Financial Review

Statement of comprehensive income
Total sales growth for the year to June 2010 was 10.0% with comparable sales growth of 2.6%. Excluding sales from our African businesses, total Group sales grew by 11.4% and comparable sales by 4.5%.

Selling price inflation declined significantly in all categories and the Group recorded deflation of 0.4% for the financial year.

During the year, six stores were closed or sold, 18 opened, and 20 stores acquired, resulting in a total of 288 stores at the end of June 2010. Net trading space increased by 8.5% to a total of 1,179,466m².

The Group’s gross margin of 18.1% was slightly higher than the prior year, despite gross margins declining in all divisions apart from Massbuild. Declining inflation and, eventually, deflation in Food adversely affected gross margins in Makro and Masscash. Gross margin was lower in Massdiscounters due mainly to lower reported Rand profits from Game Africa.

Due to acquisitions, total expenses (excluding the foreign exchange loss) increased by 13.5%. Comparable expenses however, increased by only 2.8%.

Included in operating profit are net realised and unrealised foreign exchange losses of R164.3 million (2009: R78.4 million loss). The translation of Massdiscounters’ African balance sheets accounted for R64.2 million of this (2009: R106.6 million loss), there was a net loss from other foreign monetary balances of R51.1 million (2009: R24.0 million gain) and the balance came mostly from unrealised losses on landed forward foreign exchange contracts of R49.0 million (2009: R4.2 million gain).

Net interest paid decreased slightly as commercial interest rates softened, although at R584 million the Group’s average net borrowings were higher than the prior year. Despite better working capital performances, interest received in the Divisions declined due to the lower interest rates.

The non-cash IFRS Share-based Payments charge associated with the Group’s Staff Empowerment scheme and the Black Scarce Skills Trust was R69.7 million (2009: R66.9 million). Including the preference dividend paid to participants however, the total cost of the scheme was R116.2 million (2009: R104.9 million) and has increased because 100% of the ordinary dividend now accrues to scheme participants (see note 6).

The Group’s effective tax rate is 33.4% (2009: 32.6%) and this is higher because of the effect of STC of 4.6% (2009: 3.8%).

The minority interests comprise those from certain acquisitions and store managers’ holdings in certain Masscash stores. The Cambridge Food 49% minority interest was acquired with effect from April 2010.

Headline earnings declined by 5.7% while headline EPS declined by 6.2%. Excluding the foreign exchange losses from both years however, headline earnings declined by 0.5% while headline EPS declined by 1.1%.

Statement of financial position
Group inventory levels were well controlled and, including acquisitions and new stores, were 14.5% higher than June 2009. Historical days in stock at June 2010 are 52.6 (2009: 50.5 days) and are higher only in Massdiscounters and Builders Warehouse as those businesses invested in inventory to meet accelerating sales growth.

Acquisitions continue to increase the amount of goodwill. During the period 13 businesses representing 20 stores and properties were acquired for a net cash consideration of R369.9 million.

Average interest-bearing debt for the period, using net interest paid as a proxy, was R584 million (2009: R360 million) representing gearing of 17.9% (2009: 12.4%).

Due to the decline in Group profitability and the ongoing investment in the business and acquisitions, the annual rolling return on equity of 34.9% at June 2010 is lower than the equivalent 2009 figure of 41.7%.

Statement of cash flows
Cash flow from operations grew 7.2% due to the improvement in net working capital levels. Total capital expenditure of R623.9 million (2009: R685.6 million) comprises R277.8 million on replacement and R346.1 million on expansionary expenditure. A further net amount of R369.9 million was spent on business acquisitions, some of which included properties.