Dis-Chem and Clicks remain attractive
While the general retailers index has sunk 27% from its April 2015 peak, two shares in the sector appear to be proving the lipstick theory.
The Clicks share price closed at R145, a whisker from its record of R145.64, taking its gains since the start of the year to 23% Dis-Chem ended at R28.10, just below its record of R29.50. It has gained 26% in 2017, even as consumer confidence, according to the Bureau for Economic Research, suffers its worst run since 1982.
The “lipstick effect” was coined by Leonard Lauder, chairman of Estee Lauder, who found that during times of economic stress lipstick sales rose. The premise is that consumers who are not able or confident enough to splash out on a bigticket item will comfort themselves with smaller luxuries.
There may be a deeper reason behind that. A 2015 Psychology Today report cited a series of experiments that found while tougher economic times decreased desire for most items, they increased women’s yearning for products that
boosted their attractiveness. Analysts may take a dim view of curious psychological studies, however. Of the 13 surveyed by Bloomberg, only Arqaam Capital and Barclays have buy calls on Clicks. Six rate it a hold and five thought investors should sell.
They are similarly split over Dis-Chem, with three buy calls, three holds and two sells.
Sentio Capital said Clicks’ big shareholders were mostly international and were generally more optimistic. “In SA only 26% of pharmacies are corporate owned,” said Sentio portfolio manager Imtiaz Suliman. “It’s 50% in the US and UK. Just on that basis, foreigners think there’s potential for growth.”
One asset manager said “personal care and beauty products account for only 27% and 34% of Dis-Chem and Clicks’s retail revenues, respectively, and are not the only drivers behind the earnings growth in these businesses. The two companies benefited from store rollouts and gaining share in fragmented markets.”
Sentio is not adding to its 1.15% stake in Dis-Chem, citing the company’s forward p:e of 30. Clicks is similarly lofty, trading on a forward p:e of 28.8. Shoprite’s is less than 20, while Woolworths is 14.2.
The analyst said it was more difficult for Clicks and DisChem to beat already high consensus expectations, “but if they can … the shares could rally”.
Suliman cites high levels of return on equity as a major draw. “Clicks has been consistently buying back shares, which has aided them ....
“If you look at Dis-Chem’s growth, it’s not going to be funded by rights issues, it’s a virtuous cycle. They can invest more in the business and be more competitive in pricing.”
IN SA ONLY 26% OF PHARMACIES ARE CORPORATE OWNED, IT’S 50% IN THE US