Financial review

Statement of comprehensive income
Total Group sales growth for the year to June 2012 was 15.6% with comparable sales growth of 9.6%. Sales in our African businesses represented 7.8% of total sales and grew by 21.7% in Rands and 14.4% in local currencies.

The Group’s product inflation was 1.8% for the year. This is the first year of product inflation since 2009. General Merchandise remained in deflation of 4.9%, while Food & Liquor’s inflation increased to 6.5% and Home Improvement inflation increased to 1.4%.

During the year, five stores were closed, 25 stores opened and 15 acquired, resulting in a total of 348 stores at June 2012. Net trading space increased by 7.3% to a total of 1,350,300 m2.

The Group’s gross margin of 18.38% is higher than that of the prior year (18.26%). This is from improved gross margins in Massbuild and a higher contribution from Game Africa.

Due to the new stores, specifically the three Makro stores, the investment in Cambridge’s supply chain and infrastructure, and IT upgrades across most Divisions, total expenses (excluding foreign exchange losses) increased by 19.8%. The impact of the Group’s continued investment in growth can be seen in the 24.8% higher depreciation and amortisation charge and 23.7% increase in occupancy costs. Comparable expenses increased by 7.0%.

Included in the operating profit are net realised and unrealised foreign exchange losses of R72.5 million (2011: R72.3 million loss). These are the net result of foreign exchange gains due to the weaker Rand being offset by the 50% devaluation of the Malawian Kwacha in May 2012.

Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 7.9% to R2.7 billion.

Direct costs incurred in connection with the Walmart integration were R185.4 million. This figure will reduce over the next 12 months to a permanent level of approximately R50.0 million annually.

Net interest paid of R115.1 million increased as a result of the Group’s capital expenditure programme. At R1.62 billion, the Group’s average net borrowings are 9.5% higher than the prior period’s figure of R1.48 billion.

The Group’s effective tax rate of 33.7% (2011: 38.9%) includes the effect of STC of 4.3% (2011: 5.2%). This STC charge now falls away with South Africa’s introduction of withholding tax on dividends.

The minority interests comprise store managers’ holdings in Masscash stores and minorities in acquired Masscash businesses. This year’s minority figure has reduced due to the acquisition of several store managers’ minority interests in Masscash Wholesale.

Headline earnings increased by 38.0% and headline EPS increased by 30.3%. Adjusting for the effect of the Walmart costs in both years however, reduces these to 8.9% and 2.8%, respectively. The lower earnings per share growth is caused by the higher weighted-average number of shares in issue as a consequence of the implementation of the Walmart transaction in June 2011.

Statement of financial position
Working capital continues to be effectively managed across the Group. Days in inventory at June 2012 were 50.5 (2011: 49.8 days) for the Group and supplier funding was at 57.1 days (2011: 55.9 days).

The net book value of property, plant and equipment increased by 29.5% compared to June 2011. During the year we acquired Fruitspot and Rhino for a combined net cash consideration of R326.7 million.

Despite the higher average interest-bearing debt, the Group’s gearing ratio (debt: equity) was steady at 38.9% (2011: 39.9%).

The annual rolling return on equity was 29.2% at June 2012 (2011: 23.7%). Excluding the Walmart costs this figure was 32.8% (2011: 33.7%).

Statement of cash flows
Operating cash of R2.67 billion was 62.8% higher than the prior year, reflecting the strong cash-underpin to the Group’s earnings as well as the stable working capital position. Total capital expenditure of R1.33 billion is 15.9% higher than the prior year, and comprises R620.4 million on replacement and R710.4 million on expansionary expenditure. This expansionary expenditure was incurred in three main areas being: new stores, Foodco-refurbishments and the Durban RDC in Massdiscounters (combined R358.0 million); three new Makro stores (R165.4 million); and new stores and supply chain capability in Masscash Retail (R94.7 million).