Dis-Chem to turn page on snags
Dis-Chem Pharmacies says it will focus on improving returns to shareholders after earnings were hit by one-off costs associated with a strike and the change of accounting treatment.
Dis-Chem Pharmacies says it will focus on improving returns to shareholders after earnings were hit by one-off costs associated with a strike and the change of accounting treatment.
Headline earnings per share fell 38.9% to 31c because of accounting changes that put leases on the balance sheet; excess stock due to a strike at distribution centres; and higher security and staff costs.
Group revenue rose 13.2% to R11.8bn during its six months to end-August, with the integration of Western Cape pharmaceutical wholesaler Quénet’s helping external revenue from wholesale grow 28.5%.
In six-month results released on Thursday, Dis-Chem said: “In the current period, with the challenges of the strike coming to an end and the decentralisation of the wholesale space now concluded, the group continues to focus on return on invested capital to ensure optimal returns to shareholders over the long term.”
The company faced other one-off costs, including a change to the group’s bonus policy in which employees’ 13th cheques are now expensed across the financial year, rather than in December.
Dis-Chem CFO Rui Morais said that despite a decline in headline earnings per share, the group now has a good base from which to grow profits. He said stock rationalisation freed up cash flow, giving it a “financial gearing”. Morais said the company had done a lot of work on keeping the rate of cost growth below revenue growth.
Despite the difficult consumer environment, revenue has grown 13.2% over the corresponding period.
But analysts are disappointed, citing Dis-Chem’s inability to turn sales growth into profit. Alpha Asset Management fund manager Keith McLachlan said, “Technically, Dis-Chem grew its sales at 13.2% while Clicks’ results showed revenue growth of 7.2% year on year.
“Dis-Chem is the smaller, faster-growing operator and, indeed, these sales figures do indicate that.
“That said, Dis-Chem’s inability to translate this growth via operating and financial leverage into equal to faster bottom line growth has been a key problem as shareholders cannot live on sales growth alone.”
Gryphon Asset Management’s Casparus Treurnicht said that while Dis-Chem mentioned strikes and accounting changes as one-off expenses around leases affecting earnings, it did not give details on why its gross profit increased only 2.7%. Treurnicht said he found it “extremely worrying” that the profit margin rose so slightly.
Sasfin Bank senior equity analyst Alec Abraham said: “DisChem has been disappointing in some ways since listing, for me, particularly in terms of the rollout of a smaller-format store for towns that can’t support their big-box format. A key advantage of Clicks over Dis-Chem has been its ubiquity.”
Treurnicht echoed this sentiment. “Clicks has a better model than Dis-Chem. Clicks’s smaller format and easier-to-reach positioning have a relative advantage over Dis-Chem.
“In the current environment, people travel less and shop only [for] the basics. There is lots of unused floor space in a DisChem that would only work in a booming economy.”
STOCK MANAGEMENT
However, Abraham said he expected it to turn around.
“I was interested to see from the investor presentation that the group has invested in software and technologies to improve stock management and process reporting, and efficiencies within the business — something I believe Clicks was far more adept at under the guidance of former CEO David Kneale.
“Based on these investments in efficiency, I believe Dis-Chem should perform better in a number of areas of its operation.”
Dis-Chem’s share price leapt 5.21% to R25.25 on Thursday.
THERE IS LOTS OF UNUSED FLOOR SPACE IN A DIS-CHEM THAT WOULD ONLY WORK IN A BOOMING ECONOMY