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(From Integrated Report 2012)

STATEMENT OF COMPREHENSIVE INCOME

Sale of merchandise

• Total turnover increased by 14,4% to R82,73 billion. This was a satisfactory performance seen in the context of the state of the economy in general.

The following table gives the turnover per segment:

SEGMENTAL SALES

• The Group’s investment in world-class systems and logistic infrastructure and its policy of lowest prices saw it continuing to gain on the opposition. By sticking to these principles, the Group was able not only to retain the loyalty and support of customers across the spectrum, but also to extend its customer base.
• Supermarkets RSA reported a 12,9% growth in turnover to R64,58 billion. Customers on average remained financially stressed, but Supermarkets RSA opened a net 55 stores and had a number of highly successful promotions during the year which contributed to its turnover growth. Value-added categories like cheese, wine and meat saw continued improvements to their ranges and supplied customers with world-class products.
• Internal food inflation increased from a deflation of 0,1% in 2011 to an inflation of 4,9% in 2012. This compares with the official food inflation of 8,8% for the 2012 financial year.
• Supermarkets Non-RSA, in a similar inflationary environment, contributed R9,17 billion to Group turnover after conversion to rand. Due to the relative weakness of the rand in relation to the US dollar and most African currencies in which the Group trades, this translated into a turnover growth of 25,4% in rand terms. In constant currencies the growth was 19,7%.
• Trading conditions for the furniture business also remained difficult with an internal deflation of 5,1%, but it managed to increase turnover by 11,1% to R3,40 billion. This turnover growth was achieved without sacrificing margins. Trading profit increased by a healthy 33,5% to R175,5 million (2011: R131,5 million). The strongest turnover growth at 15,3% was again reported by OK Furniture, which targets middle- to lower- income consumers. Credit participation increased in OK Furniture and OK Power Express by 2,18% with a 5,01% increase in House and Home. This assisted trading margins although finance income grew at a slower pace due to reduced interest rates.

Gross profit
Gross profit comprises primarily gross margin after markdowns and shrinkage. In line with IFRS (IAS 2: Inventory and IFRIC Circular 9/2006), the Group deducted settlement discounts and rebates received from the cost of inventory.

The Group maintained its price competitiveness in a market characterised by aggressive food discounting. Despite reducing the margins on basic foods the Group nevertheless increased gross profit margins as a result of a slightly higher contribution by non-food items and an increase in efficiencies in systems and logistic infrastructure. This resulted in the gross profit margin increasing from 20,3% to 20,5%. Gross profit increased by 15,7% to R17 billion, due mainly to the increase in turnover and efficiencies in logistical infrastructure already mentioned. Shrinkage remains well under control, but crime continues to be a scourge with perpetrators becoming more brazen by the day. This forces the Group to increase its spend on security and loss control.

Other operating income
Other operating income increased by 25,3% to R2,33 billion, mainly due to an increase in commissions received and premiums earned. Finance income earned (5,2%) remains under pressure due the reduction in interest rates, but other items grew in excess of turnover growth.

Expenses
Cost management remains a high priority for the Group as trading margins are always under pressure due to the increased competition in food retailing.

• Depreciation and amortisation: The Group is continuing to increase its investment in information technology. It is also opening new stores while simultaneously implementing an on-going refurbishment programme for older stores. On average, stores are revamped every seven to eight years. In addition, 107 new stores were opened during the year and 17 closed.
• Operating leases: Rental increases for existing stores are generally in line with those in the property market as a whole. The net 90 new stores opened during the year and the increase in turnover also saw a commensurate increase in turnover rentals. Certain lease payments were reduced by head leases that were either not renewed or were renegotiated during the year.
• Employee benefits: The increase in staff costs of 13,3% was mainly due to the additional staffing requirements in the light of the increase in turnover and the new stores opened. Productivity continued to improve while further focus was placed on improving and maintaining in-store service levels. Included in Employee benefits are provisions for long-term incentives to retain staff.
• Other expenses: These costs, which increased by 22,4%, cover expenses such as electricity and water, repairs and maintenance, security and commissions paid. The Group maintained its provision for the reinstatement of leased buildings where it has an obligation to maintain their exterior. Other expenses grew at a faster rate than turnover, and were mainly due to increases in electricity (tariff increases), commission paid (more customers making use of cards), repairs and maintenance (revamps and other general expenses) and motor vehicle running expenses (fuel and other costs). Some of the other expenses outgrew turnover due to the number of new stores opened.

Trading profit
The trading margin increased from 5,51% to 5,64% due to the higher turnover, the increase in the gross margin and the careful management of expenses.

Foreign exchange differences
As stated in the accounting policies, the balance sheets of foreign subsidiaries are converted to rand at closing rates. These translation differences are recognised in equity in the foreign currency translation reserve (FCTR). In essence, most foreign exchange differences in the income statement are due to US dollar denominated shortterm loans in operations outside South Africa and balances in US dollar held in offshore accounts.

During the year the rand weakened while the currencies of some of the countries in Africa where the Group does business maintained their levels against the US dollar. The result was a currency loss of R8,34 million compared to a loss of R0,45 million in the previous financial year. The table below gives the approximate rand cost of a unit of the following major currencies at year-end:

Net interest paid
The Group utilised overnight call facilities for both short-term deposits and borrowings for most of the year. As in the past, the Group funded all capital projects utilising short-term borrowings and cash reserves.

During March 2012 the Group issued 27,1 million new ordinary shares as well as 6,5% convertible bonds. See Non-current liabilities later in this report for full details. As a result finance costs increased to R223,5 million, but at the same time Interest received increased by 50% to R142,2 million, due to the short-term investment of surplus cash.

Income tax expense
The effective income tax rate is higher than the nominal income tax rate due to certain non-deductible expenses such as leasehold improvements as well as income tax losses in certain non-RSA countries that cannot be utilised for Group purposes. The income tax expense includes an amount of R91,8 million in respect of secondary tax on companies relating to the final dividend for 2011 which was paid at the beginning of the financial year.

Headline earnings per share
Headline earnings per share increased by 19,6% from 507,6 cents to 607,0 cents and stemmed mainly from the turnover growth and a consequent increase in trading profit of 17,0%.

STATEMENT OF FINANCIAL POSITION

Non-current assets

PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS
During the year the Group spent R3,14 billion on property, plant and equipment and software compared to R3,02 billion in 2011. The Group is also continuing with its policy to purchase vacant land for strategic purposes and for creating retail space when no developers can be found. During the year the Group spent R921 million on such land and buildings. Refurbishments cost R350 million, while R756 million was spent on new stores (excluding land and buildings), R401 million on information technology and the balance on normal replacements. The Group is in the process of upgrading its merchandising, master data and central stock ledger systems. This process will continue into the next financial year. Capital commitments of R1,71 billion relating to these improvements have been entered into for the next financial year.

Intangible assets consist mainly of goodwill paid for acquisitions, trademarks acquired and software. Goodwill represents the premium paid for certain businesses and is tested for impairment annually based on the value-in-use of these businesses, calculated by using cash-flow projections.

Software represents the Group’s investment in certain computer software that is used in its daily operations. The Group continued its investment in new SAP software which, like all software, is amortised over its useful life of three to seven years.

Trademarks mainly represent the purchased Computicket, Transpharm and Seven Eleven/Friendly Grocer trademarks and is amortised over 20, 16 and 20 years respectively.

AVAILABLE-FOR-SALE-INVESTMENTS
During the year the Group and other shareholders bought outright the international treasury systems of RMB Global Solutions.

LOANS AND RECEIVABLES
During the last quarter of the financial year the Group called for the conversion of its 13 500 000 redeemable, convertible cumulative preference shares in Pick & Buy Ltd, a retailing supermarket group in Mauritius. These preference shares were then redeemed and the proceeds utilised to subscribe for a 25% shareholding in Winhold Limited, a newly created holding company of Pick and Buy. The Group then exercised its rights to take up a further 24% in Winhold Ltd to bring its holding to 49%. Ireland Blyth Limited, a company listed on the Mauritian Stock Exchange, holds the other 51%. The balance consists mainly of amounts owing by franchisees for franchises and for fixtures and fittings sold to them.

DEFERRED INCOME TAX ASSETS
Deferred income tax is provided, using the liability method, for calculated income tax losses and temporary differences between the income tax bases of assets and liabilities, and their carrying values for financial reporting purposes. This asset developed primarily from provisions created for various purposes as well as the fixed escalation operating lease accrual.

Current assets

INVENTORIES
Inventories totalled R8,68 billion, an increase of 23% on the previous year. The inventory turn, based on the sale of merchandise, was 10,5 times (2011: 11,0 times) and based on cost of sales 8,4 times (2011: 8,8 times). The increase in inventory resulted mainly from the following:

• Provisioning a net 90 new stores.
• Extending the distribution centres in Centurion and Brackenfell with a greater number of products now flowing through these facilities.

TRADE AND OTHER RECEIVABLES
Trade and other receivables mainly represent instalment sale debtors, franchise debtors, buy-aid societies and rental debtors. Adequate allowance is made for potential bad debts and the outstanding debtor’s book is reviewed regularly.

The allowance for impairment and unearned finance income in respect of instalment sale debtors amounted to 13,18% compared to 13,19% the previous year. This minimal decrease was made possible by the quality of the book.

CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS
Net cash and cash equivalents amounted to R7,92 billion at year-end, compared to an overdraft of R80,5 million in 2011. This movement was mainly due to the following:

• Capital expenditure, mainly on land and buildings, of R3,10 billion.
• The proceeds from the share and convertible bond issue which led to the inflow of approximately R8 billion.
• The fact that the date of the Statement of Financial Position fell after the calendar month-end thereby causing certain 30-day term creditors to be paid after year-end. This also accounts for the increase in Trade and other payables.

Share capital
On 29 March 2012 Shoprite Holdings had a successful placement of new Shoprite Holdings ordinary shares and convertible bonds for gross proceeds of approximately R8 billion. This was done by way of concurrent accelerated book build offerings to qualifying investors. Shoprite Holdings Ltd issued 27,1 million new ordinary shares under a general authority at R127,50 per share, for gross proceeds of approximately R3,5 billion. Also see Convertible bonds below.

The equity component of the convertible bonds is included in Equity in accordance with IAS 32.

Non-current liablities

6,5% CONVERTIBLE BONDS
On 2 April 2012, and as per the concurrent accelerated book build offerings referred to above, Shoprite Investments Ltd issued 6,5% convertible bonds due April 2017 in a nominal amount of R4,5 billion. On 9 May 2012 a further issue for a nominal amount of R200 million was made to Shoprite Checkers (Pty) Ltd, to be utilised as part of an incentive scheme for its employees.

Specific authority was granted at an extraordinary general meeting on 28 June 2012 for the issue of a maximum of 30 million new ordinary shares of Shoprite Holdings Ltd upon conversion of the convertible bonds. The initial conversion price is R168,94 per ordinary share. On 28 May 2012 these convertible bonds were successfully listed on the JSE.

The Group intends to use the proceeds of the offerings to:

• Fund organic growth initiatives, opening new stores in existing markets and investing further in optimising supply-chain and distribution capabilities.
• Accelerate the Group’s African expansion through the purchase and development of property in both new and existing African markets.
• Enhance the Group’s ability to pursue acquisitions in South Africa and abroad.
• Increase balance sheet flexibility and proactively manage the capital structure, better aligning the funding of the Group’s long-term investments with long-term capital, repaying short-term credit facilities and diversifying funding sources; and
• Further improve working capital management, leveraging increased liquidity to obtain better terms from suppliers and strategically building inventory in an inflationary environment.

In terms of the Memorandum of Incorporation of Shoprite Holdings Ltd its borrowing powers are unlimited.

Current liabilities

PROVISIONS
Adequate provision is made for post-retirement medical benefits, reinstatements, onerous lease contracts, long-term employee benefits and all outstanding insurance claims. The Group has settled a major portion of the post-retirement medical liability in the past. The remaining liability relates mainly to pensioners and will be settled during subsequent financial years.

Credit sales
The Group continued to supply credit facilities as part and parcel of its furniture business. The management and administration of this debtor’s book is done in-house as the granting of credit is deemed an integral part of selling furniture.

Shoprite insurance
The Group operates its own short-term insurance company as part of the furniture business. During the year under review net premiums earned amounted to R295 million compared to R257 million the previous year. As in the past, the Group accounts for premiums earned and extended guarantee fees over the life of the policy. In South Africa, insurance premiums are invoiced and earned on a monthly basis. This is in line with the National Credit Act.

At year-end the insurance company had a solvency margin of 83% (2011: 76%) compared to the minimum requirement of 15% as per the Insurance Act.

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