Result overview - continuing operations

The 2011 financial year was the toughest trading year in our Group’s history. We undertook a number of significant and challenging steps to transform the business, at the same time we experienced an exceedingly difficult trading environment.

Despite our disappointment in the result, we have achieved much over the year:

• We completed the consolidation of our 3 inland regions into one which will realise tangible improvements in operating efficiencies and cost reductions.
  
• With the roll-out of SAP complete, we now have a fully integrated system across the business, with improved in-store disciplines, more efficient business processes and more timely information for performance management.
  
• We have completed the extension of our Longmeadow Distribution Centre, which now stands at 65,000 square metres. We have introduced automated replenishment which has improved store strike rates. Longmeadow now processes 50% of our inland grocery value, with 1 million cases handled each week from 44 major suppliers who deliver direct to the facility. Although significant improvements have been made, the facility is not yet optimal and every effort is being made to ensure that Longmeadow becomes the blueprint that we roll out to distribution centres in the Western Cape, Kwa-Zulu Natal, Eastern Cape and Gauteng over the next 3 to 5 years.
  
• We opened 2 stores in Zambia, which have been extremely well received and are trading ahead of expectations.
  
• We increased our footprint in the LSM 4 -7 market, and are showing strong growth in this sector from both Boxer and our Pick n Pay stores converted from Score.
  
• We opened our new flagship store “PnP on Nicol”. It is not only a world class retail destination, it is truly a store for the future – built and operated entirely on sustainable, environmentally friendly principles in line with international best practice. Customer reaction has been overwhelmingly positive and we are looking to roll-out the most successful innovations to selected stores.
  
• After a tough time with a national labour strike over our busiest trading period, we have negotiated a three year wage deal with the Union. We are confident that Pick n Pay and SACCAWU can now work together to improve the relationship.
  
• A great deal of work was done on our new loyalty programme “Smart Shopper” during the year under review, and we were thrilled by its launch in March 2011. The programme was based on significant customer research and it will provide our Smart Shoppers with meaningful reward and revolutionise the way we engage with customers.

Group turnover at R51.9 billion for the year is 5.9% above last year. Turnover growth has been modest, impacted by our national labour strike and customers exercising caution despite the dramatic fall in food inflation and many price decreases. Group like for like turnover is up 2.0% for the 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 and the effect of increased franchise participation.

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. In addition, we experienced operational difficulties at Longmeadow which had a material negative effect on our result.

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

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

Pick n Pay and Boxer combined, increased turnover by 5.9% 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.

We have seen strong growth in certain areas, including 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 have also experienced encouraging growth in the LSM
4 -7 market, with good performances from Boxer and the Pick n Pay franchise stores converted from Score.

During the year we opened 4 new Pick n Pay corporate supermarkets, 13 Pick n Pay franchise stores, 33 liquor stores (franchise and corporate), 11 clothing stores and 6 stores across our Boxer formats.

In the year ahead we plan to open a further 12 new corporate and 7 new franchise supermarkets, as well 10 clothing stores and approximately 45 liquor stores (corporate and franchise). In the Boxer stable, we will open 13 supermarkets,
7 Punch stores, 5 liquor stores and 5 Boxer Builds.

We continue our expansion into Africa. We now have two stores in Zambia and the support from our new Zambian customers has been extremely gratifying. We are once again accounting for our share of profits of our 25% investment in TM Supermarkets in Zimbabwe. We are encouraged by the improved economic climate and trading stability in Zimbabwe and are impressed with the hard work of the team at TM. We have successfully concluded negotiations to purchase a further 24% of TM, to bring our total shareholding to 49%. The transaction is awaiting approval by the Reserve Bank of Zimbabwe and the Zimbabwean Indigenisation Board.

In 2012 we will open 3 more stores in Zambia, 3 in Mozambique and 2 in Mauritius.

In July 2010, subject to approval by the Australian competition regulator, the Australian Competition and Consumer Commissions (ACCC), we accepted an offer from Metcash to acquire our Australian operation, Franklins. The ACCC reviewed the proposed transaction under its informal merger clearance process and opposed the sale to Metcash on the basis that it is likely to have the effect of substantially lessening competition in an Australian market.

Following the ACCC’s decision, the parties announced that they proposed to proceed with the transaction and this led the ACCC to commence legal proceedings in the Federal Court of Australia in December 2010, seeking to prevent the parties from completing the transaction. We and Metcash agreed with the ACCC to an expedited hearing, which commenced in mid-March 2011. The judgement of the Court is expected before 30 June 2011. If the Federal Court of Australia prevents the acquisition by Metcash, we remain committed to the sale of Franklins and anticipate selling the Franklins stores, either individually or in groups, under a competitive tender process.

Franklins has been treated as a discontinued operation and its results have been reflected separately from those of continuing operations. Turnover in Franklins for the year of AUD827.2 million was down 3.9%, with a net loss incurred of AUD18.1 million (excluding depreciation, which is not provided at Group level from the time a business is classified as held for sale) against a profit of AUD2.5 million last year.

General comments

We are disappointed in the result, but would like to give credit to the Pick n Pay team for achieving an enormous amount under trying conditions. As we have communicated before, we are in the process of positioning Pick n Pay for the future, and strongly believe that our strategic initiatives will build a sound platform for future growth and continued success in the medium to long term.

For and on behalf of the board