Dis-Chem operating costs spike offsets earnings rise
Pharmacy retailer Dis-Chem is experiencing a slight increase in store traffic from customers who purchased its health insurance products as it aims to grow its businesses offering healthcare and increase uptake of nurse-led consultations at both its baby and pharmacy stores.
Due to restrictions in the demarcation regulations, new insurance providers cannot enter the healthcare insurance market, which offers fewer benefits than medical aids.
To drive traffic to its pharmacies, Dis-Chem acquired a stake in insurance provider Kaelo, while Discovery partnered with Auto & General Insurance.
Dis-Chem sees restrictions on competition in the insurance market as an advantage.
The group intends to use the restrictions on new entrants to expand its health insurance brand.
Instead of breaking even, profits from health insurance will be reinvested in growing the business, said incoming CEO Rui Morais.
He said insurance benefits will be redesigned to boost store foot traffic and medicine purchases. It aims to eliminate the 12-month waiting period in traditional medical insurance for individuals with chronic conditions.
By doing so, insurance holders will have immediate access to some chronic medications.
“Cross-subsidisation of the waiting period costs can be achieved through the benefits of increased foot traffic,” Morais said. The company has introduced a reward programme with medicine discounts for policyholders.
COVID VACCINES
Dis-Chem experienced doubledigit headline earnings growth and upped its dividend, but operational costs grew at a faster rate than revenue growth in its year to end-February.
Excluding Covid-19 vaccines, revenue grew 9%, with wholesale revenue from its medicine distribution business up 10.4% to R24.2bn. “We had a really good first half, and a slightly more challenging second half,” said Morais.
However, operating costs rose more than sales growth, at 16.1%. Its costs included the acquisition of new Baby Boom stores, salary increases, IT costs, including the rollout of the new point-of-sale system, and additional advertising expenditure.
It warned rising operational costs linked to load-shedding will affect its earnings in future. The group expects consumers to continue experiencing financial hardship, outgoing CEO Ivan Saltzman said.
“While the group has taken the necessary measures to minimise the operational effect of load-shedding, the unavoidable increase in operational costs will continue to impact earnings,” Saltzman said.
Its diesel costs, used to run generators, increased 65% to R91m.
PRICE INFLATION
Retail revenue grew 6.5% to R28.9bn with comparable store revenue at 3.3%.
It did not give internal price inflation figures that would give a better sense of real volume growth, but its like-for-like growth figures are low, suggesting minor increases in products sold compared with the prior year.
If the contribution of Covid19 vaccines and testing are excluded from both periods, retail revenue grew 8.4%.
Its cash flow, a metric investors use to determine business strength, was negative as it invested in new stores and bought extra stock before price increases. It started the year with R280m cash on hand and ended with -R160m.
At end-February, the group had 258 retail pharmacy stores and 54 retail baby stores, to which clinics have been added.
Headline earnings per share, a main profit measure in SA, increased 17.4% to 116.5c.
Dis-Chem declared a final dividend of 18.5c per share, resulting in a total dividend of 46.6c for the year, an increase of 17.3% from the prior period.
The group lost clients with chronic scripts after a memo in November about a moratorium on hiring whites in response to BEE laws was leaked, but new six-month chronic scripts business returned in April with more business in May.