Shoprite Holdings Financial Performance Report HY2019

1. Financial Performance Report

2. Trading Context HY2019 The six months to December 2018 saw retailers facing continued tough market conditions and increasing competition. The South African economy remained constrained, despite stepping out of a technical recession, GDP growth averaged at +2.0%. Consumer confidence is wearing down after the unprecedented jump last year (CCI: 7), with disposable income under pressure and employment opportunities dwindling. Growth in total retail trade sales for the six months at +1.2%, thanks in part to the recovery in some durables and the resilience in health and beauty. Food retail sales growth declined -1.9% for the six months (2018: -1.7%).  Rand volatility saw the currency fluctuate in response to domestic and international changes. Inflation consistently within the target range however the Reserve Bank decided to act pre-emptively and increase the interest rate as the exchange rate and international fuel price expectations suggested inflation could increase despite food inflation remaining low at 3.4% on average for the six months (LY: 5.6%) Amongst these challenges in the industry, South Africa’s biggest retailer faced an onslaught of issues causing a weak half: the disruption caused by SAP ERP re-platforming; this on the back of industrial action at the Group’s largest DC, saw supply chain issues amounting to R1bn in missed sales; a massive devaluation in the Angolan currency, and the longest period of stagnant internal inflation in the last 10 years at 18 months. SOURCE: Ti Economic Indicators Report, StatsSA, BER

3. SOURCE: Shoprite Holdings • “We are not put off by the challenges of this country or the rest of the continent […] We continue to invest in the downturns and the upswings.”Christo Wiese Chairman Shoprite Holdings - Graham O’ Connor, SPAR Group CEO Jun 2018

4. Group Turnover Performance • Group turnover increased +0.2% to R75.9bn (HY2018: +6.2%) during this tough, transformational period marred with multiple overlapping factors disrupting trade • Comparable growth -2.7% Volume growth +0.2% with 3.75 billion products sold andcustomer growth +1.7%, serving 563 million customers • Factors impacting sales • Over R1bn in lost sales due to out-of-stocks caused by SAP ERP system roll out and compounded by industrial action in Gauteng DC where the third-party work force went on strike • Record sales for ‘Black Friday’ biggest day ever with over R1bn in one day, satisfactory growth on last year • Non-SA’s performance was severely impacted by the significant currency devaluations • Consistently low internal inflation over the last 18 months, HY2019: +0.4%, new low • Other factors include robberies, revamps, listeriosis outbreak, sugar tax and VAT increase • Private label sales are reportedly growing at double the rate of all brands, with +767 new products, participation +0.6% points to 16.4% in HY2019 • Online channels reportedly performing well – ‘Click n Collect’ at 257 Checkers, delivery with Uber eats and Mr D SOURCE: Shoprite Holdings, NOTE: The hyperinflation in Angola is a result of the move on the exchange rate at the end of the year needing to be applied back to the full period under review

5. SA Supermarket Performance • Turnover +2.6% to R56.1bn for HY2019 (HY2018: +5.7%), accounting for 74% of total sales. Transaction growth +2.0% and volume growth +0.7% • Comparable turnover declined -0.5%. Core categories faced zero inflation or deflation, total internal inflation +0.4% for HY2019 • Sales impacted by constrained consumer and stock-outs caused by the Gauteng DC strike and the change over to SAP ERP • Shoprite • Turnover+1.2% growth in a zero inflation period where targeted consumers are over-indexed in commodities and price-sensitive, basic food prices continued to be subsidised to assist the most vulnerable • Sales were hard-hit by out-of-stock • Checkers • Turnover +4.3% (Excluding Hyper), Hyper sales were impacted by refurbs but should recover in H2 • Market share gains and sales growth are attributed to gains in the top-end affluent consumer segment with continuous innovation and improvement in fresh, health and convenience food ranges • 20 stores have been converted to a new look FreshX concept out of a target of 80 stores • Usave • Turnover -1.0% impacted by DC issues despite growth on the Usave private label • The small format has a clear strategy to offer the lowest possible price on a restricted range, deflation is a challenge and includes 9 new stores in underserved areas with a new container format coming out soon • LiquorShop • Significant market share gains reported with +20.1% growth, this continued strong performance includes the opening of 27 net new stores, meeting the expansion target of a new store per week for the six months • SOURCE: Shoprite Holdings

6. Non-SA Supermarket Performance • Operating out of 14 Non-SA countries in Africa and the Indian Ocean islands and contributing 14.7% to Group sales • Turnover growth -13.3% to R11.1bn (HY2018: +0.4%) • Comparable store turnover growth –16.5% attributed to currency fluctuations in major countries of operation • Constant currency growth at +0.05% (HY2018: +1.9%) • Internal inflation increased to +2.8% for HY2019 • Angola currency devaluation of 85.1% against the US$ since Jan 2018 compounding the effect of the economic recession on consumer spending • Nigeria also affected by exchange rates, positive constant currency growth +8.4% bolstered by the new store opened in the past year, the improved stock availability and the addition of a fresh through their DC • Kenya joined the portfolio opening up in East Africa’s largest economy • The Group remains positive about the viability of their investment in Non-SA, with generally positive long-term prospects, rapid population growth and market formalisation and believe their footprint and strategic expansion plan, uniquely position them on the continent • SOURCE: Shoprite Holdings

7. Furniture Group Performance • Turnover for HY2019 +4.3% to R3.4bn • Comparable store turnover +4.2% • Solid result considering that credit sales participation dropped drastically to only 12.7% of total sales (HY2018: 14.5%). ‘Black Friday’ sales exceeded expectation boosting next half’s sales • Other Operating Segments Performance • Turnover +6.5% to R5.2bn • OK Franchise Division • Turnover +8.5% with market share gains • Conversion of franchise stores to the OK brand to be completed this year • 11 new OK Express forecourt stores opened in H1, total 35 • Increasing use of DC’s • Better sales with wider range of fresh products and more frequent deliveries • Strong uptake of private label products and general merchandise ranges • MediRite has 163 pharmacies • Including 15 in Angola, 1 in Mozambique and 3 in Swaziland • SOURCE: Shoprite Holdings

8. Group Profit Performance • Gross Profit • Group gross profit declined -2.8% to R17.5bn for HY2019 (HY2018: R18.0bn) with an estimate of over R250m lost in profit due to supply chain disruptions • Gross profit margin is reported at 23.11% for HY2019 (HY2018: 23.8%) • Change in margin attributed to: • SA Supermarket’s margin under pressure to support prices and deliver low price promise • R95.2m adjustment due to change to MAC impacted margin • Unprecedented 85.1% currency devaluation in Angola • Supermarket Non-SA account for a margin declined -0.8 percentage points, especially in Angola where the margin was under pressure as the cost inflation couldn’t be passed to consumers (reported R10m loss in GP) • DC costs and IFRS financial adjustments account for a decline of -0.4 percentage points as distribution fee income was lost when suppliers had to deliver direct during industrial action at the DC as well as additional expenses incurred • The rest of the business maintained the margin and offset the decline by +0.5 percentage points • Components to gross margin include: • Profit on selling price vs MAC • Supplier • DC costs – including the fuel cost • Waste and shrink • SOURCE: Shoprite Holdings

9. Group Profit Performance cont. • Trading Profit • Trading profit declined -19.0% to R3.3bn including the effect of hyperinflation of R376m • Trading margin at 4.4% for HY2019 (HY2018: 5.4%) on the back of the declining gross margin, but remains competitive relative to the relevant markets • H2 margin target is around 5%, the Group warns that it will not be enough to make back H1’s decline • SOURCE: Shoprite Holdings

10. Group Profit Performance cont. • Operating Profit • Operating profit declined -16.9% in HY2019 to R3.4bn (HY2018: R4.1bn), this is with expenses growth +5.6% and other operating income +9.4% • Operating margin declined to 4.46% in HY2019 (HY2018: 5.38%), in line with the shift in trading margin and the lower sales growth • SOURCE: Shoprite Holdings

11. Group Profit Performance cont. • Operating Profit cont. Other Operating Income growth +9.4% to R1.6bn in HY2019 • The Group reported an exchange rate loss of –R3.4m for HY2018 (HY2018: gain +R4.0m) showing their hedging strategy is working for Non-SA • Includes the 85.1% devaluation of the Angolan currency vs US$ since Jan 2018 Net premiums declined: Drop in credit participation in furniture to 12.7% (HY18: 14.5%) Investment income increased: Angolan investment • Operating Expenses growth at +5.6% to R16.2bn in HY2019 • SOURCE: Shoprite Holdings

12. CAPEX • CAPEX declined -4.7% to R2.8bn in HY2019 (HY2018: R2.9bn) with R1.9bn on expanding operations and R900m on maintaining operations • Split of expenditure: • 24% going to store refurbishments, up +23% on LY, this includes the Hypers • 16% of CAPEX was on Other replacements – including vehicles and general asset replacements, up +49% on last year • DC CAPEX -21% as LY included the Western Cape DC and H2 will include for Fresh in WC • IT CAPEX includes loyalty programme development as well as value-added services • ‘Future-fit’ formats as space growth in SA slows and new formats give opportunity for better returns on capital • CAPEX and cash flow is a focus going forward the Group is waiting to move some Angolan bonds from US$ to rands to change their net finance cost weighting • SOURCE: Shoprite Holdings

13. Inventory Levels • Inventories -0.3% to R21.7bn in HY2019 (HY2018: R21.8bn) • This includes adjustments made in the switch to MAC (moving average cost), these now complete • Stock holding has taken a backseat to in-stocks as the Group recovers from out-of-stocks and focuses on serving the customer • Non-SA currency movement resulted in –R900m less stock as well as improved stock management • Growth in inventory levels is attributed to a net 86 new corporate stores opened in the 12 months to Dec 2018 as well as Increased capacity at DC (Cilmor, WC) • Shoprite is the biggest distributor on the continent • It is anticipated that there will be ongoing efficiency gains through the extensive and sophisticated supply chain as it matures and consolidates, once the short-term on-shelf availability issues are resolved • This has been supported by investment in information technology around inventory management systems and distribution centre development plans • SOURCE: Shoprite Holdings

14. Internal Inflation and CPI • Internal food inflation for the Group is reported at +0.4% for HY2019, unchanged from HY2018 • This marks 18 months of stagnant inflation, the longest period of stagnation in a 10 years • This is the lowest reported internal food inflation in seven years and is substantially below the average Food CPI of 3.4% for the period • Shoprite’s SA Supermarkets internal inflation of +0.4% • For September 11,607 items in deflation and December10,719 products soldwith deflation in selling price • Greater exposure due to mix weighted towards commodity/basic which are price-supported by the Group, this dampening growth results in Shoprite and Usave which have a dominant share in the products that are in deflation • Shoprite retail stores internal inflation at zero for HY2019 • Non-SA Supermarkets reported internal inflation at +2.8% for HY2019 (HY2018: approx. +0.7%) • Towards the end of FY2019 an increase in internal inflation is anticipated in SA as commodity prices could increase SOURCE: Shoprite Holdings, Ti Economic Indicators Report, StatsSA

15. In Summary A weak half result for the Group at half-year with turnover +0.2% from R75.70bn to R75.8bn, despite massive disruptions and tough trade environment The positives: • Positive sales growth for SA Supermarkets +2.6% to R56.1bn despite massive disruption from system roll out and industrial action • Internal inflation for the core business, SA Supermarkets well below last year and CPI at +0.4% • SAP ERP system implemented, all stores and distribution centres in all countries on one common technology platform to enable better inventory accuracy and improved efficiencies whilst addressing scalability The negatives: • Sales growth in Non-SA Supermarkets -13.3% with massive currency devaluation in Angola • Gross profit -2.8% from R18.03bn to R17.53bn with gross margin decreasing from 23.8% to 23.1% • Trading profit -19.0% from R4.1bn to R3.3bn with trading margin decreasing from 5.4% to 4.4% • HEPS -24.1% from 525.6 cents to 398.9 cents

16. Outlook Trading will remain challenging for South African retailers, this is the new normal, with South Africa’s GDP forecasts muted. In a climate of geo-political uncertainty globally, over and above domestic challenges, with fiscal constraints and low investment growth, there remains little hope for growth in consumer spending in the short to medium term. Consumers face ongoing pressure on their disposable income, despite the lower inflation, as interest rates rise, credit extensions are hard to come by and unemployment levels remain high. The Group remains confident that the outlook for the second half of the year is positive, and although Shoprite is unlikely to achieve full growth due to H1 performance, the second half will be telling in terms of return on the significant investments made by the business into supply chain infrastructure, systems and formats.

17. Maryla Masojada | Lead AnalystCarey Leighton | Associate Analyst