Chief financial officer's report
Introduction
Clicks Group produced another highly competitive financial performance in 2011 and enhanced returns to shareholders. This was achieved through solid earnings growth, increased distributions and substantial funds returned to shareholders through share buy-backs.
Headline earnings for the period increased by 13.9% to R655 million, with diluted headline earnings per share (HEPS) benefiting from the share buy-back programme and increasing by 18.1% to 249.7 cents per share.
Return on shareholders’ interest (ROE) increased from 50.8% to 62.2% for the year, lifted by the impact of share repurchases of approximately R300 million in the last six weeks of the financial year. Management has increased the medium-term target for ROE to 55% – 65% given the sustainable financial performance of the group.
In the Sunday Times Top 100 Companies awards for 2010, Clicks Group was ranked the fifth best performer on the JSE, based on the five-year compound growth in shareholder value of 43.3%. Over this period an investment of R10 000 in Clicks Group shares rose to R60 436.
International fund managers continue to view Clicks Group as an attractive investment proposition and the offshore shareholding increased to 60.6% at year-end (2010: 47.1% and 2009: 12.3%). Eight of the 10 largest investors are based abroad.
Financial performance
The following review of the group’s financial performance for the year ended 31 August 2011 is limited to the key line items of the statement of comprehensive income and the statement of financial position which have a material impact on performance. This review should be read in conjunction with the annual financial statements, together with the supplementary information contained in the five-year analysis of financial performance and the business unit segmental analysis which follow here.
Statement of comprehensive income
Turnover
In an environment of low selling price inflation, group turnover increased by 6.2% to R14.1 billion (2010: R13.3 billion).
In recent years there has been minimal seasonal effect on the group’s turnover as the festive season trading period in the first half is counter-balanced by the winter season in the second half which is a busy trading period for a healthcare business. Group turnover increased by 8.9% during the first half which contributed 51% of the turnover for the year. However, the growth slowed to 3.6% in the second half, highlighting the tougher trading conditions as the year progressed.
Retail turnover, including Clicks, Musica and The Body Shop, increased by 10.9%, with comparable store growth of 6.9%. Selling price inflation declined to 0.6% from 5.4% in the prior year. Average trading space increased by 5.3% to 224 000 m² following the opening of a net 29 new stores during the year.
The Clicks chain, which accounts for 60% of group turnover, increased sales by 13.0%. The brand reported real growth of 12.0% as inflation averaged 1.0% for the year.
Musica sales for the period declined by 5.9%, impacted by deflation of 2.4%, as the decline in the CD and DVD markets accelerated in the second half.
Deflation of 6.6% resulted in turnover in The Body Shop being 2.8% lower for the year.
UPD increased wholesale turnover by 4.2%, with inflation averaging 3.3%.
The continued expansion of the Clicks pharmacy network and the strong growth in the Clicks dispensary business resulted in a 26.2% increase in intragroup turnover from UPD to Clicks.
The trading performance of the business units is covered in the Operational Review.
Total income
Total income, which comprises gross profit and other income, grew by 10.9% to R3.9 billion. The total income margin, which reflects total income as a percentage of sales, expanded by 110 basis points to 27.7%. This margin has shown consistent growth in recent years, improving from 24.2% in 2008 to 25.3% in 2009 and to 26.6% last year.
The total income margin for the retail businesses rose by 50 basis points to 32.8% (2010: 32.3%) owing to the performance of Clicks, where good buying and supply chain management off-set the margin dilution of dispensary where Clicks continues to price aggressively.
UPD’s total income declined by 7.9%. The prior year included a stock gain of R26 million from the increase in the single exit price (SEP) of medicines which was not repeated in the current year as no SEP increase was granted for 2011. The decline in UPD’s front shop sales, owing to the continued contraction of independent pharmacy, also placed pressure on the margin.
Operating expenditure
Operating expenses increased by 9.9%. Expense growth was well contained in the second half of the year through an increased focus on cost management, with retail costs growing by 7.7%. Retail expense growth for the 12-month period was 10.8%, including the investment in 31 new Clicks stores and 32 dispensaries.
Retail operating expenses were impacted by the following:
- An IFRS 2 charge of R15 million following the introduction of the employee share ownership scheme in February 2011
- Pharmacy employment costs, which represent approximately 30% of retail employment costs, were 16% higher on a same store basis
- Electricity and water costs were R19 million higher than the prior year at R83 million
- The disposal of the incentive scheme derivative hedges resulted in a gain of R41 million in 2011 (2010: R123 million).
UPD reduced expenses by 5.6% in the second six months through improved operating efficiencies, and expenses for the year were 0.1% lower than 2010.
Operating profit
The group’s operating margin improved by 40 basis points to 6.6%, translating into a 13.9% increase in operating profit to R938 million (2010: R824 million).
Clicks increased its operating margin from 6.9% to 7.7% through sales volume growth and efficient cost management, resulting in a 25.8% increase in operating profit for the year. Clicks accounts for 81% (2010: 72%) of the group’s profit.
Despite maintaining gross margin and stringent cost management, Musica’s operating profit was impacted by the decline in turnover and fell by 40.2%.
The Body Shop’s margin improved to 19.1% as a result of the strong Rand and operating profit was 3.5% higher for the period.
UPD’s operating profit was 19.4% lower than the prior year owing to the lack of a trading gain on SEP.
Statement of financial position
Inventory
The group has continued to focus on creating efficiencies in working capital management while improving stock infill and store availability metrics.
Inventory days in stock moved from 55 to 60 days and inventory levels were 14.7% higher at year-end, mainly as a result of stock levels in UPD returning to normalised levels. At the prior year-end, UPD’s stock levels were abnormally low at 22 days and should ideally be between 28 to 30 days in order to service customers optimally.
Clicks and Musica improved inventory cover and maintained stock growth below the rate of sales growth. Inventory levels in The Body Shop showed a sharp increase owing to a large shipment of product being received shortly before year-end ahead of product price increases.
The medium-term inventory days target has been revised from 50 – 55 days to 55 – 60 days to sustain customer service with appropriate stock availability.
Cash and capital management
The group remains highly cash-generative. Cash inflow from operations increased by R244 million over 2010 to R677 million (2010: R433 million).
Capital expenditure of R226 million (2010: R231 million) was invested in new stores and dispensaries, refurbishments and IT systems. Distributions to shareholders increased to R296 million (2010: R245 million) owing to higher payouts on the improved financial performance.
As part of the ongoing capital management programme, the group repurchased shares totalling R552 million (2010: R322 million) at an average price of R40.43.
The group has acquired R2 399 million in shares at an average price of R18.37, representing 37.3% of the issued shares at the commencement of the programme in May 2006. The ratio of shareholders’ interest to total assets at 22.7% was outside the targeted 30% – 35% owing to the higher volume of shares repurchased during the year. This medium-term target has been revised to 27% – 32%.
Shareholder distribution
Shareholders will receive a total distribution of 125.0 cents per share for the year, an increase of 17.7%. This comprises an interim distribution of 37.0 cents (2010: 30.5 cents) and a final distribution of 88.0 cents (2010: 75.7 cents), based on a distribution cover of 2.0 times undiluted HEPS. The ordinary distributions are paid as a capital reduction from share premium. A maiden distribution of 12.5 cents per “A” share was declared for participants in the employee share ownership programme. This distribution is payable from distributable reserves.
Financial reporting and disclosure
The group’s annual report was rated in the “Excellent” category in the annual Ernst & Young Excellence in Corporate Reporting awards for the third consecutive year. These independent awards recognise the quality of financial reporting of the top 100 companies on the JSE and are widely regarded as the benchmark for disclosure and reporting in the country.
Medium-term financial targets
The group’s medium-term financial targets are reviewed annually based on budgeted performance and prospects for the next three-year period. The revised targets for 2012 to 2014 are set out below:
| Achieved in | 2012 – 2014 | |
|---|---|---|
| 2011 | target | |
| Return on shareholders’ interest (%) | 62.2 | 55 – 65 |
| Shareholders’ interest to total assets (%) | 22.7 | 27 – 32 |
| Return on assets (%) | 15.7 | 14 – 18 |
| Inventory days | 60 | 55 – 60 |
| Group operating margin (%) | 6.6 | 6 – 7 |
For further detail on the group’s financial and operating targets refer to the Group Strategy and Targets report.
Financial outlook for 2012
Capital expenditure of R257 million is planned for the 2012 financial year. This includes R152 million for new stores and dispensaries, refurbishments and relocations, and R65 million for IT expenditure.
Total retail trading space is expected to increase by 4% to 5%, with 20 to 30 stores planned for Clicks and two for The Body Shop.
Management expects selling price inflation to remain at the current low levels for at least the first half of the new financial year.
The group will incur an annual IFRS 2 charge of approximately R28 million for the employee share ownership programme.
The group’s HEPS for 2012 will benefit from the significant volume of shares repurchased during 2011.
The group remains committed to returning surplus cash to shareholders through distributions and share buy-backs. As detailed in the Chairman’s Report, the board has lowered the group’s distribution cover from the current 2.0 times to 1.8 times undiluted HEPS with effect from the 2012 interim distribution.
Appreciation
Thank you to our shareholders as well as fund managers and analysts both locally and offshore for their continued investment and support of the group. We also welcome those shareholders who invested in the group for the first time this year.
I would like to thank my predecessor, Keith Warburton, for his support in facilitating a smooth transition into my new role, and extend my thanks to the board for their confidence in appointing me to the group. Finally, thank you to the finance staff across the group for their efficient financial management and commitment to quality reporting to our stakeholders.
Micheal Fleming
Chief Financial Officer
Clicks Group Limited