Financial Review

Statement of comprehensive income
Total Group sales growth for the year to June 2011 was 11.6% with comparable sales growth of 5.2%. Sales in our African businesses represented 7% of total Group sales and total African sales grew by 8.3% in Rands and 11.4% in local currencies.

The Groupís product inflation remained in deflation overall and was -1.3% for the year. General Merchandise remained strongly in deflation (-7.8%) while Food & Liquor moved into inflation (1.6%) and Home Improvement was steady at 0.7% inflation.

During the year one store was closed, 20 opened, and four stores acquired, resulting in a total of 313 stores at June 2011. Net trading space increased by 6.0% to a total of 1 280 936m2.

The Groupís gross margin of 18.26% improved on that of the prior year (17.90%) as margins improved in Massdiscounters, Makro and Massbuild. Deflation in Food and a highly competitive environment adversely affected gross margins in Masscash.

Due to acquisitions, new stores and the investment in Cambridgeís infrastructure, total expenses (excluding the foreign exchange losses) increased by 15.6%. Comparable expenses however increased by 5.4%.

Costs incurred by the Group in connection with the Walmart Transaction totalled R408.8 million. Included here are total advisorsí fees and expenses of R238.7 million, the R100.0 million Supplier Development Fund and R70.1 million in accelerated IFRS 2 charges. The latter two amounts are non-cash and a portion of the total amount may not be tax-deductible. The other effects of the Walmart Transaction on the Groupís results are noted below.

The agreement to sell Makro Zimbabwe was signed in November 2010 and was finalised in late February 2011. The loss on sale of R38.6 million represents costs relating to the disposal of the Makro Zimbabwe stores.

Net interest paid of R107.2 million increased significantly as a result of the Groupís highest ever capital expenditure programme and funding the post-December 2010 over-stocking in Massdiscounters as well as higher stock levels in Makro and Masscash. At R1,484.8 million the Groupís average net borrowings were higher than the prior yearís equivalent figure of R583.8 million.

The Groupís tax rate is 38.9% (2010: 33.4%) but this is artificially higher because of the non-deductible amounts included in Transaction costs and also the effect of STC of 5.6% (2010: 4.6%). Adjusting for the Transaction costs results in a more representative tax rate of 32.6%.

The minority interests comprise those from acquisitions and store managersí holdings in certain Masscash stores.

Headline earnings declined by 22.5% and headline EPS declined by 23.6%. Excluding the after-tax effect of the Transaction costs however, headline earnings increased by 10.0% and headline EPS increased by 8.5%.

Statement of financial position
For most of the second-half of the 2011 financial year, Group inventory levels were high but by June 2011 had been restored to historical levels. Days in inventory at June 2011 were 49.8 (2010: 52.6 days) for the Group, and inventory days are higher only in Masscash. The level of supplier funding returned to normal Group levels as the prior year had been bolstered by the additional inventory purchases for the 2010 FIFA World Cup.

Acquisitions and IT capital expenditure increased the amount of goodwill and intangible assets. During the financial year, seven businesses representing six stores and a property were acquired for a net cash consideration of R171.0 million. A net amount of R108.4 million was invested in IT this year.

Excluding the effect of Transaction costs, the annual rolling return on equity was 33.7% at June 2011.

Statement of cash flows
Operating cash of R2,26 billion was 3.5% below the prior year but this includes the cash effect of the Transaction costs. Adjusting for these costs results in a more representative figure of R2,50 billion which is 6.7% above the prior year. Cash from operations was 37,9% lower due to the Transaction costs and the retention of cash in net working capital level. This figure adjusted for the cash effect of the Transaction costs is R1,88 billion which is 28,8% below the prior year. Total capital expenditure of R1,148.2 million is 84% higher than the prior year, and comprises R305.2 million on replacement and R843,0 million on expansionary expenditure. Larger items included in expansionary expenditure are the costs of the new Makro store in Milnerton, Cape Town and Cambridge stores.

Effect of Walmart Transaction
There were two main financial consequences of the Walmart Transaction, being the Transaction costs of R408.8 million described above and the effects of the vesting and purchase by Walmart of the Massmart options held by share trust beneficiaries. With regard to the latter, in June 2011 share premium increased by a net cash amount of R481.6 million as 51% of all vested and unvested Massmart options held by trust beneficiaries (including Thuthukani) were converted into ordinary shares and then acquired by Walmart. Issued shares therefore increased by 12.4 million or 6.1% to 213.9 million shares. These additional shares had a limited impact on the weighted-average number of shares due to the transaction occurring in late June 2011.

In addition, cash proceeds were received from Walmart on 20 June 2011 but, at 26 June 2011, the actual year-end date, had not yet been paid to share trust beneficiaries. As the share trusts are consolidated with the Group, the net cash proceeds of R1,093.6 million are shown as Restricted cash held on behalf of scheme beneficiaries, with an equal amount shown as a Scheme beneficiariesí liability.