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New Clicks Holdings Limited [logo] Reviewed group results for the year end 31 August 2004

Commentary

Financial performance

  • New Clicks Holdings increased group headline earnings by 22.3% to R271 million, with diluted headline earnings per share showing a 15.5% increase to 74.5 cents per share.
  • Turnover from continuing operations increased by 28.6% to R7.4 billion, with the core retail brands growing by 10.5% to R4.7 billion.
  • The group increased profit before capital items, interest and taxation from continuing operations by 20.4% from R333.6 million to R401.8 million.
  • The ongoing uncertainty around the implementation of the medicine pricing regulations and single exit pricing has resulted in the group writing off the goodwill of R258 million relating to the acquisition of Purchase Milton & Associates ("PM&A").
  • New Clicks' return on equity (RoE) increased from 15.6% to 18.2%, benefiting from the write-off of goodwill in PM&A.

Year-on-year comparison of the group's performance is impacted by:

  • the inclusion of NUPD in the results for the full 12-month period (compared with 8 months in the previous year);
  • the results of NCA, which was sold earlier in the year, are included for only four months (as opposed to the full 12 months in 2003);
  • the incorporation of PM&A for the second six months of 2004.

Trading performance

The group's core retail brands have underperformed management's expectations in the second half of the year, impacted by an increasingly challenging FMCG retail market and the deflationary environment.

Turnover in the core Clicks brand increased by 9% for the year. Turnover for August in the previous financial year was boosted by the Clicks 35th birthday promotion and the same level of growth was not repeated this year. The brand also experienced higher than expected shrinkage, mainly in cellular airtime. Higher margin homewares merchandise continue to grow satisfactorily.

Discom lifted turnover by 13.9%, with strong growth in FMCG sales and a pleasing comeback in homeware merchandise. This contributed to Discom returning to profitability for the first time in several years, reversing an operating loss of R5.6 million in 2003 and recording an operating profit of R5.7 million. The brand continues to entrench its dominant position in the African beauty and hair care market.

The Entertainment division, comprising Musica and CD Wherehouse, recorded strong growth in the second half of the year through an aggressive promotional strategy, and increased turnover for the year by 12.8%. However, operating profit for the year was down 19.8% to R20.6 million mainly as a result of the poor first half results. The repositioning to a broader entertainment offering is realising benefits and sales of DVDs, gaming and lifestyle merchandise have increased from 11.3% to 18.2% of turnover.

Turnover in The Body Shop grew by 12.0% for the year. Operating profit rose by only 2.4% to R10.3 million, with a poor performance in the second half of the year reversing the profit growth of the first six months. The brand was impacted by high expense growth relating mainly to new stores and marketing costs. Stock turn continues to improve.

NUPD increased turnover strongly during the year to R2.3 billion, and posted an operating profit of R75.6 million, an increase of 21% over the previous 12 months. The wholesale distributor continued to grow turnover from PM&A stores, independent pharmacies and single channel distributors. Costs were tightly managed and the business generated strong cash flows.

The retail pharmacy environment came under intense pressure following the introduction of the medicine pricing regulations which capped the dispensing fee levied by pharmacists. New Clicks challenged the new legislation in court, and litigation continues.

During the second half of the year, 21 PM&A stores were converted to the Clicks brand, including the opening of dispensaries in three large format Clicks stores. Turnover in the large format stores has been encouraging and supports the business model that both front and back shop sales will increase once a dispensary is introduced into a Clicks store.

Capital management

During the year the group initiated a share repurchase programme, buying back 13 million shares for R99.5 million at an average price of R7.65 per share. Management aims to continue the repurchase programme. The board decided to reduce dividend cover from 2.5 to 2.2 times, reflecting a 34.6% increase in the dividend declared over the prior year.

Prospects

Despite trading in a deflationary environment, the group remains committed to the strategy and value proposition of the Clicks brand. Steps have been taken to address shrinkage and the short-term decline in sales. The turnover growth trend has been restored, with sales for the first seven weeks of the new financial year increasing by 11.0% over the corresponding period last year.

The outlook for the other retail brands is encouraging, with improved performances expected from Discom, the Entertainment division and The Body Shop.

The group continues to integrate the pharmacy offering into the larger format Clicks stores and, based on the performance of the stores that have been converted to date, the prospects for increased turnover in both the front shop and the dispensary are positive.

NUPD is well-positioned to increase volumes and capitalise on rationalisation in the pharmaceutical market.

The group remains committed to improving expense control and focusing on stock distribution and financial management systems.