Results that click with the market
First-half results at Clicks will please investors, and the retailer expects more of the same — despite looming election hiccup
The rosy rating investors prescribe for Clicks might well be questioned by the more cynical market watchers. But the health, home and beauty retailer itself seems optimistic, with plans to spend more than R1.3bn on growth initiatives this financial year.
The group’s heady historic earnings multiple of 25 and forward multiple of 23 promise pulse-racing growth for the foreseeable future. In the latest interim period to end-February, Clicks delivered another set of encouraging numbers. But the outlook for consumer spending remains dour overall, and the election signals caution and circumspection.
The Clicks executive team, though, see ample opportunity for longer-term growth and are backing this upbeat prognosis with a hefty capital commitment to store and brand expansion.
Dis-Chem, the other large corporateowned pharmacy chain, is also pursuing expansion, but other retailers may be reining in their ambitions for now.
Clicks CEO Bertina Engelbrecht sees much runway for growth for corporate pharmacy groups. She notes the ratio of independent pharmacies to corporateowned pharmacies is significantly higher than in many other countries.
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, expects to see plenty of independent pharmacies getting squeezed by Dis-Chem and Clicks.
The long-term plan is to have more than 1,200 stores with a pharmacy in every store (Clicks currently has 902 stores). The
pharmacy rollout is constrained partly because of government limitations on the number of licences it will issue. Over the past year, it added 27 pharmacies, bringing the total number to 718.
The retailer now plans to accelerate its store expansion by opening 50-55 stores by the end of the financial year. This is up from its previous target of 40-50 new shops a year. Clicks will spend about R920m this year — which includes R514m on the envisaged new stores as well as 1020 pharmacies and the refurbishment of up to 60 outlets. Another R406m will be invested in supply chain technology and infrastructure.
In the first half Clicks gained market share across the retail health and beauty categories. The group, reassuringly, continued to generate strong cash flows. Sales and margins improved (the latter rose 30 basis points to 8.5%) and the group reported strong demand for private-label products — this grew 14.3% and now accounts for 31% of front-shop sales.
In truth, Clicks still remains focused on its core pharmacy, health, beauty and wellness business — which accounts for 84% of turnover.
In the period under review Clicks continued its triedand-tested formula of offering products at reasonable prices, supported by its expansive store network and customer following — its ClubCard loyalty programme has 11million members.
Clicks added
100,000 new customers to the programme each month in the first half, and the ClubCard contribution to sales was 82% for the period.
While other retailers have headed offshore with a more aggressive approach, often to come unstuck and withdraw, Clicks has been more restrained and focused largely on South Africa. The group has stores in Namibia, Lesotho, Botswana and Eswatini and is considering opening in Zambia.
The recently acquired Sorbet is adding a new flavour to the revenue line. Clicks paid R105m for the chain of franchise beauty salons. Sorbet actually outperformed Clicks in the interim reporting period and salon sales were up almost 15%. There are now plans to open branches in Botswana and Mauritius. Engelbrecht says the Sorbet Man brand has the potential to grow a new demographic for the group — the metrosexual male.
Clicks bought the 24-hour specialist pharmacy outlet MKem in Bellville last year, and the plan is to open 15-20 more such pharmacies over the next three to five years.
Overall, Clicks increased its share of the retail pharmacy market from 23.5% to 24.3%, with the front-shop health market share increasing from 32.7% to 33.2%.
Can these gains go unchecked? Rival Dis-Chem has stated its intent to expand more aggressively in turf dominated by Clicks, such as the Western Cape. “We haven’t seen the realisation of the plans they’ve put in place,” says Engelbrecht. “What we’ve done over the past six months is buckled down on service. In pharmacy it’s not about cost because it’s regulated, it’s the quality of service and convenience of location.”
Clicks also indicates that the United Pharmaceutical Distributors division is expected to deliver a stronger second half following a recent systems upgrade and as it reaps the benefits of the single-exit-price increase.
Engelbrecht says the period reflected “a culmination of a lot of things that went right and that, to me, is the best possible outcome. The organisation is sound and everyone is pulling in the right direction at the same time.”
Still, Clicks has warned of a tough six months ahead with high consumer inflation and possible disruptions ahead of the election. The group is forecasting that diluted headline earnings for the full year will rise 10%-15%.
Treurnicht says buying a kettle at Clicks might not be a surprise any more. “I think what Clicks did right was to attract a very specific customer who spends on particular goods (makeup) where they know they will get the best price and availability. Put on top the loyalty card and they will return for more.
“Over time Clicks has rolled out a pharmacy, which was a game changer,” he says. “But in the meantime it has expanded some of its ranges, sometimes without the customer consciously noticing. Some years ago, Clicks used to be a simple store with specific goods. Today those stores are either very cramped or in a new location with bigger floor space.”
Treurnicht says Clicks is superbly run. “It amazes me how the growth simply continues. I think this is an aspect that some analysts — including myself — underestimated. It has certainly evolved and expanded into more categories.”
Clicks, he says, was smart to focus on a model and geography that it understood. “Other retailers were too ambitious and looked at other pastures, just to return with their tails between their legs.”