Chief Executive Officer’s report

Result overview – continuing operations

As indicated in October 2009, this financial year turned out to be exceptionally tough with the recessionary climate biting especially hard during the second six months.

This year was really a tale of two halves where, in South Africa, earnings growth was affected by the rapid decline in food inflation (from August 2009 off the previous year’s high base), continued investment in lower selling prices, escalating electricity costs, and further conservative provisions made against franchise debt. In Australia, the increase in interest rates, which started before the Christmas trading period, severely affected consumer spend. We foresee that the beginning of the 2011 financial year will continue to present a tough trading environment. However, we expect the 5.5% reduction in interest rates in South Africa over the last 15 months and reduced food inflation to ease the strain on consumers’ disposable income.

“Despite these challenges, we continue to make significant strides with the implementation of our strategy and in transforming Pick n Pay”

Despite these challenges, we continue to make significant strides with the implementation of our strategy and in transforming Pick n Pay, an update of which is presented below.

Group turnover at R54.7 billion was 9.8% above last year; Pick n Pay and Boxer grew by 11.5% and Franklins Australia by 1.4%, in Australian dollars.

Trading profit for the year decreased by 2.5% as a direct result of the reduction in gross profit margin from 19.0% last year to 18.6% this year. This reduction in margin is due to our continued investment in prices on basic foods. The overall decrease was cushioned by enhanced operating efficiencies, especially in supply chain.

Profit before tax for the year is up 10.5%, which includes a profit on sale of properties of R190.9 million and a decrease in net interest paid of R19.9 million due to an improvement in net cash balances during the year.

Headline earnings per share at 236.33 cents is 1.1% above last year.

The total dividend per share for the year of 174.50 cents for Pick n Pay Stores Limited and 84.94 cents for Pick n Pay Holdings Limited is 2.6% and 2.4% above last year, respectively.

Nick Badminton Chief Executive Officer

Operational highlights

South Africa

Pick n Pay and Boxer increased turnover by 11.5% for the year. The second half of the year saw growth rates drop substantially as customers remained cautious despite lower interest rates and substantially lower levels of inflation. During the year we opened 5 new Pick n Pay corporate supermarkets, 20 Boxer stores and 38 Pick n Pay franchise stores (including 5 Express stores and Score conversions). In the year ahead we plan to open a further 27 supermarkets under the Pick n Pay and Boxer brands and are working on opening substantially more new stores for the years thereafter. This commitment to investing in expanding our footprint shows the confidence we have in both the country, our strategy and operating model.

Despite the economic conditions we saw a significant increase in the number of customer transactions during the year, demonstrating the resilience of the PnP and Boxer brands, and the tremendous support we receive from customers as we bring world-class retailing to all sectors of our community.

Africa

Our expansion further into Africa is progressing well. We are due to open our first corporate store in Zambia midyear; we have signed up franchise partners in Mozambique; and we have identified sites for expansion into Mauritius. We will expand into countries where we see opportunities to give customers real value, support local enterprise and provide career opportunities.

Australia

Franklins turnover at AUD861.1 million increased by 1.4% and before capital items produced a profit of R21.9 million which is on par with last year. This was on the back of the most challenging retail environment in a decade, with successive interest rate rises negatively impacting on consumer spending.

The impact of the 3 year, AUD50 million store refurbishment programme continues to be positive with completed stores achieving double-digit sales growth and improved profitability. The programme saw 18 refurbishments this year and a further 8 are planned for the next financial year. Next year we also plan to open 4 new stores and further grow the franchise business.

Franklins’ Loyalty Club achieved substantial membership growth with cardholders now exceeding 780 000. The programme was recognised as offering customers better value than the programmes offered by other major supermarket groups.

General comments

The Competition Commission’s investigation into the retail sector is ongoing and we continue to give the process our full cooperation.

Over the next financial year we will focus on the following priorities:

– Improve the efficiency of the core SA Retail business, by;

• Reducing supply chain costs through further improvements at Longmeadow and by commencing the roll out of central distribution to the rest of South Africa.
• Reducing the cost of doing business through Goods Not For Resale enhancements and further cuts in overheads.
• Simplifying the organisation further, building on the consolidation of the inland region.
• Enhancing the way we use SAP to improve process efficiency.

– Accelerate store rollout with particular focus on LSM 4-7, smaller supermarkets and Express; and

– Make further improvements to the quality and range of Fresh food and Private Label.

All of these initiatives position us well to benefit from the anticipated upturn in the economy.

PnP private label brands were repackaged with our new branding