Financial Review

Statement of comprehensive income
Total sales growth for the six months to December 2010 was 13.3% with comparable sales growth of 7.3%. Selling price inflation declined across most categories and the Group recorded product deflation of 2.9% for the financial year-to-date. There are signs of inflation returning to certain Food categories.

During the six-month period one store was closed, 16 opened, and five stores acquired, resulting in a total of 308 stores at December 2010. Net trading space increased by 8.7% from December 2009 to a total of 1,249,584m2.

The Group’s gross margin of 18.06% was slightly higher than the prior year’s 17.81%, as gross margins recovered, to different degrees, in all divisions.

Total expenses (excluding the foreign exchange loss) increased by 16.2% while comparable expenses increased by only 7.8%. Total expense growth exceeded sales growth due to the impact of the new stores not yet trading to full capacity, the associated store pre-opening costs, the Massdiscounters’ Gauteng RDC opening, and the store refurbishment programmes in Masscash Food Retail. These results do not include any material costs associated with the Walmart transaction.

Included in operating profit are net realised and unrealised foreign exchange losses of R79.5 million (2009: R13.9 million loss). The translation of Massdiscounters’ African balance sheets accounted for R57.8 million of this (2009: R7.0 million loss) and there was a net loss from other foreign monetary balances of R21.7 million (2009: R6.9 million loss). Over the six-month period, the average ZAR/US$ rate strengthened by 6% while the closing spot rate was 11% stronger.

Despite lower commercial rates, net interest paid increased as the Group funded new stores, Massmart shares acquired by the Employee Trust, and acquisitions, including those in the second half of the 2010 financial year. Working capital performance improved in three Divisions, whilst Massdiscounters was overstocked by approximately R300 million at the period end.

The Group’s effective tax rate of 31.68% (2009: 31.89%) includes the effect of STC of 2.6% (2009: 2.8%). The effective tax rate is anticipated to reduce slightly as Group profitability improves, diluting the effect of non-deductible expenditure.

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 increased by 6.5% while headline EPS increased by 5.6%. Excluding the foreign exchange losses from both years however, headline earnings increased by 13.1% while headline EPS increased by 12.1%.

Statement of financial position
Group inventory levels were 22.3% higher than December 2009. This includes the Massdiscounters’ overstocking and about R100 million inventory in the new Makro store. Historical days in inventory at December 2010 are 59.7 (2009: 55.2 days).

Acquisitions continue to increase the amount of goodwill. During the period five businesses, representing five stores, were acquired for a net cash consideration of R87.0 million.

Average interest-bearing debt for the period was R1,162.9 million (2009: R588.9 million) representing average gearing of 31.4% (2009: 17.4%). The reasons for the greater net debt levels are noted in the net interest paid paragraph above.

Despite the significant investment in the business and the acquisitions, the improvement in the Group’s profitability slightly increased the annual rolling return on equity to 30.8% at December 2010 (December 2009: 30.6%).

Statement of cash flows
Operating cash flow improved by 2.7% but after net working capital movements declined by 13.7%. Total capital expenditure of R566.0 million (2009: R291.1 million) comprises R215.9 million on replacement or maintenance and R350.1 million on expansionary expenditure, respectively. A further amount of R87.0 million was spent on business acquisitions.