Financial Review

Statement of comprehensive income

Total sales growth for the six months to December 2009 was 6,1% while comparable sales declined by 0,5%. If one excludes the sales of our African businesses, which have been severely affected by the significant strengthening of the Rand, then total Group sales grew by 7,0% and comparable sales by 1,2%.

During the period inflation declined in all categories and Group sales inflation for the financial year-to-date was 1,6%.

During the six-month period four stores were closed or sold, 15 opened, and 25 stores acquired, resulting in a total of 290 stores at the end of December 2009. Net trading space increased by 7,3% to a total of 1 164 201m².

Gross profit of 17,8% was lower than the prior period’s 18,1%. In Masscash gross margins were lower due mainly to deflation in 21% of this division’s sales categories by value. Deflation in Food also adversely affected Makro. In addition, gross margins were lower in Massdiscounters and Makro due to the increased competitive intensity in General Merchandise categories.

Due to acquisitions, total expenses increased by 8,9%. Comparable expenses increased by only 2,5%.

Included in operating profit are net realised and unrealised foreign exchange losses of R68,7 million (2008: R52,7 million gain). The translation of Massdiscounters’ African balance sheets accounted for R7,0 million of this amount (2008: R21,4 million gain), there was a net loss from other foreign monetary balances of R24,4 million (2008: R45,0 million gain) and the balance came from mostly realised losses on landed forward foreign exchange contracts of R37,3 million (2008: R13,7 million loss). These current period translation losses arose as a result of the strengthening of the Rand from June 2009.

Net interest paid decreased as commercial interest rates softened, although the Group’s average net borrowings were approximately R81,0 million higher than the comparable period.

The non-cash IFRS 2 Share-based Payments charge associated with the Group’s Staff Empowerment scheme and the Black Scarce Skills Trust was R39,1 million (2008: R30,6 million). Including the preference dividend paid to participants however, the total cost of the scheme was R52,6 million (2008: R42,4 million) and has increased because of the greater proportion of the ordinary dividend now accruing to scheme participants (see Note 6).

The Group’s effective tax rate is 31,9% (2008: 29,7%). This is higher because of the effect of STC of 2,8% (2008: 2,1%). The non-deductible IFRS 2 charges increase the Group effective tax rate by 2,2% (2008: 1,5%). The minority interests comprise CBW store managers’ holdings in certain Masscash stores and certain acquisitions, including Cambridge Food acquired with effect from December 2008.

Headline earnings declined by 19,5% while headline EPS declined by 19,9%. Excluding the net realised and unrealised foreign exchange movements from both years however, headline earnings declined by 9,8% while headline EPS declined by 10,3%.

Statement of financial position

In response to the trading environment, Group inventory levels were well controlled and, despite acquisitions and new stores, at December 2009 are only 8,4% higher than December 2008. Historical days in stock at December 2009 are 55,2 (2008: 54,2 days).

Acquisitions continue to increase the amount of goodwill. During the period seven businesses with 25 stores were acquired for a total cash consideration of R155,4 million. The net cash impact after accounting for take-on bank balances was R146,0 million.

Average interest-bearing debt for the period was R294,4 million (2008: R213,4 million), representing gearing of 8,3%.

Due to the decline in Group profitability and the recent capital investment in acquisitions, the annual rolling return on equity of 30,6% at December 2009 is lower than the equivalent 2008 figure of 49,1%.

Statement of cash flows

Cash flow from operations grew 2,2% due to an improvement of net working capital levels. Total capital expenditure of R291,1 million (2008: R338,8 million) comprises R137,6 million on replacement and R153,5 million on expansionary expenditure.