SPAR

FINANCIAL OVERVIEW
In a year of slow economic recovery, low inflation and an extremely competitive retail environment, the group has produced a satisfactory financial performance. Comparable headline earnings per share of 543.7 cents, which is exclusive of the broadbased black economic empowerment (BBBEE) transaction cost, increased by 12.1%. The annual dividend declaration increased 12.4% as the dividend policy remained unchanged. Cash generation was strong, impacted by a lower level of capital expenditure this year of R206 million and the buy back of company shares amounting to R188 million. Food inflation was negligible at 1% for most of the year, influenced mainly by deflation on basic commodities. Consumer spending remained under pressure despite reduced interest rates while the increased level of unemployment also impacted on our retail performance, particularly in the rural markets. The group’s continued focus on competitive retail pricing and retailer profi tability resulted in the gross margin declining slightly to 7.9% (2009: 8.0%). Warehouse expense ratios were negatively affected by a 6.3% increase in volumes handled by our distribution centres in a low food inflation environment. Increased municipal charges and an increased fuel price adversely affected the second half of the year. Positive highlights were the low increase in administration expenses together with an improved level of irrecoverable debts. Overall, group operating costs at 6.7% up on last year were well controlled. In order to secure key sites, the group purchased five retail stores during the year. These will be managed by a newly established retail division. Net interest earned of R3.7 million was lower than that earned in 2009 (R5.4 million) and refl ected the effects of the continued capital expenditure programme, the share buybacks and lower interest rates. The group has continued to advance or secure loan facilities for retailers in order to enable them to purchase or revamp stores. The group discounts these retailer loans with its bankers. The group has no longterm borrowings and, when necessary, funds its operations from overdraft facilities. These facilities are in excess of forecast requirements and are subject to annual review. Dividend cover was maintained at 1.5, and a fi nal dividend of 222 cents per share was declared. Dividends for the year amounted to 362 cents (2009: 322 cents) per share.


SPAR RETAIL Despite a challenging trading environment, SPAR storesincreased retail turnover by 8.6% to R44.6 billion. The retail market place remained extremely competitive over the year, driven by increased advertising exposure and aggressive pricing by the major retailers. Margins remained under pressure, both at wholesale and retail, and the group remains focused on ensuring profi table growth for retailers. Retail trading space increased to 898 495 m2, a net growth of 1.75%. Thirty one new stores were opened and thirteen stores changed to larger store formats. Of particular satisfaction was the upgrade programme which resulted in 146 stores completing revamps. The roll out of SPAR’s customised merchandising concepts continued. SPAR branded products had a solid year achieving wholesale sales in excess of R3.9 billion and a growth of 9% despite signifi cant defl ation in major commodity categories. Extensive product development took place with 310 products being introduced or repackaged. In many instances packaging now includes detailed information on product ingredients and guidelines on recommended daily consumption, the objective being to help consumers to live a balanced and healthy lifestyle. In addition, work was commenced on aligning the labelling of all SPAR branded products with the new legislation. The SAVEMOR “price fighting” brand continued to play an important role in our marketing strategy although performance was also impacted by deflationary pricing in most commodities. Sales in excess of R400 million confirm that this brand continues to enjoy support from the price sensitive consumer.

The FRESHLINE brand enjoyed excellent support from quality seeking customers, achieving wholesale sales growth of 16%. This growth was once again driven by a continued strategic focus on this brand’s cornerstones of uncompromising quality, innovation and availability backed by improved supply chain efficiencies. The group recognises its house branded products as an opportunity to build customer loyalty through a “quality, value for money” offering. Innovative and aggressive advertising and promotions have been key in this competitive environment. The group’s media campaigns focused on both brand image and product and price under the “Save More, Live More” theme for the year. It is anticipated that 25 new stores will open during 2011, which, together with store revamps, will add approximately 3% to retail trading space. We will, however, continue to close some stores which fail to meet group store standards.

Review of trading results

TRADING OVERVIEW
Trading for the year under review continued to be challenging with consumer spending under pressure, low levels of food inflation for most of the period and a highly competitive retail environment. The group has, nevertheless, produced a satisfactory set of results, with a pleasing improvement in performance in the second half of the year. Turnover growth of 10.4% included exceptional performances from our liquor and building materials businesses. Food inflation through our distribution centres averaged 3.3% and was impacted by a significant increase in the last quarter. Volumes handled by our facilities showed a healthy growth of 6.6%, which continues to reflect the underlying health of the business. Operating profit increased by 7.8% for the year and by an encouraging 11.8% in the second half. SPAR wholesale turnover of R31.9 billion increased by 8.6% and reflects
good real growth. Retail trading space was up by 3% with the opening of 25 new stores. At year end the group serviced 859 SPAR stores. TOPS enjoyed another successful year and store numbers increased to 501 with 48 new stores opening. Liquor sales remained extremely strong with wholesale turnover reaching R2.6 billion and showing an impressive growth of 19.9%. This brand can now confidently claim to be the number 1 liquor
brand in the country. Build it has again had an excellent trading year with 21 new stores opening and wholesale turnover growing by 18.2% to R3.9 billion. The new Build it
imports warehouse has shown encouraging growth over the year and we expect this operation to be in a profitable position by 2013. The group’s retail division added, as planned, a further 5 SPAR retail stores during the year under review, bringing the total SPAR stores owned to 10. The trading performance of these stores is not satisfactory, with a loss of R29.9 million incurred for the year. Considerable effort and focus will ensure an improvement in this division’s performance in the new year. The focus on our independent retailers’ profitability continued to put pressure on our gross margins and core margins declined slightly to 7.8% (2010: 7.9%). The impact of the retail division and the building materials wholesale operation has positively countered this reduction and resulted in a
net improvement in overall margin from 7.9% to 8.1%. Operating expenses, up by 17.4%, continued to be affected by the retail division and building materials wholesale operation as these two new initiatives have no full base year comparative. Comparable group expenses
increased by 9.6% and were significantly impacted by high diesel prices which contributed to delivery costs increasing by 19.9%. Headline earnings per share increased by 3.9% which was mainly influenced in the current year by a reduced tax benefit arising from the take up of share options. Cash generation remained strong and was impacted by reduced levels of
capital expenditure this year of R160 million, the purchase of retail stores for R94 million, and the buy back of company shares amounting to R98 million. The extension to the perishable facility at the Eastern Cape distribution centre was completed in September 2011 at a cost of R39.7 million. The dividend cover was maintained and a final dividend of 235 cents per share was declared. Dividends for the year amounted to 377 cents representing
a 4.1% increase over last year. The group has no long term borrowings and, when necessary, funds its operations from overdraft facilities. These facilities are adequate for forecast requirements and are subject to annual review.

PROSPECTS
The group expects 2012 to be a challenging year with consumer spending remaining under pressure and an increasingly competitive trading environment. We are, nevertheless, positive about the opportunities for the business and will continue to focus on improving the performance of the new business initiatives, driving retail growth and realising further cost savings through improved operating efficiencies.
The group is confident that the capital expenditure in 2012 will not exceed R190 million.
Cash generation is expected to remain positive as capital expenditure is closely controlled and the effective dividend cover is maintained. Where appropriate, surplus cash will be utilised to buy back shares.

Mike Hankinson Wayne Hook
Chairman Chief Executive

The SPAR Group Limited acts as a wholesaler and distributor of goods and services to SPAR supermarkets, Build it building materials outlets, and TOPS at SPAR liquor stores. Seven distribution centres provide goods and services to retail stores in South Africa, Swaziland, Botswana, Mozambique, Namibia, Zimbabwe and Zambia. The relationship between The SPAR Group Limited and its independent retailers is one of a “voluntary trading” partnership. The philosophy being that all parties will benefit by working together in a spirit of close cooperation. The company actively drives and manages its brands and provides a full range of support services to independent retailers