Chief Financial Officer’s Report


Clicks Group produced a resilient performance in striving to achieve its overall objective of increasing wealth for stakeholders, despite operating in an environment of low inflation and subdued consumer spending.

Headline earnings increased by 5.6% to R692 million, with diluted headline earnings per share (HEPS) growing by 9.5% to 273.4 cents per share.

The group remained strongly cash generative, with R1.1 billion in cash generated by operations (before interest and taxation). The reduction in the dividend cover from 2.0 to 1.8 times HEPS has enabled the group to increase the total dividend for the year by 21.6% to 152 cents per share.

Return on shareholders’ interest (ROE) is a major focus for the group and this key metric remains the highest in the retail sector at 59.9% (2011: 62.2%).

Shareholders received a return of R17.32 per share (41.5%) for the year (2011: R5.45), comprising an increase in the share price of R15.80 (2011: R4.20) and a total distribution of 152 cents per share (2011: 125 cents).

In 2011 the group produced its first integrated report and this was rated in the “Excellent” category in the inaugural Ernst & Young Excellence in Integrated Reporting Awards. These awards are recognised as the benchmark for disclosure and reporting standards in the country and acknowledge the progress made by the group in adopting the philosophy and principles of integrated reporting.

Financial performance

The review of the group’s financial performance for the year ended 31 August 2012 is focused on the key line items of the statements of comprehensive income and financial position that management consider to have a material impact on performance. The following review should be read in conjunction with the summary financial statements, and the annual financial statements on the group’s website. The business unit segmental analysis appears here, and the five-year analysis of financial performance is also available here.

Statement of comprehensive income


Group turnover increased by 9.2% to R15.4 billion (2011: R14.1 billion) with selling price inflation of only 0.5% for the year. All the group’s businesses achieved real volume growth in this low inflationary environment.

Turnover was evenly spread over both halves of the year. Owing to the nature of the healthcare offering, there is minimal seasonal effect on turnover as the festive season in the first half of the financial year is counter-balanced by the winter trading period in the second half of the year.

Retail turnover, including Clicks, Musica and The Body Shop, increased by 8.2%, with comparable store growth of 5.5%. Selling price inflation averaged 0.7% for the year.

The Clicks chain increased turnover by 9.2% as inflation averaged 1.2% for the year. Comparable store sales grew by 5.9%.

Musica performed well to limit the decline in sales to 2.7% as a net 14 stores were closed during the year. Comparable store sales were flat, despite the brand experiencing deflation of 4.9%.

The Body Shop increased turnover by 14.1% with price deflation of 1.9%, and grew same store sales by 13.8%.

UPD increased wholesale turnover by 11.1% with price inflation averaging only 0.1% after a 2.1% maximum increase in the single exit price (SEP) of medicines was granted during the second half of the year. UPD benefited from a preferred supplier contract secured in February 2012, which offset the impact of the faster growth in sales of lower value generic medicines on UPD’s turnover.

Refer to the Operational Review for details on the trading performance of the business units.

Total income

Total income, comprising gross profit and other income, grew by 8.4% to R4.3 billion. The total income margin at 27.7% was 20 basis points lower than the previous year.

The trading margin in Clicks declined marginally by 10 basis points to 32.0% as a result of the strong promotional programme followed by the chain throughout the year. Musica’s margin strengthened to 35.9% from 35.7%, benefiting from improved supplier terms, which were renegotiated in August 2011. The Body Shop margin normalised to 65.3% from 69.3% following the depreciation of the Rand against the Pound. The group hedges foreign currency risk by means of forward exchange contracts, details of which are provided in the annual financial statements.

The increase of 14.6% in UPD’s total income reflects the benefit of the SEP increase and the new distribution agency contracts secured during the year.

Operating expenditure

Management continued to focus on cost containment in the low inflationary environment, with group operating expenses increasing by 8.5%.

Retail costs grew by 8.1% with the continued investment in new stores and pharmacies, store revamps and IT systems increasing both depreciation and occupancy costs. Employment costs were tightly managed through more effective and flexible staff scheduling and increased by only 2.6% on a same store basis. Electricity and water costs were 23.6% higher at R97.5 million. On a comparable basis, retail cost growth was contained to 5.0%.

UPD expenses increased by 13.0%, and include the investment of R11.0 million in distribution capacity, and additional variable distribution costs of R9.3 million relating to the servicing of the new distribution clients. Excluding these variable and once-off costs, UPD’s expenses grew by 6.7%.

Operating profit

Operating profit increased by 7.9% to R1.0 billion (2011: R938 million), and the group operating margin was maintained at 6.6% despite the trading pressures encountered during the year.

Group profitability was impacted by the slower performance in Clicks where the operating margin declined by 30 basis points to 7.4% and operating profit increased by 4.9%. The margin for the Clicks chain remains within the medium-term target range of 7% to 8%.

Musica’s improved performance is reflected in the 36.3% growth in operating profit, while The Body Shop also performed well and lifted operating profit by 15.9%.

UPD increased its operating margin to 2.5% and grew operating profit by 18.5% as the business gained new distribution agency supply contracts during the year.

Statement of financial position


Inventory days in stock increased from 60 to 63 days with inventory levels 15.4% higher at year-end. Clicks increased stock levels to support the introduction of new product ranges and expanded store space. Product availability in Clicks was 95.1% (2011: 95.1%) for the year.

Following the focus in recent years on creating efficiencies in the Clicks distribution centres, the group plans to optimise the store replenishment system over the next five years to improve inventory working capital management to further improve both stock infill and store availability metrics. This will enable the group to manage the level of inventory days cover to fall within the group’s medium-term target range of 55 to 60 days.

UPD stock levels were higher owing to the new preferred supplier contract taken on during the year. Availability in UPD improved to 93% (2011: 92%).

Cash and capital management

Cash inflow from operations increased by 12.8% to R764 million (2011: R677 million), highlighting the cash-generating nature of the group’s businesses. The cash flow in the previous year benefited from the once-off disposal of a derivative hedge of R161 million.

Capital expenditure of R256 million was invested in new stores and dispensaries, store refurbishments, IT systems and in increasing UPD’s infrastructure capacity over the past year.

The group returned R349 million to shareholders through distribution payments of R337 million and share buy-backs of R12 million. The level of share buy-backs was low as the group brought forward approximately R300 million of the current year’s planned share buy-back shortly before the start of the 2012 financial year.

Since the inception of the share buy-back programme in May 2006, the group has acquired R2 411 million in shares at an average price of R18.43, representing 37.4% of the issued shares at the start of the programme.

The ratio of shareholders’ interest to total assets was 28.2%(2011: 22.7%), within the targeted range of 27% to 32%.

The group’s debt:equity ratio was 14.0% (2011: 37.1%) at year-end.

Shareholder distribution

The total distribution to shareholders for the financial year was increased by 21.6% to 152.0 cents per share (2011: 125.0 cents), based on a reduced distribution cover of 1.8 times HEPS. This comprises the interim distribution of 44.1 cents (2011: 37.0 cents) and a final distribution of 107.9 cents (2011: 88.0 cents). A distribution of 15.2 cents per “A” share (2011: 12.5 cents) was declared for participants in the employee share ownership programme.

Medium-term financial targets

Financial targets are published to provide shareholders with a guide to the group’s medium-term performance objectives. Four of the five targets were achieved in the 2012 financial year and the group remains committed to achieving its medium-term targets.

The targets are reviewed annually based on actual performance and prospects for the next three-year period. The target for shareholders’ interest to total assets has been revised to 25% to 30% (previously 27% to 32%) given the growth in UPD’s business and associated current asset base, which is largely funded by a corresponding growth in UPD’s current liabilities.

in 2012
2013 – 2015
Return on shareholders’ interest (%) 59.9 55 – 65
Shareholders’ interest to total assets (%) 28.2 25 – 30
Return on total assets (%) 15.3 14 – 18
Inventory days 63 55 – 60
Group operating margin (%) 6.6 6.0 – 7.0

For further details on the group’s financial and operating targets, refer to the Group Strategy and Targets Report.

Financial outlook for 2013

The group will remain cash generative, and management plans to improve working capital utilisation, particularly in the Clicks chain.

Capital expenditure of R356 million is planned for the 2013 financial year. This investment includes R161 million for new stores and dispensaries, refurbishments and relocations, R85 million for IT systems to drive further operating efficiencies, and R67 million for capacity building in UPD.

Total trading space is expected to increase by 4% to 5%, with 20 to 30 new stores planned for Clicks, and three for The Body Shop. A further 14 Musica stores will be closed in the next 12 months, largely completing the right-sizing of the brand.

Selling price inflation is currently anticipated to remain at low single- digit levels in the new financial year.

The group will continue to return cash that is surplus to the group’s operational and capital requirements to shareholders in the form of dividends and share buy-backs.


Thank you to our shareholders and the broader investment community both locally and abroad for their continued investment and interest in the group. International fund managers continue to regard Clicks Group as an attractive share investment and at year-end 58.4% (2011: 60.6%) of the group’s shares were managed by offshore institutions.

The finance staff across the group have ensured the group has maintained its high standard of reporting to stakeholders, and I thank my colleagues for their ongoing support.

Michael Fleming

Michael Fleming
Chief Financial Officer