Predictable Clicks defies gravity but now faces toughest test

Clicks is nothing if not predictable, but in this increasingly uncertain world, predictable is good.

In most of the time that I have analysed this wellmanaged company, going way back to when June Kritzinger was CEO in the 1980s, it has rarely if ever shot the lights out.

But it has been an incredibly consistent performer, and investors have been more than willing to pay up for this boring yet sustained performance.

It is one of the most highly rated retail stocks on the JSE, with a price-earnings ratio of 32.6 times. This compares with Dis-Chem on 34.3 and Pick n Pay on 24.

It went through a strange patch last decade under Trevor Honeysett, who referred to himself as “group leader”. He was obsessed with establishing a corporate pharmacy powerhouse, which he did, but in the process took his eye off the ball of basic retailing.

He was replaced by Briton David Kneale, a Boots veteran. This CEO stopped the downward spiral under Honeysett and turned it around in an extremely successful way. By his 2019 retirement, he had transformed this SA retailing icon and returned it to its former glory.

Current CEO Vikesh Ramsunder has inherited a quality business and has risen to the challenge of increasing profitable market share in all areas of the business. His pedigree is impeccable, having headed the United Pharmaceutical Distributors (UPD) division previously. Before that he was involved in a variety of functions in a career going back to 1993.

But by the group’s own admission, the next six months will be really tough, as the economy buckles under the effects of the coronavirus.

The latest results — the prelockdown February 2020 interims — were good. The broad metrics were impressive, especially considering the poor background economy.

Group turnover was up 9.9% to R16.9bn, with health and beauty sales up 9.6% and UPD, the pharmaceutical wholesaler, enjoying a 12.3% rise in turnover. Operating profit margin was flat at 7.4%. Return on equity was a healthy 30.4% and debt to equity was almost nonexistent at 6.2%.

In anticipation that the next six months will be significantly tougher, the interim dividend was passed, as has been the case with a number of JSElisted companies.

In the seven weeks from March 1 to April 19, Clicks experienced a mixed bag of consumer behaviour. In the immediate aftermath of the state of disaster declaration, it saw unprecedented demand for health-care and hygiene products.

Then, in common with most other essential goods retailers, sales began to moderate significantly during the level 5 lockdown. Parts of the business, such as music distributor Musica and luxury beauty products retailer The Body Shop, were forced to close.

The retail chain was confined to selling only essential goods during restricted hours. Nevertheless, its sales for these seven weeks rose by 7.6% comparatively. This is no mean achievement considering the restrictions in operation. UPD turnover grew by 31.2% as customers prepared for the effects of the coronavirus.

Analysing companies during this time is difficult because of ongoing uncertainty and conflicting forces in play. A group such as Clicks should do better than most retailers in a pandemic-dominated economy. But the pushback then comes from significantly reduced consumer spending that will inevitably accompany much higher levels of unemployment as many companies close down and workers are furloughed or retrenched. Passing the dividend was a very prudent decision.

We will know how badly Clicks has been affected by the direct and indirect effects of the virus only when full-year results to end-August are published in October.

The share price has defied gravity for the past few years as many of its peers in the sector have fallen on hard times. DisChem, for example, its closest listed peer, is back to where it was at its listing in November 2016, while Clicks is more than 100% higher over the same period. The current pandemic conditions will test the ability of the share price to continue in this vein, to the limit.

THE NEXT SIX MONTHS WILL BE REALLY TOUGH, AS THE ECONOMY BUCKLES UNDER THE EFFECTS OF THE CORONAVIRUS