Towards the end of 2008, Blue Square Israel Completed an Additional Step of its Strategy - the Launch of the HD 'Mega Bool' Format & the 'Mega' Private label Brand

Mr. Zeev Vurembrand, Blue Square's President and CEO, Said, 'We are Currently Positioned to Address Various Consumer Needs in Challenging Times.'

ROSH HA'AYIN, Israel, March 23 /PRNewswire-FirstCall/ -- Blue Square-Israel Ltd. (NYSE and TASE: BSI) today announced its financial results for the full year and fourth quarter ended December 31, 2008.

NOTE: IFRS - International Financial Reporting Standard

Financial results for the full year and last three-month period ended December 31, 2008 are presented in accordance with the International Financial Reporting Standards ('IFRS'). To facilitate comparison, results from the full year and last three-month period ended December 31, 2007 have been adjusted in accordance with IFRS, and differ from the results originally reported.

Results for the Full Year 2008

Revenues: The Company's revenues for 2008 were NIS 7,429 million (U.S. $1,954 million)(a) compared to NIS 6,982 million in 2007, an increase of 6.4%. The increase reflects: 1) the opening of 20 new supermarkets in 2007-2008, including the accelerated expansion of the Eden Teva Market format; 2) the year's 1.1% increase in Same Store Sales, reflecting the continued growth of Mega In Town countered partially by declining sales in Shefa Shuk format and Mega stores before their conversion to the Mega Bool format; and 3) the ongoing expansion of Bee Group Retail ('Bee Group'), and this year's consolidation of the full-year results from Naaman Porcelain Ltd. (TASE: NAMN) ('Naaman') and Vardinon Textile Ltd. (TASE: WRDT) ('Vardinon'), as opposed to the previous year, in which their revenues were only partially consolidated into the Company's financial results, increasing 2008 revenues by NIS 133 million.

Gross Profit: Gross profit for 2008 increased by 11.2% to NIS 2,060 million (U.S. $541.8 million) (27.7% of sales) compared to NIS 1,852 million (26.5% of sales) in 2007. The increase reflects improved supplier terms; a positive influence from raised prices, a shift in the mix of sales between the Company's formats, and the expansion of the Bee Group, as mentioned above, which is characterized by a higher sales gross margin compared to the food sector.

Selling, General, and Administrative Expenses: Selling, General, and Administrative expenses for 2008 were NIS 1,795 million (U.S. $472 million) (24.2% of sales) compared to NIS 1,563 million (22.4% of sales) in 2007, an increase of 14.8%. The increase reflects: 1) increased expenses associated with the opening of new stores and the accelerated development of the Eden Teva Market format; 2) expenses associated with the launch of the Mega Bool format; 3) a rise in the operating expenses of existing stores due to the increase in energy and electricity prices, as well as an increase in the CPI, which increased CPI-linked expenses such as rent and municipal taxes; and 4) the rise in expenses of the Bee Group due to its expansion and the fact that 2008 expenses included the full-year contributions of Naaman and Vardinon, as explained above, in contrast to 2007, when only a portion of their expenses were consolidated into the Company's results.

Operating Income Before Other Expenses (Net) and Revaluation of Investment Property: Operating income for 2008 before other expenses and revaluation of investment property was NIS 265 million (U.S. $69.8 million) (3.6% of sales) compared to NIS 289 million (4.1% of sales) in 2007. The decrease in operating income comes mainly from the decrease in the profitability of the food retail, mainly from stores which were converted to the Mega Bool format, and the increased expenses of Eden Teva Market, which is currently carrying out an establishment plan. In the Non-Food operations the operating income decreased due to the negative contribution of the Bee Group's Dr. Baby format, which opened eight self-operating stores in 2008.

Revaluation of Investment Property: In 2008, the Company's recorded income of NIS 19.1 million (U.S. $5.0 million) associated with the increase in value of its investment property compared with NIS 10.5 million in 2007. The revaluation of Investment Property is mainly from Hadar Talpiyot mall which is located in Jerusalem, in which the company holds 50%.

Other Expenses (Income), Net: In 2008, the Company recorded other expenses (net) of NIS 2.5 million (U.S. $0.7 million) compared with net income of NIS 3.1 million during 2007. This included a NIS 6.0 million (U.S. $1.6 million) expense associated with the Company's efficiency program, primarily including the reduction of headcount at the Company's headquarters, and a provision of NIS 6 million (U.S. $1.6 million) associated with the reduction of property value and depreciation. The expenses were countered partially by other income (net) totaling NIS 9 million (U.S. $2.4 million), which derived from the decrease in the Bee Group's holdings following its reorganization.

Operating Income: Operating income for 2008 was NIS 281.8 million (U.S. $74.1 million) (3.8% of sales) compared to NIS 302.7 million (4.3% of sales) in 2007, a decline of 6.9%.

Financial Expenses (net): Financial expenses (net) for 2008 were NIS 106 million (U.S. $27.8 million) compared to NIS 57 million in 2007. This increase derived from the year's increase in the consumer price index compared to 2007, an increase in net financial debt and hedging against a rise in the consumer price index, mitigated partially by financial income of NIS 24 million related to revaluations of the Company's financial instruments.

Taxes on Income: Taxes on income for 2008 were NIS 43.8 million (U.S. $11.5 million) (24.9% effective tax rate compared to a statutory tax rate of 27%) compared to NIS 69.8 million in 2007 (effective tax rate of 28.4% compared to a statutory tax rate of 29%) in 2007.

The decrease in the effective tax rate derived primarily from the year's decline in the statutory tax rate.

Net Income: Net income for 2008 was NIS 132.4 million (U.S. $34.8 million) compared to NIS 175.8 million for 2007. The portion of the net profit attributable to shareholders, as calculated in accordance with the IFRS, was NIS 104.6 million (U.S. $27.5 million), or NIS 2.41 per ADS (U.S. $0.63), while the portion attributable to the share of minority interests was NIS 27.8 million (U.S. $7.3 million). The decrease in net profit derives from the decrease in operating income and the increase in the financial expenses, as explained above.

More details

Supermarkets: As of December 31, 2008, the Company operated 194 supermarkets in the following formats: Mega In Town -113; Mega Bool - 36; Mega - 19; Shefa Shuk - 21; Eden Teva Market - 5.

EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization): EBITDA for 2008 was NIS 427 million (U.S. $112.4 million) (5.8% of sales) compared to NIS 423 million (6.1% of sales) in 2007.

For the fourth quarter of 2008, the EBITDA (earnings before Interest, Taxes, Depreciation, and Amortization) was NIS 83 million (U.S. $21.8 million) (4.7% of sales) compared to NIS 94 million (5.3% of sales) in the fourth quarter of 2007.

In 2003, the Board of Directors has resolved that dividends will not be distributed in a quarter when the ratio of financial obligations (as defined by S&P Maalot in its rating for BSI's debentures issued in 2003) to EBITDA for the prior four quarters exceeds 3, or if the ratio of the cost of unencumbered fixed assets to financial obligations is below 1.2. This is in accordance with definitions established by the rating company Standard & Poor's Maalot in its rating analysis of the Company's debentures issued in 2003. According to the Company's unaudited financial reports as of December 31, 2008, the ratio of its financial obligations to EBITDA as of the end of 2008 was 3.3, and the ratio of its unencumbered fixed assets to the financial obligations was 1.6.

    Events During the Reporting Period
    - Dividend: In October 2008, the Company distributed a cash dividend of
      NIS 150.0 million.
    - Successful tender offer: During the fourth quarter, the Company
      announced the successful completion of a NIS 150.7 million tender
      offer for all of the remaining publicly held shares of BSIP (Blue
      Square Chain Properties & Investments Ltd.). As such, the Company
      now holds 100% ownership and control of the shares of BSIP. The Company
      believes that this course will contribute to the improvement of its
      overall operating efficiency and increase its earnings per share for
      the benefit of shareholder value.
    - Launch of Mega Bool (Blue Square's New HD Format) and 'Mega' line of
      private label products: on December 23rd, the Company launched Mega
      Bool, a new HD supermarket format formed through the conversion of
      approximately 36 existing Blue Square-Israel stores (approximately
      120,000 square meters), including approximately 20 large stores from
      the Mega and Shefa Shuk formats and 16 smaller stores located within
      residential neighborhoods and city centers. In parallel, the Company
      has also announced the launch of its new Mega line of private label
      goods with the goal of strengthening customer loyalty and recognition
      of the Company's format brand area. The Company believes these steps
      will make Blue Square-Israel a strong, focused player in Israel's HD
      formats, which are currently estimated for one third of all Israeli
      retail food sales, while enabling the Company to provide a
      comprehensive shopping solution for each type of shopper in each
      region in Israel.
    - Organic and health food markets: During the fourth quarter, the Company
      continued its accelerated expansion of the Eden Teva Market
      organic/health food format through the opening of a new branch in
      Ashdod next to an existing Mega store. The growth in demand for
      high-quality organic food at reasonable prices is evident from the
      continuously rising sales of this exciting new format, confirming the
      desire of consumers to buy healthier products even in current times.
    - Bee Group (non-food retailing): During the fourth quarter, the Company
      continued with a re-organization process that will help it capitalize
      on potential synergies between Bee Group subsidiaries and to begin
      functioning as the Non-Food retailing arm of Blue Square-Israel as a
      whole.

On March 22, 2009, Bee Group (of which the Company holds 85%) acquired an additional 8% (approximately) of the shares of Naaman Porcelain Ltd. (TASE: NAMN) ('Naaman'), thereby increasing its holdings in Naaman to 68.42%.

Results for the Fourth Quarter

Revenues: Revenues for the fourth quarter were NIS 1,753 million (U.S. $461.2 million), compared to NIS 1,784 million in the parallel quarter of 2007 a decrease of 1.7%. Supermarket same store sales (SSS) for the period decreased by 4.5% compared to the parallel quarter. This is due primarily to the process of establishing the Mega Bool HD format, which involved the conversion of approximately 36 stores, together with a decrease in sales of the Shefa Shuk format and a decrease in the sales of some Mega stores prior to their conversion to the Mega Bool format, which was partially offset by the increase in same store sales (SSS) of Mega In Town stores. The decrease was mitigated by the opening of ten new stores during the 12-month period, adding approximately 12,000 square meters to the chain, contributed to the increase in revenues, and the increased sales of Bee Group by approximately NIS 5.2 million (U.S. $1.4 million) during the fourth quarter of 2008 compared to the parallel quarter of 2007.

Gross Profit: Gross profit for the fourth quarter increased by 2.7% to NIS 490 million (U.S. $128.9 million) (28.0% of sales) compared to NIS 477 million (26.8% of sales) in the fourth quarter of 2007. The increase in the gross margin reflected a change in the mix of sales, including a higher contribution from formats characterized with relatively high gross margins. Gross margin was also positively affected by improved supplier agreements and discounts, together with rising prices.

Selling, General, and Administrative Expenses: Selling, General, and Administrative expenses for the fourth quarter increased by 8.3% to NIS 446 million (U.S. $117.3 million) (25.4% of revenues) compared to NIS 412 million (23.1% of revenues) in the parallel quarter of 2007. The increase reflects: 1) increased expenses associated with the opening of ten new stores and the accelerated development of the Eden Teva Market format; 2) expenses associated with the launch of the Mega Bool format; 3) a rise in the operating expenses of existing stores due to the increase in CPI, which increased CPI-linked expenses such as rent and municipal taxes; and 4) the rise in selling and administrative expenses of the Bee Group.

Operating Income Before Other Expenses (Net) and Revaluation of Investment Property: Operating income for the fourth quarter before other expenses (net) and revaluation of investment property was NIS 44.3 million (U.S. $11.6 million) (2.5% of sales) compared to NIS 65.8 million (3.2% of sales) in the fourth quarter of 2007. The decrease derived from the quarter's decrease in sales as compared to the parallel quarter of 2008 and the rise in operating expenses; from expenses associated with the accelerated opening of new Eden Teva Market branches; from expenses associated with the launch of the Mega Bool format; and from activities associated with the opening of new stores in the Bee Group's Dr. Baby format, as explained above; countered partially by the rise in gross margin.

Revaluation of Investment Property: During the fourth quarter of 2008, the Company recorded income of NIS 1.1 million (U.S. $0.3 million) compared with NIS 10.5 million in the parallel period of 2007.

Other Expenses, Net: In the fourth quarter of 2008, the Company recorded other expenses of NIS 11.8 million (U.S. $3.1 million), while in the fourth quarter of 2007 it recorded other income of NIS 5.4 million.