MAGMA group - Review of business activities and non-revised sales results for the year 2008

Business events which marked the year 2008 for Magma are:

- Relocation into the new centre for logistics and distribution in Jastrebarsko

- Entering the market with the new Magma home program for home decoration

- Restructuring more than 30% of retail network

- Implementation of SAP ERP system, the production of which starts on 19th January 2009

According to the first non-revised data:

- MAGMA group achieved total consolidated revenue in the amount of 1.000,1 mil HRK which

represents growth of 21% compared to the year 2007.

- Retail chain Turbo lima (75 stores) achieved total revenue of 434.4 mil HRK, which

represents growth of 29% compared to the revenue achieved in 2007. Stores which were in

business for more than 13 months (Like to like comparison) recorded a growth of +7.16%.

- Retail chain Turbo sport (27 stores) achieved total revenue of 200.3 mil HRK which is 20%

growth compared to the revenue achieved in 2007. According to Like to like comparison

Turbo sport retail chain records a negative trend of -0.30%.

- Retail chain of Magma’s fashion franchise stores (50 stores) achieved total revenue of 274.2

mil HRK which is 6% growth compared to the same period last year. In Like to like

comparison the chain of Magma’s fashion stores records a negative trend of -17.33%.

In 2008, MAGMA group operated in extremely complex and market unfavourable conditions. The

decline of purchasing power, caused by the rise of prices of energy sources and basic food items started in

the last quarter of 2007. In most households, reduced home budgets could not absorb the mentioned price

impact so the consumption of expensive items started to decline.

Faced with the decline of purchasing power, Magma tried to adapt to the new conditions on the market

from the beginning of the year by changing the assortment and restructuring the retail network.

First quarter was marked by relocating to the new centre for logistics and distribution in Jastrebarsko

and the activities related to the implementation of the new IT system for control of warehouse business

transactions (WAMAS). The whole implementation was successfully completed in August, a bit later than it

was originally planned, which explains why the logistics sector had to do business with an increased

number of employees, which caused additional costs. Today, logistics operations are completely at the

level of needs of retail network, and all goods that arrive to the warehouse are delivered to Magma’s retail

network within 48 hours.

The rise of costs was also influenced by additional working hours spent for relocating from the old

warehouse locations into the new logistics centre, as well as the tasks of reassigning and equipping the

former warehouse on Žitnjak into the biggest store of „big box“ format on 8.000 m2 net area.

The largest part of Magma’s capital investment relates to equipping the aforementioned, largest

Magma’s store on Žitnjak as well as equipping Magma’s central building in Jastrebarsko.

During summer, for the first time Magma introduced the new chain of stores aimed at home equipment

and decoration named Magma home. This division was a sequel of company’s natural growth, and in less

than half year of existence, this youngest division has recorded sales results above planned, which

indicates growth potential now present in Magma’s most successful chain Turbo lima. Positive effects of

Magma home are expected through direct turnover, but also through synergic effect caused by increased

number of customers on existing retail locations.

Today, Magma home does business on 15 locations on 5.000m2, and was already present in the

revenue structure for the year 2008 with more than 2% on the annual level. If we look at the second half of

the year only, when this chain entered the market, it is visible that it was present with 5% in the total

structure of retail revenues.

If we analyse the Group’s results, it is visible that the most important effects of the decline of purchasing

power were reduced demand and decline of sale in the chain of franchise fashion stores (LTL comparison -

17.33%). These stores are primarily focused on customers of medium purchasing power who changed their

consumer habits due to decreased household budgets in favour of brands of more acceptable prices.

In these conditions Magma’s own brands achieved growth rates above expected, however, their growth

was not sufficient to compensate for the loss made by the chain of franchise fashion stores.

For this reason, during 2008 Magma carried out first part of retail network restructuring which resulted

resulted in the following: 15 stores changed their content, 4 stores were closed, and a total of 18 new

stores were opened. Restructuring of retail network will continue in 2009, so at the beginning of the year 12

stores will be closed, and in about 30 stores content will be changed. During 2009, 15 new stores will be

opened within the chain of stores Turbo lima, Turbo sport, Magma home and Urban Republic. The whole

restructuring process will be carried out in the way that the content of stores changes in favour of those

brands and fashion lines which achieve better results, ensure growth and enable opening new stores since

they are more suitable for customers’ preferences and markets in which Magma operates.

Even in these somewhat difficult conditions, MAGMA group has managed to achieve total consolidated

revenue of 1.000,1 mil HRK.

In 2009 Magma does not plan any significant investment, so for the first time, total amount of

investment in 2009 will be lower than the amount of amortisation for this year.

Owing to this restructuring of retail network and investment which were completed during 2007 and

2008 and in spite of difficult conditions of business activities and negative trends in the market which

continue into 2009, Magma expects the revenue growth of in the year 2009 above 20% in relation to 2008.

Implementation of SAP ERP which took place in the last six months will start on 19th January 2009 for

Magma d.d. Croatia. This new IT solution will contribute significantly to the quality of business transactions

through a better reporting system and business processes management.

Activities of the management in 2009 will primarily be focused on stock reduction and cost control,

which will have a positive effect on the cash flow, along with reduced investment activities, thus ensuring

the realisation of the business plan for the year 2009.