Chief Executive Officer’s report

Result overview – continuing operations

The 2011 financial year has proven to be exceptionally tough. We have experienced a combination of a difficult trading environment and some internal challenges that have contributed to a decline in headline earnings per share from continuing operations of 18.3%. At the same time, however, we have made some significant strides towards transforming the business into a modern world-class retailer.

Our immediate priority is to address some of the short term challenges we face, whilst simultaneously continuing our transformation. Achieving the appropriate balance between these two priorities is key.

Turnover at R51.9 billion for the year is 5.9% above last year. Turnover growth has been subdued, impacted by a national labour strike over our busiest trading period leading up to Christmas and customers continuing to exercise caution after the global recession, despite the dramatic fall in food inflation and many price decreases. Group like-for-like turnover is up 2.0% for the year. On average Pick n Pay’s corporate internal food price inflation was 1.3% for the financial year, against an average of 8.7% last year.

Gross profit margin has fallen from 18.0% last year to 17.5% this year, due to aggressive investment in price to regain lost ground after the national strike. The effect of increased franchise participation also reduces the gross profit margin.

Trading profit is down 13.5% to R1 417.7 million, due to the lower gross profit margin and cost inflation exceeding internal sales price inflation. Trading expenses increased by 7.2%, largely driven by increases in electricity, water, rates and our continued investment in strategic initiatives. In addition, we experienced operational difficulties at Longmeadow which had a material negative effect on our result.

EBITDA (earnings before interest, tax, depreciation and amortisation and before capital items) at R2 160.9 million is down less than trading profit at 4.9%, demonstrating our ability to generate cash and to strongly cover our interest and tax charges.

Headline earnings per share at 189.35 cents is 18.3% down on last year.

The total dividends per share for the year of 142.50 cents for Pick n Pay Stores Limited and 69.28 cents for Pick n Pay Holdings Limited are 18.3% and 18.4% down on last year, respectively.

Operational highlights and challenges – continuing operations

Pick n Pay and Boxer

Despite our disappointment in the result, strategically a great deal has been achieved during the 2011 financial year, which will position Pick n Pay well for the future.

South Africa

We completed the consolidation of our 3 inland regions into one which will realise tangible improvements in operating efficiencies.

With the roll-out of SAP complete, we now have a fully integrated system across the Pick n Pay business, with improved in-store disciplines, more efficient business processes and more timely information enabling better and faster decision making.

We have completed the extension of the Longmeadow Distribution Centre, which now stands at 65 000 square metres. Longmeadow now processes 50% of our inland grocery value, with 1 million cases handled each week from

44 major suppliers. We were able to significantly improve service to stores compared with suppliers delivering directly. Although significant improvements have been made, the facility is not yet optimal and every effort is being made to ensure that Longmeadow becomes the distribution and demand planning blueprint to roll-out to the Western Cape, KwaZulu-Natal, Eastern Cape and another facility in Gauteng over the next 3 to 5 years.

We increased our footprint in the LSM 4 – 7 market, showing strong growth in this sector from both Boxer and our Pick n Pay stores converted from Score. In addition, we have seen strong growth in Private Label, Liquor, and most notably Clothing. Our Clothing division has grown turnover significantly over last year, demonstrating the positive acceptance by customers of our clothing, which offers good quality at an affordable price.

We opened our new flagship store Pick n Pay on Nicol. It is not only a world-class retail destination, it is truly a store for the future, built on green design principles and operated according to international best practice on sustainability. Customer reaction has been overwhelmingly positive and we are looking to roll-out the most successful innovations to selected stores.

After nine months of wage negotiations we endured a national labour strike over our busiest trading period and subsequently were able to negotiate a three year wage deal with the Union.

A great deal of work was done on our new loyalty programme Smart Shopper and we were thrilled by customer reaction to its launch in March 2011. The programme was based on significant customer research and it will provide our Smart Shoppers with meaningful reward for their custom and revolutionise the way we engage with them. Information gathered from the programme will enable us to engage with suppliers on targeted promotions, enable us to provide more appropriate ranges and give us a deeper understanding of our customers’ needs. In the future, Smart Shopper customers will be able to donate their rewards to charity, providing an easy and effective way of investing in their communities.

During the year we opened four new Pick n Pay corporate supermarkets, 13 Pick n Pay franchise stores, 33 liquor stores (franchise and corporate), 11 clothing stores and six stores across the Boxer formats.

In the year ahead, we plan to open 12 new Pick n Pay corporate and seven new franchise supermarkets, as well as 10 clothing stores and approximately 45 liquor stores (corporate and franchise). Boxer will open 13 supermarkets, seven Punch stores, five liquor stores and five Boxer Builds.