REVIEW OF OPERATIONS

We are encouraged by the Group’s improved performance over the past six months, after a tough interim result, with the first clear indications that our investments are starting to yield real benefits.

Significant investment costs have had an impact on profit growth for the year, most notably the upfront launch costs of Smartshopper, the implementation of specialist category buying and the continued investment in our central distribution capability, all of which will improve future operating efficiencies and enable us to serve our customers better.

Strategic update

We remain focused on improving our customer offer and streamlining our operations. We are in the process of consolidating and upgrading our support functions so that we are better positioned to deliver outstanding products and services in world class stores.

The first steps in this consolidation are the set-up of a specialist category buying function and the centralisation of our supply chain. At the same time, our customer offer has been significantly enhanced by the launch of our Smartshopper loyalty programme. Looking ahead, we will be optimising our regional and store management structures and our administration functions.

Smartshopper – We launched our Smartshopper loyalty programme in March 2011. Customer acceptance of the programme has far exceeded our expectations and we currently have in excess of 5 million active card holders on the programme, against a first year target of 3 million. It will take a number of years before the benefits of the programme are fully realised, however we believe the encouraging growth in turnover this year is due in part to Smartshopper. Set-up costs have impacted the earnings of the Group, but we expect the programme to drive turnover growth now and into the future and generate additional value as we understand our customers better and can market more effectively to them.

Specialised category buying – We have successfully completed the transformation of our regional buying teams into a single, specialised category buying division. This is a complete overhaul of buying at Pick n Pay and marks a significant shift in the way in which we engage with suppliers. The division has already delivered improved performance through the reduced cost of goods and a scientific approach to ranging and pricing. With specialised category buying we will be better placed in negotiations with suppliers, will rationalise our product range and will optimise our product display. Our key focus is on delivering an improved selection of high quality products and better value to customers.

Central distribution – Operational improvements at Longmeadow, our central distribution centre in Gauteng, include reduced labour and distribution costs per case on last year. We continue to focus on this facility to ensure that the supply channel is fully optimised. We open our new Western Cape distribution centre in May 2012 which will benefit from our experience at Longmeadow.

Labour costs and expense control – General expense control remains a high priority and management is focused on eliminating inefficiencies, improving productivity and reducing controllable costs, especially in light of the extraordinary increases in property rates and electricity tariffs over the year. In December 2011 we negotiated a new agreement with the Union, which affords us much more flexibility and will enable us to staff our stores more efficiently. We expect the benefits of this agreement to start flowing in the 2013 financial year.

Franklins, Australia – In September 2011, after a lengthy dispute with the Australian Competition and Consumer Commission, we sold our Franklins business to Metcash Limited for R1.2 billion, net of fees. We are now able to focus our teams and capital entirely on our core southern African retail operations.

Franklins continues to be disclosed as a discontinued operation, with its results from operations for the 7 months to 30 September 2011 and the subsequent profit on sale of the business being disclosed separately from continuing operations.

Financial highlights

Group turnover – at R55.3 billion for the year is 8.1% above last year (8.6% above last year for the six months ended 29 February 2012), with pleasing like-for-like growth. This turnover growth is encouraging in a highly competitive environment and is the result of a number of factors, including the positive effect of our Smartshopper programme. While our own internal selling price inflation remains below CPI, South African consumers are facing inflationary increases across the board, which, when combined with continued economic uncertainty, is leading them to exercise caution in their spending.

Gross profit margin for the year is 18.0% (2011: 17.8%). This improvement in margin is due to the initial benefits of specialised category buying, which more than offsets the cost of the Smartshopper points. We believe that we will be able to strengthen margins further over the coming years while maintaining our competitive price position through further category buying and supply chain improvements.

Trading profit growth in the 6 months to February 2012 is 11.2% on the same period last year, a marked improvement on the first half. Trading profit for the year of R1 267.5 million (2011: R1 417.7 million), at a margin of 2.3% (2011: 2.8%) is 10.6% down on last year, most significantly due to costs relating to our strategic transformation initiatives.

EBITDA (earnings before interest, tax, depreciation and amortisation) is up 9.6% for the second 6-month trading period, but is down 4.0% for the year to R2 073.7 million.

Net cash from operating activities at R1 558.8 million is up from R3.5 million last year, due to significant improvements in working capital management. We are focused, in particular, on reducing and managing optimum stock levels in store, and we are pleased with the progress made in this area, with like-for-like stock holdings reducing by 5.3% on last year.

Headline earnings per share for the 6 months to 29 February 2012 is up 6.7% on the same period last year to 105.98 cents per share. Headline earnings per share for the year is down 15.1% to 160.78 cents per share.

The final dividend per share of 108.35 cents for Pick n Pay Stores Limited and 52.57 cents for Pick n Pay Holdings Limited includes an additional amount to be paid to shareholders in respect of the 10% secondary tax on companies (STC) no longer payable by the Group. This brings the total dividend per share for the year to 130.85 cents for Pick n Pay Stores Limited (8.2% down on last year) and 63.48 cents for Pick n Pay Holdings Limited (8.4% down on last year).

The Group intends to maintain its dividend cover at 1.33, however with the additional dividend declared to shareholders referred to above; the dividend cover for the current year is 1.23 times.

Operational highlights

Turnover growth is encouraging, with the most significant growth coming from the LSM 4 – 7 market, with Boxer a strong competitor in this arena, and from our smaller format stores.

In addition, our private label, clothing, pharmacy and liquor divisions also delivered strong turnover growth.

Pick n Pay owned stores (corporate) - During the year we opened 9 new supermarkets, closed 3 and converted 5 franchise supermarkets to corporate stores. In addition, we opened 34 liquor stores and 15 clothing stores. We intend to open at least 9 new supermarkets next year, 20 liquor stores and 15 clothing stores.

Pick n Pay franchised stores - During the year we opened 9 new supermarkets, closed 5 supermarkets and converted 5 franchise supermarkets to corporate stores. In addition, we opened 19 liquor stores, 2 clothing stores and closed 2 mini markets during the year. We intend to open at least 7 new supermarkets and 15 liquor stores in South Africa next year.

Boxer - We opened 10 Boxer superstores during the year, closed 4 and opened 8 new Punch stores. Boxer also opened 4 liquor stores and 2 Boxer Builds. We intend to open 22 superstores, 9 Punch supermarkets, 4 Boxer Builds and 10 liquor stores next year.

Africa – we continue our steady growth outside of South Africa and at 29 February 2012, the total number of stores outside South Africa (both owned and franchised) was 94. We opened three new stores in Zambia during the year, all of which are trading well, and we continue to explore opportunities in the region. We also opened our first store in Mozambique and our first two stores in Mauritius. We have three openings planned for 2013 (excluding TM Supermarkets in Zimbabwe) in Mozambique, Zambia and Mauritius.

In February 2012 we purchased an additional 24% stake in our associate TM Supermarkets in Zimbabwe for R102.5 million (US$13 million), taking our total investment to 49%. The business is currently incurring losses, our share being R1.9 million for the year. However, we are confident of its future prospects and are looking forward to playing a part in growing the business in Zimbabwe.

GENERAL COMMENTS

We would like to thank Nick Badminton, our outgoing CEO, for the integral role he played in transforming the business and for the dedicated service he has given over the last 33 years. We wish him well for his future. We are currently looking both locally and internationally for the best candidate to replace him.

Despite a challenging year, our improved performance over the last 6 months gives us confidence in the work that we have done in repositioning the Group for the future, and gives us good momentum into the 2013 financial year.

A significant portion of our transformation strategy has been implemented. There is still much work to be done in seeing the strategy through to completion, however we have reached the point where the benefits of the changes to date are starting to be felt and are expected to accelerate in the year ahead.

For and on behalf of the board