TRADE of the MONTH
Clicks and Dis-Chem square up in a battle for investors
is-Chem has finally listed on the JSE, seven years after its CEO and co-founder Ivan Saltzman first hinted it was a move being considered. The question investors will now be asking is: which is the better bet, Clicks or Dis-Chem?
It is not an easy choice. Both have powerful management teams, robust business models and well-defined growth plans.
Historical performance provides one means of weighing up their merits. Clicks has shone under David Kneale, its CEO since January 2006.
In the 10 years to August 2016 Clicks set a cracking pace, growing headline EPS (HEPS) at an average of 20%/year and dividends at 23.4%/year. Over the 10 years, return on equity soared from 14% to 49%.
Unfortunately Dis-Chem does not provide a depth of historical data, its prelisting statement disclosing figures only for the three financial years to February 2016 and interim figures for the 2017 and 2016 financial years.
Dis-Chem’s figures present a mixed picture, arguably a rather disappointing one which swings the investment odds strongly in favour of Clicks.
Between its 2014 and 2016 financial years Dis-Chem grew headline earnings from R408.65m to R498.23m, a rise of 21.9%. But at the HEPS level a number of factors, including a big jump in issued shares, especially in the 2016 financial year, left HEPS down 8.5%.
Clicks outshone Dis-Chem, growing headline earnings in the two years to August 2016 from R838.36m to R1.098bn, an increase of 26.5%.
DAt the HEPS level the increase was a stronger 30.2% thanks to share buybacks, a hallmark of Clicks’ policy of returning surplus cash to shareholders.
Dis-Chem’s performance in the latest six months to August was also uninspiring, with net income of R297.9m being 7.9% down on the comparable period in 2015.
Another big factor dragging on Dis-Chem’s bottom line growth has been a soaring debt level. In no small way it’s a result of recent mega dividends.
Since the 2014 financial year, R2.54bn has been paid in dividends, R772m (43%) more than total net profit over the period.
Of total dividends, R1.927bn was paid over the 18 months to August with almost R1.3bn going to the Saltzman family.
Dis-Chem ended the latest six months to August with debt of R2.3bn (all short-term), up from R406m in February 2014. Though R700m of the listing proceeds will be used to reduce debt it will still remain a sizeable R1.6bn, or around 180% of equity.
It is a very different situation at Clicks, which ended its latest financial year with an ungeared balance sheet sporting cash of R370m.
It reflects a conservative stance which, in uncertain times, must give Clicks another edge over Dis-Chem as an investment.
However, the bottom line is that neither is at bargain levels. At current share prices, analysts’ estimates indicate Clicks in its year to August 2017 is on a forward 22.4 p:e while Dis-Chem, in its year to February 2017, is on a very similar forward 22 p:e.
Clicks and Dis-Chem will have to justify their ratings by producing bottom-line growth that is consistently aboveaverage. Both retailers have aggressive expansion strategies aimed at doing just that.
At first glance Dis-Chem appears to have the edge. Its strategy calls for doubling store numbers from the current 101 over the next five to eight years. It represents an annual addition of 13-20 new stores and, as with existing stores, all will have pharmacies.
The strategy at Clicks is to add 20-25 new stores annually to its existing base of 511.
The difference between the two retailers lies in store size and location. Dis-Chem is married to shopping mall-based, big-format destination stores with a targeted size of 1,000 m2-1,800 m2 while Clicks’ focus is primarily on smaller convenience stores.
“The average size of a Clicks store is 600 m2,” says Kneale. “We have only 50 large-format stores.”
With its expansion, Dis-Chem will add more trading space than Clicks. Taken at the average annual pace of their expansion plans, Dis-Chem will add about 9,000 m2 trading space more than Clicks annually. Dis-Chem’s trading density (sales/m2) is also notably higher than Clicks’.
It gives Dis-Chem a growth advantage over Clicks. Or does it?
Clicks’ focus on convenience stores places it in the fastest growing segment of SA retail.
“Convenience shopping is the name of the game,” notes research firm Urban Studies in a new report.
Clicks has another plus going for it. Though it and Dis-Chem are running neck and neck in the retail pharmacy sector with a 19.6% share each, only 400 Clicks stores (78%) have pharmacies.
It is remedying this by adding 30-35 new pharmacies annually with the objective, says Kneale, of having a pharmacy in every Clicks store.
A pharmacy acts as a big attraction to customers and when added to an existing store, holds the promise of a big boost to the front store which accounts for more than 70% of the sales of a Clicks store with a pharmacy.
As Dis-Chem co-founder and MD Lynette Saltzman notes, the front store is “the profit engine”.
It is certainly not clear-cut whether Clicks or Dis-Chem will be the winner in the profit race game over the coming years.
But for now, the wiser investment move appears to be to stay with Clicks, the business with the longest disclosed record of outstanding growth.
Clicks outshone Dis-Chem, growing headline earnings in the two years to August 2016 from R838.36m to R1.098bn, an increase of 26.5%