REVIEW OF OPERATIONS

This has been a challenging six months for the Group. The combination of modest sales growth, significant investment in selling price and continued material investment in our strategic transformation programme has resulted in trading profit being R204.2 million (41.5%) below last year. We have tried to accomplish too much too quickly, and are now addressing the considerable operational challenges that large scale change brings. We have prioritised the major initiatives in our change programme to ensure that the basic principles are completely bedded down, and that we have a solid foundation in place from which to trade.

Financial review – continuing operations

Group turnover at R28.3 billion for the period is 5.9% above last year, with like-for-like growth of 3.2%. A number of factors have contributed to the disappointing turnover growth. The uncertain economic climate, characterised by escalating food and fuel prices, continued high levels of unemployment and household indebtedness, has resulted in cautious customer spend. We continue to invest in selling price, easing the burden for our customers, and entrenching our position as the best value supermarket in South Africa. We have lagged our competitors in space growth, which has eroded our market share and negatively impacted like-for-like sales growth. Expansion plans are in place in the short to medium-term, which will add to our footprint and provide opportunity to regain market share. In-store stock shortages, due to both disappointing operational execution and poor inventory availability, have hampered turnover growth. We are tackling this issue both internally and with suppliers, to ensure that all underlying reasons are addressed.

Gross profit margin for the period is 17.6% (2011: 18.0%). The deterioration in margin is largely attributable to some early missteps in the implementation of centralised category buying, increased distribution costs due to transitional difficulties in bringing the management of our Longmeadow distribution centre in-house, the increased participation of smartshopper loyalty sales and our continued investment in selling price. There is opportunity to strengthen margins, while maintaining our competitive price position, through supply chain improvements and further enhancements of our specialised category buying function.

Trading profit of R288.0 million (2011: R492.2 million) for the period, at a margin of 1.0% (2011: 1.8%) is 41.5% down on last year. In addition to the issues discussed above, this is mainly attributable to on-going strategic transformation costs, including accelerated investments in category buying, demand planning, supply chain and marketing capabilities. In addition, we have seen large increases in electricity, fuel and rates. We are encouraged by improvements in labour productivity and the savings which are beginning to come through from the flexibility we gained from our new labour agreement; however there is still opportunity for improvement.

EBITDA (earnings before interest, tax, depreciation and amortisation) is down 16.4% for the period to R737.4 million (2011: R882.4 million), with comfortable coverage of both interest and tax.

Net cash from operating activities for the period at R300.8 million is down from R1 190.0 million last year. An increased level of inventory, to compensate for reduced availability, has reduced the cash generated from operations. In addition, our new Philippi distribution centre in the Western Cape has added to inventory levels, with an anticipated lag in the compensating decrease at store level.

Headline earnings per share for the 6 months to 31 August 2012 is down 34.4% on the same period last year, to 35.91 cents per share. Excluding the effect of STC in the prior year, headline earnings per share is down 44.9%.

The interim dividend per share, of 14.75 cents for Pick n Pay Stores Limited and 7.17 cents for Pick n Pay Holdings Limited, is down 34.4% and 34.3% respectively, in line with the decrease in headline earnings per share.

Operational review

We have a total of 932 stores, consisting of 787 Pick n Pay and 145 Boxer stores (540 owned and 392 franchised), across all formats. Our smaller format stores are out-performing the larger formats, with our customers shopping more frequently for a smaller basket. Our expansion plans will therefore concentrate on smaller formats. We are also focused on ensuring our larger hyper format remains relevant. We are encouraged by the good growth shown by our liquor and clothing formats. Like-for-like growth in our emerging market stores is no longer outperforming the higher income stores, as our lower LSM stores are more affected by aggressive expansions in retail space. We are pleased with the achievements of our Boxer brand in this environment, which continues to deliver good results.

Pick n Pay owned stores - we opened 22 stores during the period, including 3 supermarkets, 10 clothing stores, 6 liquor stores and 3 pharmacies. We closed one supermarket during the period. We intend to open 9 supermarkets, 14 liquor stores and 10 clothing stores in the next 6 months.

Pick n Pay franchised stores - we opened 11 stores during the period, including 3 supermarkets, 1 mini-market and 7 liquor stores. We converted 1 store during the period to a Pick n Pay owned store and 1 to a Boxer and closed 4 non-performing stores. We intend to open a further 8 supermarkets, 15 express stores and 18 liquor stores in the second half of the year.

Boxer owned stores - we opened 17 stores during the period, including 11 Superstores, 2 Boxer Builds (hardware stores) and 4 liquor stores. 1 Boxer Punch closed during the period. We intend to open a further 7 Superstores, 4 Punch, 4 liquor and 2 Boxer Builds in the second half of the year.

Outside South Africa – we continue our steady growth outside of South Africa and at 31 August 2012, the total number of stores outside South Africa (both owned and franchised) was 100, including our 49% interest in 50 TM Supermarkets trading in Zimbabwe. We currently trade in Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Swaziland, Zambia and Zimbabwe.

Strategic update

Our focus remains on improving our customer offer and on streamlining operations, including consolidating and upgrading support functions, to better position us to deliver outstanding products and services in world class stores.

Central distribution - we opened our new Philippi distribution centre in the Western Cape in May 2012 and our in-house supply chain team has taken over the operation of the Longmeadow facility in Gauteng from our outsourced partner. Operational difficulties at Longmeadow, particularly during the transition phase of bringing the management of the facility in-house, have resulted in material operating losses during the period under review. There have been marked improvements in both cost control and productivity subsequent to our take-over of the facility and we look forward to enhanced performance going forward. The Philippi distribution centre is performing well ahead of expectation and is already achieving productivity substantially in excess of that of Longmeadow.

Category buying - our specialist category buying division was in place from March this year. This is a fundamental, large-scale change in the way we buy and range and has come with operational and administrative teething problems. The team is focused on a number of key enhancements, and as a result, consulting costs continue to impact earnings significantly. We are working towards eliminating these costs by February 2013.

Space growth - our new store pipeline is looking strong with 225 stores across all formats (138 corporate and 87 franchise) planned to open over the next 18 months, representing a 12.6% increase in trading space.

Smartshopper - it has been 18 months since the launch of our loyalty programme, which has experienced take-up well beyond expectations. We currently have 5.8 million smartshoppers, participating in 57% of total turnover and 36% of baskets, with the average value of a loyalty transaction being 2.7 times that of a non-smartshopper transaction. The main aim of the loyalty programme is to gain valuable consumer insights that will inform both ranging and positioning of stores, with this high value intelligence already informing both. The programme has required considerable capital investment and significant on-going operating costs and there is still work to be done before the full benefits of the programme are realised. We are currently focused on developing strategic partnerships with suppliers and third parties to drive maximum value to customers and to offset the costs of the programme.

Labour costs – the new flexibility and mobility agreement reached in December 2011, has enabled us to staff our stores more efficiently and cost-effectively. The positive effects of the agreement are starting to be felt, however it will take time before the full advantages are realised, as we are taking considered and measured steps in implementing the full terms and conditions of the agreement, while being sensitive to the labour relations issues that this change brings.

CLOSING COMMENTS

We will no doubt look back at this time as one of the most trying in our Group’s history. Despite a challenging 6 months and the disappointing result, we have not lost sight of how far we have come in transforming the business, and the opportunities in place to improve our performance. The trading environment will remain tough in the foreseeable future and, coupled with the cost and effort still required by our strategic transformation programme, our short-term performance will remain under pressure. We are confident that we will meet our target of completing the foundation phase of our strategic transformation programme by 2014. The Group is delighted by the appointment of Richard Brasher as the new Chief Executive Officer and believe he will bring focus, energy and directly relevant expertise to the Group at a very important time in its development. The news of his appointment has been well received both internally and externally and we look forward to him joining us in February 2013.

Gareth Ackerman Chairman and acting CEO

Richard van Rensburg Deputy CEO

23 October 2012