Blue Square - Israel Ltd. Announces Financial Results for the Third Quarter and First Nine Month Period of 2006

ROSH HA'AYIN, Israel, November 20 /PRNewswire-FirstCall/ -- Blue Square-Israel Ltd. today announced results for the third quarter and nine month period ended September 30, 2006. All financial results are reported according to Israeli GAAP (Generally Accepted Accounting Principles).

- Net income for the nine month period: NIS 157.1 million or NIS 4.02 per ADS, compared to NIS 63.2 million.

- Net income for the three month period: NIS 89.1 million, or NIS 2.27 per ADS, compared to NIS 17.7 million or NIS 0.45 ADS. Excluding capital gain, the net income is 40.5 million

Results for the Third Quarter

Revenues: The Company's revenues for the third quarter of 2006 increased by 7.9% to NIS 1,710.2 million (U.S. $397.5 million)(a) compared to NIS 1,585.6 million in the third quarter of 2005. The revenues reflect the strong sales of the holiday season and a 2.7% increase in Same Store Sales ("SSS"), together with the opening of 6 stores during the previous 12 months, increasing the Company's sales area by approximately 10,094 square meters. The Company's sales were not materially affected by the Lebanon War which took place during the third quarter.

Gross Profit: Gross profit for the third quarter of 2006 increased by 11.1% to NIS 446.5 million (U.S. $103.8 million) compared to NIS 402.0 million in the third quarter of 2005 due to the success of the Company's selective marketing strategies. Gross margin for the period increased significantly to 26.1% from 25.4% in the third quarter of 2005, reflecting the success of the Company's pricing and marketing policies and its negotiations with vendors, which has enabled it to compete successfully in an environment of continued strong competition.

Selling, General, and Administrative Expenses: The Company's Selling, General, and Administrative expenses for the third quarter of 2006 increased by 6.0% to NIS 363.3 million (U.S. $84.5 million) compared to NIS 342.9 million in the third quarter of 2005, reflecting expenses related to the opening of new stores during the prior 12 months and the launch of the Company's loyalty club together with an increase in employee wages. However, as a percentage of revenues, operating expenses declined to 21.2% of sales from 21.6% in the third quarter of 2005. This, together with the 4.5% increase in sales per employee recorded during the quarter, illustrates the success of the Company's ongoing efficiency efforts.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): EBITDA for the third quarter of 2006 was NIS 116 million (U.S. $26.9 million) , an increase of 26% compared with NIS 92 million in the third quarter of 2005. EBITDA margin for the quarter was 6.8% compared with 5.8% in the third quarter of 2005.

Operating Income: Operating income for the third quarter of 2006 increased by 40.6% to NIS 83.2 million (U.S. $19.3 million) compared to NIS 59.2 million in the third quarter of 2005. This reflects the significantly increased revenues and gross profit for the period, together with the moderate increase in Selling, General & Administrative expenses. Operating margin for the period increased to 4.9% from 3.7% in the third quarter of 2005.

Financial Expenses: Financial expenses for the third quarter of 2006 decreased by 43.0% to NIS 12.2 million (U.S. $2.8 million) compared to NIS 21.4 million in the third quarter of 2005. The decrease mainly results from the quarter's 0.8% decline in the price index to which the Company's loans and debentures are linked, compared to the parallel quarter of 2005, in which the price index increased by 1.4%.

Other Income: The Company recorded capital gains of NIS 48.6 million (U.S. $11.3 million) during the quarter as a result of the IPO of its subsidiary, Blue Square Real Estate Ltd. ("BSRE", see below). In the third quarter of 2005, the Company recorded other expenses of NIS 0.5 million.

Taxes On Income: Taxes on income for the third quarter of 2006 were NIS 22.4 million (U.S. $5.2 million) compared to NIS 12.9 million in the third quarter of 2005, representing a tax rate of 18.8% compared to 36.1% for the third quarter of 2005. The reduction is due to the capital gains associated with the IPO of the Company's subsidiary BSRE, which have not been taken into account in computing tax expenses as it is the Company's policy to hold this investment and not to realize it. In addition, the Company's nominal tax rate has been reduced in line with amendments to the Income Tax Ordinance enacted in July 2004 and August 2005. These ordinances provide for a gradual reduction in the rate of corporate tax. As a result, the Company's corporate tax will be reduced during the next five years as follows: 2006 - 31%; 2007 - 29%; 2008 - 27%; 2009 - 26%; 2010 and thereafter - 25%.

Net Income: The Company's net income for the third quarter of 2006 increased by 404.7% to NIS 89.1 million (U.S. $20.7 million), or NIS 2.27 per ADS (U.S. $0.53), compared to NIS 17.7 million, or NIS 0.45 per ADS, for the third quarter of 2005. Net of the capital gains associated with the IPO of the Company's subsidiary BSRE, net income for the third quarter of 2006 would have been NIS 40.5 million (U.S. $9.4 million), an increase of 130% compared to the parallel period of 2005.

Other Operating Data:

- The Company's Same Store Sales(c) for the third quarter of 2006 increased by 2.7%.

- Sales per square meter for the quarter increased by 2.1% compared to the third quarter of 2005, reaching NIS 5,094 (US $1,184) per square meter.

- Sales per employee for the quarter increased by 4.5% compared to the third quarter of 2005, reaching NIS 237.8 thousand (U.S. $55.3 thousand) per employee.

- During the third quarter of 2006, the Company opened 3 stores. Results for the Nine Month Period

Revenues: The Company's revenues for the first nine months of 2006 increased by 14.0% to NIS 4,924.6 million (U.S. $1,144.7 million)(a) compared to NIS 4,321.5 million in the first nine months of 2005. Excluding the sales of Kfar Hashaashuim(b), revenues for the period grew by 11%. The growth in sales reflects the continued increase in SSS, which rose by 5.7% during the period, together with the Company's opening of 6 stores over the preceding 12 months.

Gross Profit: Gross profit for the first nine months of 2006 increased by 14.3% to NIS 1,273.9 million (U.S. $296.1 million) compared to NIS 1,114.6 million in the parallel period of 2005 due to the higher revenues. Gross margin for the period increased to 25.9% from 25.8% in the first nine months of 2005.

Selling, General, and Administrative Expenses: The Company's Selling, General, and Administrative expenses for the first nine months of 2006 increased by 10.2% to NIS 1,039.8 million (U.S. $241.7 million) compared to NIS 943.9 million in the first nine months of 2005, reflecting the factors explained above in Results for the Third Quarter. However, as a percentage of revenues, operating expenses for the period declined to 21.1% of sales from 21.8% in the first nine months of 2005. This, together with the 7.1% increase in sales per employee recorded during the period, demonstrates the success of the Company's efficiency efforts.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): EBITDA for the first nine months of 2006 was NIS 332 million (U.S. $77.2 million), an increase of 23.4% compared with NIS 269 million in the first nine months of 2005. EBITDA margin for the period was 6.7% compared with 6.2% in the first nine months of 2005.

Operating Income: Operating income for the first nine months of 2006 increased by 37.1% to NIS 234.0 million (U.S. $54.4 million) compared to NIS 170.6 million in the first nine months of 2005. Operating margin for the period increased to 4.8% from 3.9% in the first nine months of 2005.

Financial Expenses: Financial expenses for the first nine months of 2006 increased slightly to NIS 44.7 million (U.S. $10.4 million) compared to NIS 44.1 million in the first nine months of 2005. This reflects a rise in the prime rate of interest during the period, countered somewhat by a decrease in the price index to which the Company's loans and debentures are linked.

Other Income, Net: The Company recorded other income (net) of NIS 47.9 million (U.S. $11.1 million) during the first nine months of 2006, consisting primarily of the capital gain taken in the third quarter as a result of the IPO of BSRE, as explained above. During the first nine months of 2005, the Company recorded other expenses of NIS 1.5 million.

Taxes On Income: Taxes on income for the first nine months of 2006 were NIS 60.8 million (U.S. $14.1 million), an increase of 36.1% compared to NIS 44.7 million in the first nine months of 2005, representing a tax rate of 25.6% compared to 37.0% for the parallel period of 2005. The reduction is due to the capital gains associated with the IPO of the Company's subsidiary BSRE, which have not been taken into account in computing tax expenses as it is the Company's policy to hold this investment and not to realize it. In addition, the Company's nominal tax rate has been reduced as explained above in Results for the Third Quarter.

Net Income: The Company's net income for the first nine months of 2006 increased by 148.6% to NIS 157.1 million (U.S. $36.5 million), or NIS 4.02 per ADS (U.S. $0.93), compared to NIS 63.2 million, or NIS 1.63 per ADS, for the first nine months of 2005. Net of the capital gains associated with the IPO of the Company's subsidiary BSRE, net income for the first nine months of 2006 would have been NIS 108.5 million (U.S. $25.2 million), an increase of 71.7% compared to the parallel period of 2005.

Other Operating Data:

- The Company's Same Store Sales(c) for the first nine months of 2006 increased by 5.7%.

- Sales per square meter for the first nine months increased by 6.4% compared to the first nine months of 2005, reaching NIS 14,969 (US $3,480) per square meter.

- Sales per employee for the period increased by 7.1% compared to the parallel period of 2005, reaching NIS 724 thousand (U.S. $168.3 thousand) per employee.

- During the first nine months of 2006, the Company opened 6 stores, adding a total of 10,094 square meters to the chain.

Dividends: On September 13, 2006, the Company distributed a dividend in the amount of NIS 30 million (U.S. $6.8 million), or NIS 0.76 per share/ADS (approximately U.S. $0.18 per ADS). IPO of the Company's Subsidiary, Blue Square Real Estate (BSRE)

On August 24, 2006, the Company's subsidiary, Blue Square Real Estate Ltd. ("BSRE"), carried out an Initial Public Offering on the Tel Aviv Stock Exchange. Gross proceeds from the transaction were NIS 911.3 million; net proceeds after issuance expenses were approximately NIS 879 million, allocated as follows: NIS 623 million as debentures, NIS 108 million as convertible debentures, and NIS 148 million as equity. As a result of the offering, the Company's holdings in BSRE were reduced to 80% (74.1% fully diluted). For full details of the transaction, please see the Company's 6K Report filed with the SEC on August 24th, 2005:

http://www.sec.gov/Archives/edgar/data/1016837/000117891306001576/zk62852.htm Comments of Management

Commenting on the results, Mr. Gil Unger, Blue Square's President and CEO, said, "We are pleased to report another quarter of strong growth according to all financial metrics together with significant strategic progress across the board. Our continued growth in revenues reflects the ongoing expansion of our supermarket chain together with the success of our brand management, Near-Food and Non-Food initiatives. Just as important, we have delivered another quarter of growth in gross and operating margins, confirming our strategies for economic pricing, marketing and supplier negotiations.

"We continue with a policy of aggressive expansion. Since the beginning of the year, we have opened six stores, and plan to open an additional two stores until the end of the year. The roll-out of our new 'You' credit card and loyalty plan is progressing ahead of plan, paving the way toward the launch of financial products in the year ahead. We were delighted by the success of the IPO of BSRE, our real estate subsidiary, and expect it to become increasingly active in the months ahead. And, we are currently making final preparations to open our first Company-owned gas station."

Mr. Unger concluded, "Taken as a whole, we continue to build out our core business and to roll out new initiatives, all with the goal of fully exploiting our superb brand assets and favorable market positioning. We are proud of our performance during the past year and continue working to build the Company's value for our shareholders."

NOTE A: Convenience Translation to Dollars

The convenience translation of New Israeli Shekel (NIS) into U.S. dollars was made at the rate of exchange prevailing at September 30, 2006: U.S. $1.00 equals NIS 4.302, the translation was made solely for the convenience of the reader.

NOTE B: Kfar Hashaashuim

Further to the closing of the Company's acquisition of Hamachsan Hamerkazi Kfar Hashaashuim Ltd. ("Kfar Hashaahuim") in May, 2005, Kfar Hashaashuim's balance sheet and operating results of the third quarter and first nine months of 2006 have been consolidated into the Company's consolidated financial statements. Comparative data for the first nine months of 2005 includes Kfar Hashaashuim's financial results from the July-September 2005 period only.

NOTE C: Change in Calculation of Same Store Sales

For a more meaningful comparison, the Company has changed the policy by which it calculates Same Store Sales.

As of the fourth quarter of 2005, the Company's Same Store Sales calculation is based only on stores 1) that have operated continuously throughout the current and prior reporting period, and 2) that have not been resized significantly during the period.

Previously, the Company's Same Store Sales referred to the sales of those stores that operated continuously during the entire reporting period of both the current year and that preceding it. Stores were not deemed to have operated continuously (and therefore not included as "same stores") if such stores were closed for at least two weeks during the reported period or the preceding period for any reason including renovation or relocation.

Blue Square is a leading retailer in Israel. A pioneer of modern food retailing in the region, Blue Square currently operates 175 supermarkets under different formats, each offering varying levels of service and pricing.

This press release may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the Company's business, financial condition, prospects and operating results. These statements are based on current expectations and projections that involve a number of risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including risk of market acceptance, the effect of economic conditions, the impact of competitive pricing, supply constraints, the effect of the Company's accounting policies, as well as certain other risks and uncertainties which are detailed in the Company's Annual Report on Form 20-F and other filings with the Security and Exchange Commission. Forward-looking statements speak only as of the date on which they are made and the Company undertakes no commitment to revise or update any forward-looking statement in order to reflect events or circumstances after the date any such statement is made.

CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2006 Convenience translation (note a) December 31, September 30 September 30, 2005 2005 2006 2006 (Audited) (Unaudited) (Unaudited) NIS U.S. dollars In thousands A s s e t s CURRENT ASSETS: Cash and cash equivalents 66,773 79,289 243,429 56,585 Deposit in bank - - 519,654 120,794 Trade receivables 558,758 697,126 812,656 188,902 Other accounts receivable 129,670 238,027 230,079 53,481 Inventories 356,881 383,619 403,536 93,802 Total current assets 1,112,082 1,398,061 2,209,354 513,564 INVESTMENTS AND LONG TERM RECEIVABLES: Restricted deposit 500,190 - Associated companies 3,325 3,272 4,189 974 Other long term receivables 2,962 - 3,208 746 506,477 3,272 7,397 1,720 FIXED ASSETS, NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION 1,971,577 1,969,906 1,957,998 455,137 INTANGIBLE ASSETS AND DEFERRED CHARGES, NET 92,899 95,373 104,297 24,243 3,683,035 3,466,612 4,279,046 994,664 BLUE SQUARE - ISRAEL LTD. CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2006 Convenience translation (note a) September December 31, September 30 30, 2005 2005 2006 2006 (Audited) (Unaudited) (Unaudited) NIS U.S. dollars In thousands Liabilities and shareholders' equity CURRENT LIABILITIES: Credit and loans from banks 291,058 245,742 247,267 57,477 Current maturities of debentures 68,258 - 55,336 12,863 Trade payables 879,136 1,046,650 1,057,858 245,899 Other accounts payable and accrued expenses 323,674 456,635 511,095 118,804 Total current liabilities 1,562,126 1,749,027 1,871,556 435,043 LONG-TERM LIABILITIES: Long-term loans from banks, net of current maturities 781,304 341,885 129,132 30,017 Debentures, net of current maturities 136,517 203,177 830,564 193,065 Convertible debentures, net of current maturities 184,989 183,546 218,226 50,727 Deferred income taxes 13,392 14,269 27,787 6,459 Liability for employee rights, net of amount funded 28,166 27,696 37,168 8,640 Total long-term liabilities 1,144,368 770,573 1,242,877 288,908 MINORITY INTEREST 111,233 108,520 230,589 53,600 SHAREHOLDERS' EQUITY 865,308 838,492 934,024 217,113 Total liabilities and shareholders equity 3,683,035 3,466,612 4,279,046 994,664 BLUE SQUARE - ISRAEL LTD. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2006 Convenience translation (note a) for the Nine Three three months months months Year ended ended ended ended December 31 September September September 30 30 30 2005 2005 2006 2005 2006 2006 (Audited) (Unaudited) (Unaudited) U.S. NIS dollars In thousands (except share and per share data) Sales 5,797,018 4,321,496 4,924,630 1,585,581 1,710,242 397,546 Cost of sales 4,298,211 3,206,930 3,650,770 1,183,540 1,263,716 293,751 Gross pro- -fit 1,498,807 1,114,566 1,273,860 402,041 446,526 103,795 Selling, general and adminis- -trative expen- -ses 1,269,760 943,923 1,039,837 342,864 363,304 84,450 Operating income 229,047 170,643 234,023 59,177 83,222 19,345 Financial expenses, net 59,529 44,066 44,720 21,371 12,189 2,835 169,518 126,577 189,303 37,806 71,033 16,510 Amortization of goodwill 6,508 4,687 - 1,752 - - Other income (expenses), net 690 (1,478) 47,917 (455) 48,535 11,282 Income before taxes on income 163,700 120,412 237,220 35,599 119,568 27,792 Taxes on income 58,490 44,670 60,799 12,860 22,424 5,212 Income after taxes on income 105,210 75,742 176,421 22,739 97,144 22,580 Share in profits of associated companies, net 498 437 712 - 229 53 Minority interest in profits of subsidiaries, net 15,717 13,004 20,060 5,088 8,281 1,925 Net income for the period 89,991 63,175 157,073 17,651 89,092 20,708 Net income per Ordinary share or ADS: Basic 2.32 1.63 4.02 0.45* 2.27 0.53 Fully diluted 2.26* 1.60* 3.66 0.45* 2.03 0.47 Weighted average number of shares or ADS used for computation of income per share: Bas- -ic 38,832,663* 38,793,397* 39,044,588 38,815,158* 39,232,544 39,044,588 Fully dilu- -ted 44,443,433* 44,443,433* 44,939,784 44,443,433* 44,939,784 44,939,784 * After retrospective application of accounting change. BLUE SQUARE - ISRAEL LTD. SELECTED OPERATING DATA FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 Convenience translation (note a) for the three months ended Nine months Three months ended September ended September September 30 30 30 2005 2006 2005 2006 2006 NIS NIS NIS NIS U.S.$ (Unaudited) (Unaudited) Sales (in millions) 4,321 4,925 1,586 1,710 397 Operating income (in 59 83 19 millions) 171 234 EBITDA (in millions) 27 (Excluding one time expenses) 269 332 92 116 EBITDA margin (Excluding one time expenses) 6.2% 6.7% 5.8% 6.8% NA Increase in same store 6.2% 2.7% NA sales* 3.2% 5.7% Number of stores at end of period 168 174 168 174 NA Stores opened during the period 7 6 4 3 NA Stores closed during the period 3 0 1 0 NA Total square meters at end of period 312,000 322,165 312,000 322,165 NA Square meters added during the period, net 12,000 10,094 9,800 3,833 NA Sales per square meter 14,070 14,969 4,991 5,094 1,185 Sales per employee (in 228 238 55 thousands) 676 724 * Compared with the same period in the prior fiscal year Contact: Blue Square-Israel Ltd. Dror Moran, CFO Toll-free telephone from U.S. and Canada: +1-888-572-4698 Telephone from rest of world: +972-3-928-2220 Fax: +972-3-928-2299 Email: cfo@bsi.co.il