product inflation and, for a period, the weaker South African currency.

During the year five stores were closed or sold, seven opened and 12 stores acquired, resulting in a total of 256 stores at the end of June 2009. Net trading space increased by 3,8% to 1 087 459m² (the Group’s opening trading space figure was adjusted upwards to 1 047 539m² following accurate re-measurement in one Division).

Gross profit of 18,0% was lower than the prior year’s 18,4%, a combination of steady gross margins in Makro and Masscash and lower gross margins in Massdiscounters and Massbuild.

Effective expense management resulted in total expenses increasing by only 8,2% and improving as a percentage of sales over the prior year.

Included in operating profit are net realised and unrealised foreign exchange losses of R78,4 million (2008: R62,5 million gain). The year end translation of Massdiscounters’ African balance sheets accounted for a loss of R106,6 million (2008: R63,0 million gain) and there was a net gain from other non-African monetary balances of R28,2 million (2008: R0,5 million loss). In the fourth quarter of the year, the basket of African currencies to which Massdiscounters is exposed weakened by more than 20%.

Net interest paid decreased as commercial interest rates softened and better working capital levels were achieved in the second half of the year.

The non-cash IFRS 2 Share-based Payments charge associated with the Group’s Staff Empowerment scheme and the Black Scarce Skills Trust was R66,9 million (2008: R67,1 million). Including the preference dividend paid to participants however, the total cost of the scheme was R104,9 million (2008: R89,6 million) and has increased because of the greater proportion of the ordinary dividend now accruing to scheme participants (see note 5).

The Group’s effective tax rate is high at 32,6% (2008: 32,7%) because of the non-tax-deductible IFRS 2 charges of R133,5 million (2008: R109,1 million). Excluding these charges results in an adjusted tax rate of 30,5% (2008: 31,1%), which includes the effect of STC of 3,8% (2008: 3,4%). STC is higher due to the prior year’s final dividend having been bolstered by the 53rd week’s earnings.

The minority interests comprise mainly CBW store managers’ holdings in certain Masscash stores and Cambridge Food, 51% of which was acquired with effect from 1 December 2008.

Headline earnings declined by 4,3% (53-weeks: 8,5% decline) while headline EPS declined by 4,6% (53-weeks: 8,7% decline). Excluding the net realised and unrealised foreign exchange movements from both years however, headline earnings grew by 3,8% (53-weeks: 0,9% decline) while headline EPS grew by 3,6% (53-weeks: 1,1% decline).

Balance sheet

Group inventory levels were well controlled in response to the trading environment and at June 2009 are only slightly higher than 2008.

At year end, the non-current interest-bearing debt of R149,6 million (2008: R267,7 million) represents gearing of 4,9% (2008: 9,8%). A more representative figure however, being average interest-bearing debt for the year, was R360,1 million (2008: R501,7 million) which suggests gearing of 12,4% (2008: 20,4%).

The annual return on equity of 41,7% at June 2009 is lower than the 2008 figure of 50,7%.

Cash flow

Cash flow from operations grew a pleasing 6,0% as working capital management improved. Total capital expenditure of R685,6 million (2008: R572,7 million) comprises R345,5 million on replacement and R340,1 million on expansionary expenditure. Expenditure on acquisitions of R198,5 million includes Cambridge Food with six stores, three Buildrite stores, and two Retail Cash and Carry businesses with three stores.