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finance director’s report

			Retail
	Group		Woolworths		Country Road		Financial services
	2008	2007	2008	2007	2008	2007	2008	2007
	Rm	Rm	Rm	Rm	Rm	Rm	Rm	Rm
Revenue	21 753.6	18 641.9	18 242.1	16 099.5	1 939.3	1 361.8	1 662.9	1 274.4
Operating profit	2 006.6	1 845.5	1 245.4	1 232.9	102.0	56.7	659.2	555.9
Finance costs	502.5	378.7	0.4	12.5	1.0	1.8	501.1	364.4
Profit before tax	1 504.1	1 521.4	1 245.0	1 275.0	101.0	54.9	158.1	191.5
Return on equity	27.6%	35.1%	50.5%	63.6%	18.1%	34.6%	10.0%	14.3%
segmental analysis

Growth was still experienced in most categories, helped by higher producer inflation. Sales grew 18.8% to R10.4bn. Comparable stores sales grew 9.9% and 7.8% on a 52-week basis. Waste was also higher than planned, due to the disappointing holiday sales and the problems associated with the introduction of new systems.

	2008	2007
Store card as a % of total sales	27.2%	32.2%
Interest yield on gross books	23.5%	19.9%
Average cost of funds	11.1%	8.8%
Total gross books (Rm)	5 867.4	5 850.0
Total provisions (Rm)	(447.8)	(314.0)
Net book (Rm)	5 419.6	5 536.0
Provision as a % of book
Woolworths card debtors	6.9%	4.9%
Personal loans	7.9%	5.1%
Visa card	9.9%	7.5%
Total all books	7.6%	5.4%
financial services

Our financial services business experienced higher delinquencies in all products, but especially our Visa card offering. The debtors’ book had shown resilience in recent years to temporarily higher interest rates but were unable to cope with the impact of a consistently high interest rate environment. Net bad debts, including cost of collections, were 7.9% (2007: 4.9%).

Total bad debt provisions increased from 5.4% to 7.6%.

Higher interest yields, increasing 3.6% to 23.5%, failed to offset the increased charge-offs.

Country Road returned record sales, up 22.2% to A$290.4m. Comparable store sales growth was 8.4%.

Gross margin increased from 58.1% to 61.1% in Australian Dollar terms as a result of better sourcing and control. Profit increased 54.8% to A$14.4m.

expenses

As trading conditions worsened throughout the year, we refocused, successfully, on more effective management of expenses. This resulted in an increase in comparable costs in the SA retail segment during the second half of the year of only 10.6% (first half: 18.4%).

Bad debts and provisioning on the books increased 66.2% to R584.3m. We have seen some early signs of improvement in delinquency rates, suggesting that bad debts may have peaked.

Employment costs and productivity were tightly controlled as it became clear that the slowdown was to be prolonged, especially in stores. Full-time equivalent employees in the South African retail business increased from 19 344 to 21 374 as a result of the 7.3% increase in footage, increasing employment costs by 20.3%. Improving productivity levels in a tougher retail environment remains a key commitment. No management incentives in terms of the short-term incentive scheme were paid in South Africa this year. Incentives were paid to Country Road management in line with their success.

The 18.2% increase in the depreciation cost is indicative of our ongoing commitment to sustainable growth. It was, however, lower than planned, as we reviewed the capital programme and readdressed feasibilities on more marginal projects.

Country Road managed expenses well, holding expenses to 24.9% on last year before incentives, which includes the cost of the new concession format. This translated to an increase of 45.8% in rands due to a significantly weaker exchange rate of R6.62 to the Australian Dollar (2007: R5.67). Comparable costs excluding costs associated with the new concession format increased by 4.2% in Australian Dollar terms.

Finance costs rose as we increased our gearing of the financial services assets, but were in fact only slightly above our planned levels – the lower level of investment in the assets offsetting the impact of higher rates. We also benefited from interest rate hedge instruments taken out during last year’s usury rate freeze.

profit

Profit before tax, exceptional items and before the BEE charge improved by 6.2%, whilst HEPS was 9.5% lower, adversely impacted by the non-comparable BEE IFRS 2 charge and an 8.1% increase in the effective tax rate – the previous year’s low rate had benefited from a deferred tax credit in Country Road. The tax charge also includes a R20m STC charge resulting from our recent share repurchase.

Dilution of headline earnings per share of 2.8 cents arises from share options granted in terms of employee incentive schemes.

balance sheet

Total assets grew by 7.8% as a result of the store development plan and increased inventory holdings. Net asset book value per share rose by 10.6% to 443.8 cents per share.

The disposal of 50% plus one share of the group’s interest in Woolworths Finanical services meets the definition of a ‘disposal group’ in IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations. As a result, the major classes of assets and liabilities impacted by the transaction are disclosed separately on the face of the balance sheet. Financial services assets and related derivative financial instruments are disclosed as assets of disposal group held for sale, while financial services borrowings and related derivatives are disclosed as liabilities of disposal group held for sale. This reclassification did not impact on the reported results.

cash flow and capital expenditure
 

Cash generated by operating activities decreased 37.3% whilst cash inflow from trading reduced by 4.7%. The lack of growth in financial services fixed assets meant that cash generated by operating activities was significantly higher than the prior year at R952.6m (2007: R374.9m).

Our R638.4m (2007: R649.1m) investment in capital expenditure includes 10 new full-line corporate stores and 17 food only stores, adding 33 992m² of new footage. A further 28 are planned for the year ahead, nine of which will be full-line stores, adding 17 463m2 (14.7%) to food trading space and 19 762m2 (7.5%) to clothing and general merchandise space (2008: 7.3%).

	2008 (June)	2007 (June)
Corporate	228	200
Full line	108	98
Clothing and general merchandise	6	5
Food	114	97
Franchise SA	77	78
Woolworths Food Stops	38	24
Franchise International	42	47
TOTAL	385	349
number of stores

financial risk management

Financial risks related to funding (liquidity and counterparty risks), interest rate risk and foreign exchange risk are managed by the treasury committee which meets on a regular basis. The funding requirements of the financial services and retail segments are assessed independently in line with their business models in order to optimise the respective funding structures. Our funding strategy, which attempts to balance the operational and systemic risks with desired returns, is to gear the financial services assets with 80% debt funding. Funding of the financial services assets will be provided by Absa upon completion of the joint venture with no recourse to Woolworths.

Liquidity risk associated with borrowings is managed by staggering the timing of maturities of borrowings and maintaining substantial short-term committed and uncommitted banking facilities. Unutilised committed banking facilities totalled R2bn at June 2008 (2007: R1.2bn) and unutilised uncommitted banking facilities totalled R883.8m (2007: R1.3bn).

Financial services assets and interest-bearing borrowings carry interest rate risk. As part of the process of managing the group's fixed and floating rate borrowings mix, the interest rate characteristics of new borrowings and refinancing of existing borrowings are positioned according to expected movements in interest rates.

It is the group's policy to cover all foreign currency exposures arising from the acquisition of goods and services with forward exchange contracts.

17.9 million shares were repurchased and cancelled in June 2008 at a cost of R200m representing a weighted average repurchase price of R11.19 per share.

accounting standards

The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).

The accounting policies applied are consistent with those applied in the prior year, except for the adoption of IFRS 7 Financial Instruments: Disclosures that became effective during the year. Adoption of this standard had no impact on the reported results. All additional disclosures required by this standard have been provided for both the current and comparative period.

Headline earnings per share and diluted headline earnings per share have been calculated in terms of Circular 8/2007: Headline Earnings for both the current and prior year.

prospects and financial targets

We expect the year to June 2009 to remain challenging, with the full impact of high interest and high inflation rates continuing to be felt, and the pace of credit extension slowing further.

We expect the blended retail gross margin to continue to be maintained during 2009 despite the increased contribution of food. We expect also that inflation will continue at its current high levels in food, due to rising international commodity prices, and in clothing where margin pressure continues to be felt in China as local Yuan denominated input costs rise against a still weak US Dollar. Operating costs will continue to reflect the increased level of activity and investment in store service initiatives and bad debts are expected to remain under pressure.

Capital expenditure is expected to be approximately R860m, of which R370m is planned for the Woolworths chain store roll-out and modernisation programme and R130m is planned for the Country Road store expansion programme. Planned increases in footage have been detailed above.

We expect the group effective tax rate to be approximately 33.5%; a function of the normal rate of income tax of 28%, STC of 10%, and the impact of IFRS 2 and other non-deductible charges.