Investor Centre » Prelim Reporting

SHOPRITE HOLDINGS: REVIEWED RESULTS FOR THE YEAR ENDED JUNE 2008

SHOPRITE HOLDINGS LIMITED
(Reg. No. 1936/007721/06)
(ISIN: ZAE 000012084)
(JSE Share code: SHP)
(NSX Share code: SRH)
(LuSE Share code: SHOPRITE)
(“the Group”)

 Key information

• Trading profit was up 43,7% to R2,297 billion.
• Total turnover increased 22,3% - from R38,950 billion to R47,652 billion.
• Non-RSA supermarkets achieved 38,1% sales growth.
• Diluted headline earnings per share rose 54,1% to 298,6 cents.
• Final dividend per share declared increased 60,6% to 106,0 cents.

Whitey Basson, chief executive, commented:

The past year was an excellent one for the Group both in terms of growth in turnover and profit despite major concerns experienced in the market such as global food shortages and a further drop in supplier service levels. Our strong performance was the result of the very substantial investments we have made over several years in the growth and infrastructure of the business and which are increasingly bearing fruit. The growth was further driven by management’s strategic decision taken in October 2007 to cut margins on basic foodstuffs to alleviate the impact of price increases on especially lower-income consumers. This lead to a sacrifice of R286 million in gross profit in the remainder of the year. As the Group has achieved economies of scale in many areas in which it operates, costs were kept well under control. As a result, the strong turnover growth translated into significant growth in trading profit.

1 September 2008

Enquiries:

Shoprite Holdings Limited
Whitey Basson, chief executive
Carel Goosen, deputy managing director
Tel: 021 980 4000

De Kock Communications
Ben de Kock
Tel: 021 422 2690 
Cell: 076 390 7725

OPERATING ENVIRONMENT
Locally the period under review was dominated by the strong growth in food inflation which averaged 13,8% (as against the Group’s internal inflation of 10,6%). This was caused mainly by the massive jump in the oil price and international food shortages due to poor harvests and major producer countries reducing exports of staple foods in particular. The high fuel price affected costs all along the food supply chain, greatly increasing input costs in the agricultural, manufacturing and transport sectors. By contrast, the retail sector selling durable and semi-durable goods operated in a near deflationary environment. These trading conditions developed against the background of a cooling economy which saw a reduction in business confidence. Consumers were hard hit by a succession of interest rate increases which pushed financing and debt servicing costs significantly higher, and especially in the final months of the reporting period there was a noticeable contraction in discretionary spending.

On the other hand, the economies of most of the other countries in Africa in which the Group trades were buoyed by high commodity prices although consumers experienced the same increases in basic food prices due to international shortages.

COMMENTS ON THE RESULTS

Income statement

Total turnover
Total turnover increased by 22,3% from R38,950 billion to R47,652 billion. With the exception of furniture, all the other divisions reported excellent sales growth in excess of rising food inflation levels. The strongest growth was delivered by the Shoprite brand, the Group’s core business, while the biggest percentage growth was reported by the non-RSA operation.

Gross profit
To alleviate the impact of worldwide food price increases on consumers already buffeted by high cost-of-living increases, management took the strategic decision in October 2007 to cut margins on basic foods, thereby generating higher sales volumes. By reducing margins on basic foodstuffs the Group sacrificed R286 million in gross profit in the remainder of the year.

Expenses
An extensive, well-functioning infrastructure and advanced information technology systems enabled management to keep increases in the cost base below the growth in turnover thereby achieving an increase in trading profit.

Trading profit
Given the strong growth in turnover and the strictly contained overhead costs within an inflationary environment, trading profit advanced 43,7% to R2,297 billion.

Trading margin
The trading margin advanced to 4,8% from 4,1% in 2007. The higher margins achieved in the Group’s operation outside South Africa also contributed to the increase.

Interest received and finance costs
The 68,2% increase in interest received was brought about by the succession of interest rate increases during the reporting period as well as improved cash flow resulting from the strong growth in trading profit. Finance costs decreased 29,2% to R59,1 million due to the Group’s reduced use of external short-term financing.

Exchange rate gains
The exchange rate gain of R33,2 million, 39,9% up on the previous year, is a factor of fluctuations not only in the exchange rate between the rand and the US$ but also between the rand and the currencies of the 16 countries where the Group trades outside the RSA.

Dividend declared
The Board declared a final dividend of 106,0 cents a share to bring the final distribution for the year to 155,0 cents a share, an increase of 53,5% compared to 2007. The proposed dividend is in line with the Board’s policy of a dividend cover of two times based on headline earnings per share.

Balance sheet

Inventories
Inventory increased above the growth in turnover to R4,707 billion. It was the result of the Group buying aggressively forward in the light of global food shortages as well as rising food inflation. In the light of the continued drop in suppliers’ service levels, the Group also used its network of distribution centres for stockpiling merchandise, thereby ensuring a more consistent flow of merchandise to stores and a reduction in out-of-stock situations. In addition a net 32 new supermarkets and 20 furniture stores had to be provisioned.

Cash and cash equivalents
A favourable balance sheet closing date produced an increase in net cash and cash equivalents from R1,988 billion to R3,136 billion and should be read with the increase in trade creditors.

OPERATIONAL REVIEW

Despite difficult trading conditions, affected by inflationary pressures at home and food shortages in global markets that substantially increased the prices of basic foodstuffs in particular, the Group increased sales and profit more than satisfactorily. Its operations outside South Africa continued the trend established in the first half of the year by increasing turnover by 36,9% and contributing R5,895 billion to total turnover.

This strong performance reflects the benefits of the very substantial investments made over the years in the growth and infrastructure of the business. Its reputation for offering the lowest prices stood it in good stead when the economy worsened, for consumers in growing numbers flocked to Shoprite in particular. The major reason for the growth in turnover was not the growth in the value per transaction - which was below the official food inflation rate - but the 10,3 % increase in the number of customer transactions. As the Group has achieved economies of scale in many areas in which it operates, it was possible to keep costs well under control so that the strong turnover growth translated into significant growth in trading profit.

Stores nevertheless lost sales due to a further drop in inbound supplier service levels. Despite increasing their production capacity, many suppliers could still not keep up with the demand. The Group countered the situation by using its network of distribution centres to stockpile product enabling it to control the flow of merchandise to individual stores and so reduce the number of out-of-stock situations. Stockpiling also enabled it to hold prices for longer in a high-inflation environment.

RSA supermarkets
The Group’s supermarket operation in South Africa, encompassing the three chains Shoprite, Checkers and Usave, represents the core of the business and produces 80% of total turnover. The division grew total sales by 21,8% against a background of internal food inflation that escalated to 10,6% from 6,0% in the corresponding period. Its sales continue to be driven mainly by the continued growth of the emerging middle market population of whom 33,4% moved into the LSM 5-10 spectrum during the past three years. The number of customer transactions increased 10,3%.During the year, the number of supermarkets increased by 27, mainly in new growth points, to bring the total operated by the three main brands to 536. The infrastructure developed over time to service the Group’s supermarkets proved more than sufficient to accommodate the strong growth in turnover. Automatic re-ordering and frequent replenishment from the centralised distribution centres limited out-of-stock situations while a start was made with night deliveries to reduce daytime pressure on store receiving staff.

Shoprite
Shoprite, the Group’s flagship brand whose 302 local stores contributed 60% to the sales generated by its supermarket operations in South Africa, increased turnover by 25,0%. These results are still somewhat distorted by the industrial action in the first half of the 2007 financial year that severely disrupted trading in some of its stores. With its reputation for offering the lowest prices, Shoprite was perfectly positioned to benefit from the economic downswing. It not only managed to retain its existing clients but also to attract a great many new ones. The number of customer transactions increased by 11,2%.. The strong growth in turnover saw Shoprite’s market share increase by just over 1%, the biggest in the food retailing sector during this period. Recent AMPS figures show 42,7% of all consumers - up from 39,6% the previous year - do their main shopping at Shoprite and that it is the most popular second choice of its competitors’ customers.

Checkers
Checkers grew turnover by 15,6% in its 143 stores - 119 supermarkets and 24 Hypers. The lower turnover growth than in Shoprite reflected the effect of higher bond and interest rates on the credit-leveraged sector of the community. It should also be seen against the fact that, unlike Shoprite, Checkers hardly lost any sales during the industrial action in the first half of the 2007 financial year. Its separation from Shoprite in terms of positioning is now complete and Checkers occupies a secure niche in the market. Its main focus is on customer service, product innovation and ambience. Considerable progress was made in all these areas, while its product offering increasingly reflects the need of present-day shoppers for table-ready and value-added dishes.

Usave
Like the other trading divisions of the Group, Usave also had a successful year with both turnover and trading profit showing substantial growth albeit off a relatively low base. Turnover grew 30,5% on a like-for-like basis while the number of customer transaction increased by 21,9%. These results flowed from a management decision to sacrifice gross margin in return for turnover growth. Stock-turn increased from 9,4 times to 12,6 times. During the reporting period, a net total of 17 outlets were opened. Usave’s total number of stores now stands at 91.

Supermarkets outside South Africa
The move into Africa beyond the country’s immediate neighbours has made the Group less dependent on a single economy and will in future lessen that dependence further as its business outside South Africa grows. Management is confident that the present strong rate of turnover growth - 38,1% in the reporting period - will be maintained should the Group’s current expansion plans be brought to fruition. The 100 supermarkets outside South Africa contributed 12,1% to the total turnover generated by the Group’s supermarket division. In the past year Zambia became the first country outside South Africa where the Group, through its support for local farmers, could acquire locally all the vegetables sold in its stores.

OK Franchise
The Group’s franchise operation increased turnover by 17,7% having added 29 members during the reporting period. Both operating costs and the debtors’ book were well controlled resulting in a healthy growth in trading profit. At the end of the reporting period OK Franchise had 252 members spread throughout South Africa, Namibia, Botswana, Swaziland and Lesotho, most of them based in rural areas but with a growing number located in larger towns and metropolitan neighbourhoods. During the past year the division extended to its members a number of services similar to those available through the Money Markets in Shoprite and Checkers supermarkets such as electronic account payments as well as air-time and pre-paid electricity purchases. Much work was also done during the year to expand and refine OK Franchise’s range of house brand products which now number more than 160. In addition to the extensive product range on offer, the division also provisions 38 liquor stores belonging to franchisees.

Furniture
For the furniture division the reporting period was a challenging one. In contrast to the food divisions where operations were characterised by high inflation, the furniture division continued to operate in a near deflationary environment. At the same time the impact of the National Credit Act and the increase in interest rates saw the demand in certain areas of the market for durable goods declining markedly while competition continued to be especially severe as discounters in particular continued to aggressively discount prices. The division nevertheless increased turnover by 5,6% but despite this trading profit was down 24,2% on 2007. Despite the deteriorating credit environment, the division did not experience a marked increase in bad debt as the strong focus on collections kept debts in arrears within acceptable parameters. The division now operates 236 stores under three brands - House & Home, OK Furniture, OK Power Express - having opened 22 additional outlets and closed 2 during the year.

GROUP PROSPECTS AND OUTLOOK

Trading conditions are not expected to change materially in the first half of the new financial year. While food inflation continued to rise throughout the review period, we expect it to reach its peak towards the end of the year. By 24 August we already had a deflation of 4,9% in our fruit & vegetable business for the month. Global food shortages will, however, remain a reality as competition for available stocks increases. Anticipated higher operating costs are expected to impact on profitability. Turnover growth is projected to slow in anticipation of intensified competition as well as the high growth rate in the number of customer transactions that is not sustainable at present levels. At the same time the Board believes that, because of the strong fundamentals of the business, it will continue to perform well in the new financial year albeit not at the same level.

CORPORATE GOVERNANCE
The Group is committed to the principles embodied in the Code of Corporate Practice and Conduct in the King Report 2002 (“the Code”). The Group complies with the significant requirements incorporated in the Code and in the Listings Requirements of the JSE Ltd.

DIVIDEND No. 119
The Board has declared a final dividend of 106,0 cents (2007: 66,0 cents) per share, payable to shareholders on Monday, 29 September 2008. This brings the total dividend for the year to 155,0 cents per ordinary share (2007: 101,0 cents). The last day to trade cum dividend will be Thursday, 18 September 2008. As from Friday, 19 September 2008 all trading of Shoprite Holdings Ltd shares will take place ex dividend. The record date is Friday, 26 September 2008.

Share certificates may not be dematerialised or rematerialised between Friday, 19 September 2008, and Friday, 26 September 2008, both days inclusive.

ACCOUNTABILITY
These condensed consolidated preliminary results have been prepared in accordance with International Financial Reporting Standards ("IFRS") and Schedule 4 of the South African Companies Act (Act no 61 of 1973), as amended. The accounting policies are consistent with those used in the annual financial statements for the financial period ended June 2007 with the following exceptions:

• With the introduction of new accounting statement IFRS 7: Financial Instruments: Disclosures and the amendment to IAS 1: Presentation of Financial Statements: Capital Disclosures, all related items in the Group are now presented in accordance with these statements. These statements require retrospective application and had no significant effect on the Group’s results.
• The calculation for headline earnings were adjusted retrospectively in terms of SAICA Circular 8/2007: Headline Earnings. This recalculation had the following effect on the comparative information previously presented:

By order of the Board

1 September 2008


AUDITORS' REVIEW OPINION
The condensed consolidated preliminary results for the year ended June 2008 have been reviewed by PricewaterhouseCoopers Inc. The auditors' unqualified review opinion is available for inspection at the Company's registered office.

DIRECTORATE AND ADMINISTRATION

Executive directors
JW Basson (chief executive), CG Goosen (deputy managing director), B Harisunker, AE Karp, EL Nel, AN van Zyl, BR Weyers

Non-executive directors
CH Wiese (chairman), JJ Fouché, TRP Hlongwane, JA Louw, JF Malherbe, JG Rademeyer

Alternate directors
JAL Basson, M Bosman, PC Engelbrecht, JD Wiese

Company secretary
AN van Zyl

Registered office
Cnr William Dabs and Old Paarl Roads, Brackenfell, 7560, South Africa.
PO Box 215, Brackenfell, 7561, South Africa
Telephone: +27 (0)21 980 4000 • Facsimile: +27 (0)21 980 4050.
Website: www.shopriteholdings.co.za

Transfer secretaries

South Africa: Computershare Investor Services (Pty) Ltd, PO Box 61051, Marshalltown, 2107, South Africa
Telephone: +27 (0)11 370 5000 • Facsimile: +27 (0)11 688 5238 • Website: www.computershare.com

Namibia: Transfer Secretaries (Pty) Ltd, PO Box 2401, Windhoek, Namibia 
Telephone: +264 (0)61 227 647 • Facsimile: +264 (0)61 248 531

Zambia: Lewis Nathan Advocates, PO Box 37268, Lusaka, Zambia 
Telephone: +260 (0)1 223 174 • Facsimile: +260 (0)1 229 868

Sponsors

South Africa: Nedbank Capital, PO Box 1144, Johannesburg, 2000, South Africa
Telephone: +27 (0)11 295 8602 • Facsimile: +27 (0)11 294 8602 • Website: www.nedbank.co.za

Namibia: Old Mutual Investment Group (Namibia) (Pty) Ltd, PO Box 25549, Windhoek, Namibia
Telephone: +264 (0)61 299 3527 • Facsimile: +264 (0)61 299 3528

Zambia: Lewis Nathan Advocates, PO Box 37268, Lusaka, Zambia 
Telephone: +260 (0)1 223 174 • Facsimile: +260 (0)1 229 868

Auditors
PricewaterhouseCoopers Incorporated, PO Box 2799, Cape Town, 8000, South Africa
Telephone: +27 (0)21 529 2000 • Facsimile: +27 (0)21 529 3300

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