AAnnnnuuaall RReeppoorrtt Edcon Holdings (Proprietary) Limited For the period ended 2 April 2011 EDCON ANNUAL REPORT 2011 Index Page Business 3 Management 10 Corporate Governance 13 Summary Historical and Pro Forma Financial and Other Data 16 Management’s Discussion and Analysis of Financial Condition and Results of 22 Operations Risk Factors 39 Group Financial Statements 45 2 BUSINESS AND MANAGEMENT BUSINESS Overview We are the largest non-food retailer in South Africa with a market share of the South African clothing and footwear (“C&F”) market nearly twice that of our nearest competitor, and have been in operation for more than 80 years. Since opening our first Edgars store in 1929, we have expanded our footprint to include 1,181 stores under 13 retail brands throughout southern Africa. Our leading brands include Edgars, Jet, CNA, Boardmans and Red Square, which are among the most recognisable retail brands in the region. We are the number one or number two retailer in the majority of our product lines, including clothing, footwear, mobile phones, cosmetics, stationery and books. We also have the largest base of consumer credit customers in southern Africa, with 3.7 million active private label credit cards. Our primary operations are in South Africa, where we generate 94% of our retail sales. According to the RLC, C&F sales in South Africa, which accounted for 60% of our retail sales in fiscal year 2011, grew at a CAGR of 8.6% from fiscal year 2006, despite three quarters of recession when South Africa was facing the effects of the global economic downturn. C&F spend as a percentage of household expenditure has also increased, in part as a result of a rapidly emerging black middle class, which has more than doubled in size since 2000. Our large retail footprint positions us to continue to benefit from this growth in the South African market. The balance of our operations are in neighbouring Namibia, Botswana, Lesotho and Swaziland. Our strong operating performance generated revenue of R25,586 million (excluding OntheCards Investments II (Pty) Ltd (“OtC II”) R24,932 million), including retail sales of R22,716 million, and adjusted EBITDA of R3,624 million (excluding OtC II R3,160 million) in fiscal year 2011. From fiscal year 2006, we have increased our retail sales by a CAGR of 6.8% and our adjusted EBITDA by a CAGR of 6.0%. As of 2 April 2011 we employed approximately 18,300 permanent employees. History We opened our first Edgars store in 1929 and we launched our Jet brand in 1979. Edgars Stores Limited, our predecessor, listed on the Johannesburg Stock Exchange in 1946 and, in 1982, we became a subsidiary of The South African Breweries. Since separating from The South African Breweries in 1999, we have strengthened our position in the retail sector, in part through the completion of several carefully selected acquisitions, including Boardmans, CNA, and Discom. On 14 May 2007, Edcon became a private company after it was acquired by Edcon Acquisition (Pty) Ltd, a company beneficially controlled by funds advised by affiliates of Bain Capital. Edcon delisted from the Johannesburg Stock Exchange and the Namibian Stock Exchange on 25 May 2007. Our operations Our operations consist of our retail business and our credit and financial services business, both of which are supported by our centralised group services. Our retail business comprises three retail divisions: the department store division, the discount division and CNA, which together offer a diverse product portfolio of private label and branded products. Our credit and financial services business provides consumer credit and other financial and insurance products to holders of our credit cards. With 3.7 million customer credit accounts, we are the largest provider of credit in southern Africa by number of customers. The responsibilities of our group services include logistics, IT, property, human resources, finance and treasury management. The split of our retail sales in fiscal year 2011 by category is shown below. 3 Retail product mix Retail Business Department Store Division The department store division is targeted at middle- to upper-income consumers and accounted for 52% of our retail sales in fiscal year 2011. In addition to Edgars, our largest chain by retail sales, our department store division has expanded into complementary specialty store formats, including Boardmans, Red Square, Temptations, Prato and Edgars Active. Our six department store division chains are centrally managed, with all marketing and merchandising decisions executed at our head offices. • Edgars, which began trading in 1929, is our chain of full-line department stores carrying a range of clothing, footwear, cosmetics, mobile phones, homewares and accessories. The Edgars chain comprises 166 stores with an average size of approximately 3,500 sqm. In fiscal year 2011, Edgars generated R10,852 million, or 48% of our retail sales. • Boardmans is our chain of homewares specialty stores that we acquired in 2004 to strengthen our position in the fast-growing home-living retail segment. Boardmans carries homewares products such as kitchenwares, DIY, household appliances and textiles. The Boardmans chain comprises 36 stores with an average size of approximately 1,200 sqm. In addition, we sell homewares products under our Boardmans brand in our Edgars department stores. • Red Square is our chain of cosmetics stores carrying international branded cosmetics, skin care products and fragrances. The Red Square brand was launched in 1996. The Red Square chain comprises 37 stores with an average size of approximately 150 sqm. In addition, we sell cosmetics under our Red Square brand in our Edgars department stores. • Temptations is our ladies intimatewear specialty chain that we launched in 2005. The Temptations chain comprises 8 stores with an average size of approximately 250 sqm. • Prato is our chain of casual footwear specialty stores. The Prato brand was launched in 2004 and comprises 6 stores with an average size of approximately 150 sqm. 4 • Edgars Active is a sportswear chain launched in 2005 as an extension of the sportswear product lines offered at our Edgars department stores. Currently, Edgars Active comprises 8 stores with an average size of approximately 400 sqm. In addition, we sell sportswear under our Edgars Active brand in our Edgars department stores. CNA CNA is our chain of stores offering stationery, books, music, magazines, toys, photographic equipment, greeting cards, movies, computer accessories and communications. CNA commenced trading in 1896 and is one of the region’s oldest and best known retail brands. We acquired CNA in October 2002 and it generated R1,891 million, or 8% of our retail sales, in fiscal year 2011. CNA comprises 202 stores with an average size of approximately 460 sqm. Discount Division The discount division sells value merchandise targeted at lower- to middle-income consumers and accounted for 40% of our retail sales in fiscal year 2011. The largest chain in our discount division is Jet. In addition to Jet and its associated brands (Jet Mart, Jet Shoes, Jet Home), our discount division also operates specialty stores under the Legit, and Discom chains. Our six discount division chains are centrally managed, with all marketing and merchandising decisions executed at our head offices. • Jet, which began trading in 1979, is a discount C&F retailer serving value-seeking customers. The Jet chain comprises 299 stores with an average size of approximately 920 sqm and in fiscal year 2011 generated R4,544 million, or 20% of our retail sales. • Jet Mart is our discount general merchandise store offering a variety of product lines including clothing, footwear, kitchenwares, music, DIY, household appliances, textiles, stationery, and health and beauty products. The Jet Mart chain began trading in 2004 and comprises 118 stores with an average size of approximately 1,820 sqm. • Legit is our youth ladieswear specialty store that caters to value-seeking fashionable women. The Legit brand was launched in 2001 and currently comprises 154 stores with an average size of approximately 260 sqm. • Discom is a leading provider of health and beauty products and household appliances to lower-income consumers which we acquired in 2007. The Discom chain comprises 140 stores with an average size of approximately 390 sqm. • Jet Shoes is our footwear specialty store which we launched in 2004 and which currently comprises 6 stores with an average size of approximately 240 sqm. In addition, we sell footwear under our Jet Shoes brand in our Jet and Jet Mart stores. • Jet Home is our discount homewares specialty store offering product lines such as kitchenwares, DIY, household appliances and textiles. We currently have 1 store with a size of approximately 830 sqm. Credit and financial services business We offer consumer credit and insurance products through our credit and financial services business, which in fiscal year 2011 generated operating profit of R1,111 million (R677 million excluding OtC II). Through our private label credit card programme, we issue Edgars and Jet credit cards to qualifying customers, who can use our private label credit cards across 12 of our brands (excludes Discom). Credit card accounts are activated against sophisticated scoring mechanisms which evaluate the customer’s ability to manage their credit. After generating an internal application score, we cross-metric the score with a credit bureau score and derive a profitability metric, which forms the basis for our credit decision. In fiscal year year 2011, purchases completed with our private label credit cards accounted for 49% of our retail sales and we had 3.7 million customer credit accounts. 5 We sell eligible accounts in our credit and financial services business to OtC II. Accounts that meet the eligibility criteria may be sold at a discount to their face value. Our credit management team retains responsibility for interfacing with our credit customers whose accounts have been sold to OtC II, performing all administration and all collections for those accounts.