R3.6 billion
cash generated over past five years

Keith Warburton
Chief Financial Officer

After achieving all the financial targets for 2010, medium-term financial objectives have been revised to reflect the improved performance and prospects.


Clicks Group continued to enhance shareholder value as it delivered on its commitments to investors by achieving or exceeding all the medium-term financial targets in 2010.

Strong retail trading and efficient margin management contributed to a 20.3% growth in headline earnings to R576 million. The earnings-enhancing effect of the share buy-back programme resulted in diluted headline earnings per share growing by 27.4% to 211.4 cents per share.

Return on shareholders’ interest (ROE) is a major focus for the group and this key metric exceeded 50% for the first time, increasing from 42.3% to 50.8% for the year.

The group has shown a consistent and sustained improvement in trading, operational and financial performance since 2005 as reflected in the following table:

      5-year CAGR
  2005 2010 (%)
Return on shareholders’ interest (ROE) (%) 14.2 50.8 29.0
Diluted headline earnings per share (cents) 57.4 211.4 29.8
Distribution per share (cents) 29.7 106.2 29.0
Share price (closing) (cents) 810 3 750 35.9

Financial performance

The review of the group’s financial performance for the year ended 31 August 2010 should be read in conjunction with the annual financial statements, as well as the Business Unit Segmental analysis.

Statement of comprehensive income


In an environment of declining inflation, group turnover increased by 9.0% to R13.3 billion (2009: R12.2 billion). Turnover for the first and second half periods was consistent.

There is generally no seasonal effect on the group’s turnover. While the first half of the year includes the festive season trading period, this is counter-balanced by the winter season in the second half which is a busy trading period for a healthcare business.

Retail turnover across Clicks, Musica and The Body Shop increased by 14.7%, with comparable store growth at 11.2%. Selling price inflation declined from 8.6% in 2009 to 5.4% for the period.

The Clicks chain, which accounts for 58% of group turnover, continued its strong performance and increased sales by 16.7% (including average trading space growth of 4.3%). The brand showed real growth of 10.9% as inflation measured 5.8%.

Musica increased turnover by 0.5% as discretionary spending in the entertainment market remained muted.

Sales growth for The Body Shop slowed down in the second half and increased by 5.2% for the year, mostly attributable to new store openings.

UPD’s turnover grew by 5.2%. This growth rate is understated as distribution agency sales were included in turnover in the prior period. Wholesale turnover grew by 12.2%, with price inflation at 5.5% (2009: 9.2%).

The strong growth in the Clicks dispensary business contributed to a 30.7% increase in intragroup turnover from UPD to Clicks.

The trading performance of the business units is covered in the Operational Reviews.

Total income

Total income, which comprises gross profit and other income, grew by 14.5% to R3.5 billion. The total income margin, showing total income as a percentage of sales, has improved to 26.6% from 25.3% in 2009 and 24.2% in 2008.

The retail total income margin grew to 32.3% (2009: 31.7%) mainly through the performance of Clicks where well-managed buying margins were complemented by good control over shrinkage and waste levels.

UPD’s total income margin was slightly lower at 7.6% owing to the lower increase in the single exit price (SEP) of medicines granted to manufacturers by the Department of Health.

Operating expenditure

Group operating expenditure increased by 14.1%. Operating expense growth in the retail businesses at 14.6% (2009: 15.7%) was in line with retail turnover growth and below the growth in total income of 16.7%.

The costs in the retail businesses were impacted by the continued investment in stores and pharmacies and higher performance-related costs which were partially off-set by the increase in the valuation of the share incentive hedge. Excluding these costs the underlying growth in retail expenses for the period was 10.0% compared to 10.3% in 2009.

Costs in UPD increased by 10.5%. Eliminating non-comparable group cost allocations, the costs of reorganising the business and additional expenses directly related to the distribution agency turnover, costs grew at a modest 4.0%.

Operating profit

Operating profit increased by a pleasing 16.1% as the operating margin improved to 6.2% for the year. This margin compares most favourably with 5.8% in 2009, 5.3% in 2008 and well up on the 2005 level of 3.8%.

Clicks increased its operating margin from 6.3% to 6.9% through continued improvements in both supply chain and shrink and waste management and this translated into a 27.3% growth in operating profit for the year. Clicks now accounts for 72% of the group’s profit.

Tight expense control and good management of buying margins resulted in Musica improving its operating margin by 20 basis points to 5.5%. Operating profit increased by 4.1% which is a highly creditable performance considering the minimal growth in turnover for the second consecutive year.

The Body Shop’s operating profit performance was aided by the strength of the Rand over the period and increased by 21.6%.

The 7.2% decline in operating profit at UPD is attributable to the lower SEP increase granted in 2010. The operating margin at 3.1% is now closer to the margin guidance of 2.7% to 3.0% for the wholesale business which has consistently been provided to shareholders.


The net interest charge of R39 million showed a sharp decline from R55 million in the prior period owing mainly to the lower interest rate environment.

Cash interest servicing costs reduced from R43 million in 2009 to R35 million in 2010. Borrowing levels measured on an average daily basis for 2010 were similar to 2009, at a debt to equity ratio of 20% to 30%.

Interest cover has increased from 6.2 times in 2005 to 20.8 times in 2010.

Statement of financial position


Inventory days in stock were 55 (2009: 54), with inventory levels 10.5% higher at year-end owing mainly to the earlier buying and delivery of imports in Clicks ahead of the Christmas promotional period.

Both Musica and The Body Shop’s inventory levels were well managed considering the lower turnover growth in these brands. An automated replenishment and efficiency system was implemented in Musica in August to improve inventory management. Inventory days in stock in Musica is planned to reduce from 87 days to 70 days in the year ahead as the benefits of this system are realised.

UPD’s inventory days in stock at 22 were impacted by timing around the year-end inventory cut-off and a normalised stock level would be 28 days.

Overall the group has managed to contain the five-year compound annual growth in inventory to 1.8% while turnover has grown by 8.8%.

Cash utilisation

The group remains strongly cash-generative. Adjusting for abnormal working capital levels, particularly in UPD, the group generated normalised cash flow from operations of R744 million compared to R698 million in 2009.

The investment in capital expenditure of R231 million was in line with 2009. Distributions to shareholders increased to R245 million (2009: R191 million) which reflects the higher levels of payouts on improved financial performance and the reduced dividend cover introduced in the 2009 financial year. Share repurchases totalled R322 million (2009: R338 million).

Over the past five years the group has generated R3.6 billion in cash, utilising R959 million for capital expenditure and returning almost R2.7 billion to shareholders in distributions and share buy-backs.

Shareholder distribution

Shareholders will receive a total distribution of 106.2 cents per share for the year, an increase of 26.4% over the previous year. This comprises an interim distribution of 30.5 cents (2009: 24.5 cents) and a final distribution of 75.7 cents (2009: 59.5 cents). The distributions are paid as a capital reduction from share premium.

Distribution cover has been maintained at 2.0 times undiluted headline earnings per share.

Capital management

Efficient management of cash and capital underpins the group’s strategic objectives. One of the group’s medium-term targets is to maintain the ratio of shareholders’ interests to total assets in a range of 30% to 35%, with the ratio being 27.8% at year-end. This is achieved through the management of working capital, share buy-backs and distributions to shareholders.

Over the past year the group repurchased shares totalling R322 million at an average price of R28.42. The group has acquired R1 872 million in shares at an average price of R15.86, representing 33.2% of the issued shares at the commencement of the programme in May 2006.

Financial risk management

The group is exposed to a range of financial risks through its business activities, including market risk (currency risk, interest rate risk and price risk), credit risk and liquidity risk. The group’s exposure to these risks and the policies for managing the risk are detailed in note 27 of the annual financial statements. Further detail on the financial risk is included in the Risk Management Report.

Financial reporting and disclosure

The group’s 2009 annual report was rated ninth in the annual Ernst & Young Excellence in Corporate Reporting awards. This is the first time the group has been rated in the top ten and the second consecutive year it has been placed in the Excellent category. These awards recognise the quality of financial reporting of the top 100 companies on the JSE and are independently judged by the University of Cape Town’s Accounting Department. The group was placed first in the Institute of Chartered Secretaries (ICSA)/JSE annual report awards for 2010 in the mid-market capitalisation category.

Revised financial targets

The medium-term financial targets are reviewed annually by the board and management based on performance and prospects for the next three-year period. After achieving all the targets for the 2010 financial year, key financial objectives have been revised to reflect the improved performance and prospects (also refer to Group Targets).

  Performance target
  in 2010 2011 – 2013
Return on shareholders’ interest (ROE) (%) 50.8 50 – 60
Shareholders’ interest to total assets (%) 27.8 30 – 35
Return on total assets (ROA) (%) 13.9 14 – 18
Inventory days 55 50 – 55
Operating margin (%) 6.2 6 – 7

Plans for 2011

Capital expenditure of R250 million has been committed for 2011, with approximately 60% allocated to the Clicks chain. A total of R131 million has been budgeted for new stores, refurbishments and relocations across the group, as well as the dispensary opening programme in Clicks. Information communication and technology expenditure has been increased to R78 million to meet the growing needs of the business.

Total retail trading space is expected to increase by 4% to 5%. Further detail on the capital expenditure and store development programme for 2011 is outlined here.

Selling price inflation is expected to remain in mid-single digits during the new financial year.

Share buy-backs are a critical element of the composite return to shareholders and the group plans to continue to repurchase shares in the year ahead at price levels that remain earnings enhancing. The group bought R100 million of the 2011 share buy-back programme in the latter stages of the 2010 financial year.


Thank you to our shareholders and the broader investment community for their continued support and active following of the Clicks Group over the past year.

On a personal note I would like to thank the many local and international fund managers and analysts with whom I have interacted in my five years with the group for their positive engagement and healthy debate. I also welcome my successor, Michael Fleming, and wish him well in his new role.

Thank you to the finance staff across the group for their commitment and the role they have played in improving the quality of financial reporting and enhancing disclosure to investors.

Keith Warburton

Keith Warburton
Chief Financial Officer