Chairman’s Report

Economic environment

Ongoing instability in global financial markets and muted growth prospects locally have continued to dampen the outlook for a sustained economic recovery in South Africa. More recently a wave of widespread industrial strike action, which started in the mining sector, has highlighted frailties in the domestic economy. This has led to global ratings agencies downgrading the country’s credit rating and has resulted in further weakening of the Rand.

Consumers continued to face sustained cost pressures during the past year, including higher fuel, electricity, utility, food and medical expenses, which has impacted on disposable income levels. Consumer price inflation of 5% at August 2012 is within the SA Reserve Bank’s target range, but could be driven higher by the recent weakening of the local currency and rising food prices.

Consumer indebtedness is trending higher, with household debt at 76.3% of disposable income. This figure is well over 100% for higher income earners, despite interest rates being at their lowest levels in more than four decades. The low and stable interest rate environment appears to have had limited benefit for consumer spending in the past year.

The rapid growth in unsecured lending remains a concern and if not curtailed or regulated could negatively impact consumer spending and retail sales growth in the longer term.

Consumer sentiment, as measured by the Bureau for Economic Research’s Consumer Confidence Index, remains negative and below the historic average level. Confidence levels at the end of the second quarter in 2012 were at -3 compared to +11 only 12 months earlier. As there is a close correlation between consumer spending and consumer confidence, this does not bode well for an improvement in the retail environment in the near future.

Competitive financial performance

Against this background of continued uncertainty and low consumer confidence, the group has performed well and continued to generate highly competitive returns, evidenced by the return on shareholders’ interest (ROE) at an industry-leading level of 59.9%.

While the tightening economic and trading environment has resulted in slower growth in the core Clicks chain, the group’s other three businesses produced pleasing performances. Management is working hard to address areas for improvement, particularly in relation to the Clicks chain, and these are addressed in the Chief Executive’s Report and in the Clicks operational review. The successful implementation of these plans provides an opportunity for significantly improved performance in the years ahead.

The group’s diluted headline earnings per share (HEPS) grew by 9.5% to 273.4 cents per share. Diluted HEPS has shown a five-year annual compound growth of 21.6%.

A final distribution of 107.9 cents per share was declared, bringing the total distribution to shareholders for the financial year to 152.0 cents, an increase of 21.6%, based on a reduced distribution cover of 1.8 times. Distributions have grown at an annual compound rate of 25.8% over the past five years.

The group continues to be highly cash generative and is committed to investing for longer-term growth and returning excess capital to shareholders. Over the past five years the group has generated over R4.4 billion in cash, invested R1.1 billion in capital expenditure and returned R3.1 billion to shareholders in distributions and share buy-backs.

In the Business Times Top 100 Companies survey for 2011, Clicks Group was ranked the eighth best performer on the JSE, with a five-year compound growth in shareholder value of 34.5%. Over this period an investment of R10 000 in Clicks Group shares increased to R44 065.

The group’s trading and financial performance is covered in the Chief Executive’s Report and in the Chief Financial Officer’s Report.

Governance developments

Clicks Group recognises that sound governance can benefit long-term equity performance and enhance shareholder value. In an environment of increasing regulatory and legislative requirements and reporting, the board strives to achieve compliance while delivering sustainable performance to shareholders.

Governance processes continue to be enhanced, and during the past year have focused on the application of the King lll principles and on compliance with the Companies Act. The directors confirm that the group has in all material respects applied the recommendations of King lll.

A social and ethics committee has been established in compliance with the Companies Act. The board transformation committee has been incorporated into the social and ethics committee and the combined committee has oversight for ethics management, stakeholder engagement, empowerment and transformation. The report of the social and ethics committee appears here.

The remuneration and nominations committees have been combined into a single committee, while the terms of reference of all board committees were aligned with the requirements of King III and the Companies Act.

The members of the audit and risk committee were elected by shareholders for the first time at the annual general meeting (AGM) in January 2012.

The group published its first Integrated Annual Report for the 2011 financial year, as required by King lll. The report was rated in the “Excellent” category in the inaugural Ernst & Young Excellence in Integrated Reporting Awards in 2012. These awards are independently judged by the University of Cape Town’s College of Accounting and recognise the group’s commitment to adopting best practice reporting and disclosure to stakeholders.

The JSE Socially Responsible Investment (SRI) Index has become the benchmark for sustainability practices among listed companies in South Africa. The group qualified for inclusion in the index for the third successive year, again achieving over 90% of the governance and related sustainability indicators.

A detailed review of governance developments is contained in the Corporate Governance Report.

Aligning shareholder interests

The group’s remuneration policy was proposed to shareholders for a non-binding advisory vote at the AGM in January 2012 for the first time, and was approved by 100% of the votes cast. The policy will be proposed to shareholders annually. The group’s remuneration policy and practices are outlined in the Remuneration Report.

The remuneration structure of executive directors is closely aligned with shareholder interests and value creation. The annual short-term incentive bonus scheme is based on the achievement of the group’s published medium-term financial and operating targets, while the long-term incentive scheme is directly linked to the growth in the group’s earnings over a three-year performance period.

The group’s performance for the 2012 financial year did not achieve the required target and no short-term incentive bonuses were paid to executives for the year. None of the business units met their required performance hurdles and no bonus payments were made to employees.

Board of directors

Michael Harvey resigned as an executive director in June this year after 23 years’ service with the group. Michael was the managing director of Clicks and served as a director for the past six years. We thank him for his contribution to the group and wish him well.

The group has a stable board that is well balanced in terms of skills and expertise, and is rich in diversity. Four of the nine directors (44%) are black and three (33%) are female. The non-executive directors have an average tenure on the board of six years. The independence of the directors is reviewed annually and all six non-executive directors, including the chairman, are classified as independent in terms of King lll and the JSE Listings Requirements.


In closing I thank David Kneale and his executive team of Michael Fleming and Bertina Engelbrecht for their leadership of the group in what has been a challenging year. Thank you also to my fellow non-executive directors for their valuable insight and guidance.

I also wish to thank our 8 100 employees for their energy and commitment to ensuring our group remains the market leader. Thank you to all our external stakeholders, including our customers, shareholders and investment analysts, suppliers, industry regulators and business partners for your continued support. We also welcome those shareholders who have invested in Clicks Group for the first time this year.

 David Nurek

David Nurek
Independent Non-executive Chairman