Blue Square - Israel Ltd. Announces Financial Results of the Third Quarter of 2005

ROSH HA'AYIN, Israel, November 16 /PRNewswire-FirstCall/ -- Blue Square-Israel Ltd. today announced results for the third quarter and nine month period ended September 30, 2005.

Results for the Third Quarter

Revenues: The Company's revenues for the third quarter of 2005 were NIS 1,585.6 million (U.S. $344.8 million)(a), an increase of 14.5% compared with NIS 1,384.5 million in the third quarter of 2004. The growth in sales reflects:

- The collapse of the Clubmarket chain, which led to a substantial increase in the number of shoppers in the Company's stores;

- Stronger redemption of Gift Certificates as compared to 2004 and the success of the Company's marketing initiatives;

- The opening of 7 stores during the 12 months between the reporting date and the parallel period of 2004; and

- The contribution of Kfar Hashaashuim's sales for the period (see Note B), increasing the Company's revenues by NIS 58.5 million (U.S. $12.7 million).

Gross Profit: Gross Profit for the third quarter of 2005 increased by 13.4% to NIS 402.0 million (U.S. $87.4 million) compared with NIS 354.5 million in the third quarter of 2004, reflecting the quarter's higher revenues mitigated by strong competition and price pressure in the Company's markets. The gross margin for the third quarter of 2005 was 25.4% compared to 25.6% in the third quarter of 2004.

Selling, General, and Administrative Expenses: The Company's Selling, General, and Administrative expenses for the third quarter of 2005 increased by 13.1% to NIS 342.9 million (U.S. $74.6 million) compared with NIS 303.3 million in the third quarter of 2004. As a percentage of revenues, expenses for the quarter were 21.6% of sales, a slight reduction compared to 21.9% in the parallel quarter of 2004. This reflects:

- Aggressive advertising and marketing campaigns carried out during the quarter;

- A significant increase in electricity and energy expenses; and - Expenses of new stores opened during the prior 12 months.

Operating Income: Operating Income for the third quarter of 2005 increased by 15.4% to NIS 59.2 million (U.S. $12.9 million) compared with NIS 51.3 million in the third quarter of 2004. Operating margin for the quarter was 3.7%, the same as 3.7% recorded in the third quarter of 2004.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): EBITDA (excluding one-time expenses) for the third quarter of 2005 was NIS 92 million (U.S. $20 million), an increase of 4.9% compared with NIS 87 million in the third quarter of 2004.

Financial Expenses: The Company's Financial Expenses for the third quarter of 2005 were NIS 21.4 million (U.S. $4.6 million), an increase of 53.2% compared to NIS 13.9 million in the third quarter of 2004. The increase reflects a significant rise of 1.4% in the Consumer Price Index ("CPI") during the reporting period, increasing the interest due on the Company's CPI-linked debt. For the parallel period of 2004, there was no change in the CPI.

Other Expenses (net): Other Expenses (net) for the third quarter of 2005 were NIS 0.5 million (U.S. $99,000), a decrease of 86.8% compared to NIS 3.4 million in the third quarter of 2004. Other Expenses for the period related primarily to the closing of stores, while Other Expenses for the third quarter of 2004 reflected employee dismissals.

Net Income: The Company's net income for the third quarter of 2005 was NIS 17.7 million (U.S. $3.8 million), or NIS 0.46 per ADS (U.S. $0.10), compared to NIS 18.9 million, or NIS 0.49 per ADS, for the comparable period of 2004. The decrease reflects the quarter's higher financial expenses and minority interest compared to the third quarter of 2004, offset somewhat by the quarter's higher operating income.

Other Operating Data:

- Despite continued strong competition and price pressure, the Company's Same Store Sales for the third quarter increased by 4.8%, reflecting the effect of the Clubmarket crisis and the success of the Company's marketing initiatives. Same Store Sales for the third quarter of 2004 decreased by 0.7% compared to the comparable period of the previous year.

- Sales per square meter increased by 7.6% in the third quarter of 2005 compared to the third quarter of 2004, reaching NIS 4,991 (US $1,086) per square meter.

- Sales per employee increased by 5.0% in the third quarter of 2005 compared to the third quarter of 2004, reaching NIS 228 thousand (U.S. $49.5 thousand) per employee.

- During the third quarter of 2005, the Company opened 4 stores and closed 1, increasing the chain by a net total of 9,800 square meters.

Results for the First Nine Months

Revenues: The Company's revenues for the first nine months of 2005 increased by 8.3% to NIS 4,321.5 million (U.S. $939.9 million)(a) compared to NIS 3,988.9 million in the first nine months of 2004. The growth in sales derives from all the factors explained in Results for the Quarter above, including the Clubmarket crisis, stronger gift certificate redemption, success of the Company's marketing initiatives, store openings during the prior 12 months and the contribution of Kfar Hashaashuim's sales during the third quarter (see Note B). In addition, sales were positively affected by the Company's brand consolidation program, which was implemented throughout 2004.

Gross Profit: Gross profit for the first nine months of 2005 increased by 6.8% to NIS 1,114.6 million (U.S. $242.4 million) compared to NIS 1,043.4 million in the first nine months of 2004 due to the higher revenues. Gross margin for the period decreased to 25.8% compared to 26.2% in the first nine months of 2004. This reflects:

- An increase in discounts associated with the redemption of gift certificates during holiday seasons;

- An increase in the proportion of discount sales in the overall sales mixture due to the Company's consolidation program; and

- Continued strong competition throughout the Company's markets.

Selling, General, and Administrative Expenses: The Company's Selling, General, and Administrative expenses for the first nine months of 2005 increased by 6.5% to NIS 944.0 million (U.S. $205.3 million) compared to 886.0 million in the first nine months of 2004, reflecting the factors explained in Results for the Quarter above, including increased electricity and energy costs, expenses of new stores and aggressive advertising and marketing campaigns. However, as a percentage of revenues, expenses declined to 21.8% of sales from 22.2% in the parallel period of 2004.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): EBITDA (excluding one-time charges) for the first nine months of 2005 was NIS 269 million (U.S. $58.5 million), compared with NIS 263 million in the first nine months of 2004.

Operating Income: Operating income for the first nine months of 2005 increased by 8.4% to NIS 170.6 million (U.S. $37.1 million) compared to NIS 157.4 million in the first nine months of 2004. This reflects the increased revenues and gross profit for the period, mitigated somewhat by increased Selling, General & Administrative expenses. Operating margin for the first nine months was 3.9%, the same as it was in the first nine months of 2004.

Financial Expenses: Financial expenses for the first nine months of 2005 increased by 6.4% to NIS 44.1 million (U.S. $9.6 million) compared to NIS 41.4 million in the first nine months of 2004. The increase in financial expenses reflects the significant rise of the CPI during the reporting period, mitigated by reductions in foreign currency rates that impacted the valuation of a loan linked to a foreign currency.

Other Expenses (net): Other expenses (net) for the first nine months of 2005 were NIS 1.5 million (U.S. $0.3 million) compared to NIS 9.7 million in the first nine months of 2004. Other expenses for the period reflected capital losses related to store closures and reserves, countered by a capital gain related to the sale of one of the Company's small subsidiaries. Other expenses for 2004 reflected impairment of assets as well as expenses related to store closures and employee dismissals.

Net Income: The Company's net income for the first nine months of 2005 increased by 19.6% to NIS 63.2 million (U.S. $13.7 million), or NIS 1.63 per ADS (U.S. $0.35), compared to NIS 52.8 million, or NIS 1.37 per ADS, for the first nine months of 2004.

Other Operating Data:

- The Company's Same Store Sales for the first nine months increased by 1.8%.

- Sales per square meter increased by 4.4% in the period compared to the first nine months of 2004, reaching NIS 14,070 (US $3,060) per square meter.

- The Company's sales per employee increased by 4.8% in the period compared to the first nine months of 2004, reaching NIS 676 thousand (U.S. $147 thousand) per employee.

- During the first nine months of 2005, the Company opened 7 stores and closed 3, adding a net total of 12,000 square meters to the chain.

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 rising revenues, same-store sales, gross and operating profits, especially given a marketplace characterized by irrational pricing policies, relentless competition and skyrocketing expenses. The collapse of Clubmarket in July has worked in our favor, increasing our sales to some extent. However, the primary driver of our growth continues to be the steady execution of a sane strategy focused on intelligent brand management, aggressive expansion and diversification - all within a framework of economic pricing policies and efficiency. During the quarter, we moved forward in each of these areas.

- Taking our brand consolidation program to the next level, we have restructured our operations around our three brands, transforming each into an autonomous division with full operational responsibility. As part of this process, we have moved all marketing and operating operations from the corporate level to the brand divisions, a step that has allowed us to eliminate two VP positions, significantly reducing our corporate overhead. We believe this will lead to significant improvement in the performance of each brand while improving our overall profitability.

- During the quarter, we acquired three new stores that had been flagship operations for our competitors, giving us new selling space in important locations. We continue to evaluate the new expansion opportunities that are arising in a dynamic marketplace.

- To diversify our revenues, we also continue to move carefully into new retail sectors. Our acquisition of Kfar Hashaashuim in May placed us solidly in the toy, houseware and Dollar store business, areas that have already begun contributing nicely to our results."

Mr. Unger concluded, "In the quarters ahead, we will continue executing according to this proven work plan with the goal of expanding our share of a competitive but evolving and high-potential marketplace."

The Company's Board of Directors today empowered the Company's management to carry out activities aimed at maximizing the value of its real estate assets, including, if required, the spin-off of these assets into a subsidiary company.

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, 2005: U.S. $1.00 equals NIS 4.598. 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 have been consolidated into the Company's consolidated financial statements. Comparison data from parallel periods in 2004 include no contribution from Kfar Hashaashuim.

Blue Square is a leading retailer in Israel. A pioneer of modern food retailing in the region, Blue Square currently operates 168 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.

BLUE SQUARE - ISRAEL LTD. CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2005 Convenience translation(a) December 31, September 30, September 30, 2004 2004 2005 2005 NIS U.S. Dollars In thousands (Audited) (Unaudited) (Unaudited) Assets CURRENT ASSETS: Cash and cash equivalents 47,359 77,484 79,289 17,244 Trade receivables 483,524 572,153 697,126 151,615 Other accounts receivable 145,292 208,048 238,027 51,768 Inventories 288,042 283,007 383,619 83,432 Total current assets 964,217 1,140,692 1,398,061 304,059 INVESTMENT IN AN ASSOCIATED COMPANY 2,795 3,193 3,272 712 FIXED ASSETS, NET OF ACCUMULATED PRECIATION AND AMORTIZATION 2,011,599 2,027,304 1,969,906 428,427 INTANGIBLE ASSETS AND DEFERRED CHARGES, NET 100,400 96,988 95,373 20,742 3,079,011 3,268,177 3,466,612 753,940 BLUE SQUARE - ISRAEL LTD. CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2005 Convenience translation(a) December 31, September 30, September 30, 2004 2004 2005 2005 NIS U.S.Dollars In thousands (Audited) (Unaudited) (Unaudited) Liabilities and shareholders' equity CURRENT LIABILITIES: Short-term credit from banks 136,541 159,257 245,742 53,445 Trade payables 837,757 880,757 1,046,650 227,632 Other accounts payable and accrued expenses 331,614 445,073 456,635 99,313 Dividend payable 38,971 - - - Total current liabilities 1,344,883 1,485,087 1,749,027 380,390 LONG-TERM LIABILITIES: Long-term loans from banks, net of current maturities 390,375 412,406 341,885 74,355 Debentures 200,000 200,000 203,177 44,188 Convertible debentures 186,193 186,193 183,546 39,919 Deferred income taxes 14,576 14,104 14,269 3,103 Liability for employee rights, net of amount funded 26,894 26,051 27,696 6,023 Total long-term liabilities 818,038 838,754 770,573 167,588 MINORITY INTEREST 96,780 93,343 108,520 23,602 SHAREHOLDERS' EQUITY 819,310 850,993 838,492 182,360 3,079,011 3,268,177 3,466,612 753,940 BLUE SQUARE - ISRAEL LTD. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005 Convenience translation(a) for the Nine months Three months three months ended ended ended September 30, September 30, September 2004 2005 2004 2005 30, 2005 NIS U.S. Dollars In thousands (except share and per share data) (Unaudited) (Unaudited) Sales 3,988,851 4,321,496 1,384,523 1,585,581 344,841 Cost of sales 2,945,465 3,206,930 1,029,983 1,183,540 257,403 Gross profit 1,043,386 1,114,566 354,540 402,041 87,438 Selling, general and administrative expenses 885,985 943,923 303,280 342,864 74,568 Operating income 157,401 170,643 51,260 59,177 12,870 Financing expenses, net 41,418 44,066 13,946 21,371 4,648 115,983 126,577 37,314 37,806 8,222 Amortization of goodwill 4,371 4,687 1,457 1,752 381 Other expenses, net 9,654 1,478 3,442 455 99 Income before taxes on income 101,958 120,412 32,415 35,599 7,742 Taxes on income 38,210 44,670 10,830 12,860 2,797 Income after taxes on income 63,748 75,742 21,585 22,739 4,945 Share in profit (losses) of associated company, net (806) 437 - - - Minority interest in profits of subsidiaries, net 10,116 13,004 2,659 5,088 1,106 Net income 52,826 63,175 18,926 17,651 3,839 Net income per Ordinary share or ADS 1.37 1.63 0.49 0.46 0.10 Weighted average number of shares or ADS used for computation of income per share 38,782,336 38,950,091 38,782,336 38,950,091 38,950,091 BLUE SQUARE - ISRAEL LTD. SELECTED OPERATING DATA FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005 Convenience translation(a) Three months for the three Nine months ended ended September months ended September 30 30 September 30 2004 2005 2004 2005 2005 NIS NIS NIS NIS U.S.$ (Unaudited) (Unaudited) Sales (in millions) 3,989 4,321 1,385 1,586 341 Operating income (in millions) 157 171 51 59 13 EBITDA (in millions) (excluding one-time expenses) 263 269 87 92 20 EBITDA margin (excluding one-time expenses) 6.6% 6.2% 6.3% 5.8% NA Increase (decrease) in same store sales* (1.9%) 1.8% (0.7%) 4.8% NA Number of stores at end of period 164 168 164 168 NA Stores opened during the period 7 7 3 4 NA Stores closed during the period 4 3 1 1 NA Total square meters at end of period 300,000 312,000 300,000 312,000 NA Square meters added during the period, net 9,200 12,000 2,900 9,800 NA Sales per square meter 13,477 14,070 4,637 4,991 1,086 Sales per employee (in thousands) 645 676 217 228 49 * Compared with the same period in the prior fiscal year. Company Contact: Blue Square-Israel Ltd. Emanuel Avner, CFO Toll-free telephone from U.S. and Canada: 888-572-4698 Telephone from rest of world: +972-3-928-2220 Fax: +972-3-928-2299 Email: cfo@bsi.co.il