Reviewed group results for the year ended 31 August 2005 New Clicks Holdings Limited [logo]
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Commentary

The business of New Clicks has continued to undergo transformation over the past year with the group addressing several strategic issues which are expected to deliver long-term benefits. These include

  • the ongoing integration of pharmacy into Clicks, which is providing evidence that the group's pharmacy model is effective as the volume of customer activity increases significantly in stores that have opened dispensaries;
  • the successful implementation of an enterprise-wide information systems platform which will transform business processes; and
  • several senior appointments and changes to the group's leadership structure to enhance the depth and experience of the management team.

Financial performance

While the group's overall results are disappointing, having been impacted by the poor results from Clicks, it is pleasing to note that Clicks has started to show the initial signs of an improvement in performance during the second half. There were, however, strong performances from Discom, the Entertainment division (Musica and CD Wherehouse) and wholesale distributor, New United Pharmaceutical Distributors (UPD).

The group increased turnover from continuing operations by 18.2% to R8.7 billion for the year, bolstered by the inclusion of the pharmacy operations for the full financial year compared to only six months in the 2004 results.

However, a 28.5% decline in the operating profit (gross profit plus other revenue less operating expenditure) of Clicks from R293.5 million to R209.7 million adversely affected the group's results. This decline resulted mainly from a loss of approximately R70 million in the pharmacy business for the year, the continued high level of shrinkage in the brand and a proportionately higher allocation of central costs.

An estimated R48 million of the pharmacy losses can be attributed to the impact of the lower margin on dispensing fees adopted by Clicks to meet competitive pressures.

Owing to the relative size of the Clicks brand within the group, there has been a 8.6% decline in the operating profit from continuing operations to R358.6 million.

Diluted headline earnings per share from continuing operations reduced by 5.3% to 63.2 cents per share (refer to Notes: Accounting policies). Diluted basic earnings per share at 58.4 cents per share (2004: 5.1 cents loss per share) were lower than diluted headline earnings per share owing to an impairment of the Link Investment Trust goodwill as well as various other capital items which together totalled R17.0 million.

Working capital management remains an opportunity and therefore a key area of focus. Net cash flow from operations amounted to R479 million, which was applied to capital formation in stores, improved information technology, loan repayments, dividend payments, share repurchases and working capital funding.

The group had a negative cash flow of R345 million for the year.

The results reported are in line with the trading statement issued on 11 October 2005.

Trading performance

Retail brands

The retail sector continues to experience strong growth considering the low inflation rates currently being experienced in the country. However, sales of fast moving consumer goods (FMCG) have not experienced the same growth rates as the fashion goods sold mainly by credit-based retailers.

Clicks increased turnover by 17.9% to R4.5 billion, inflated by the inclusion of the pharmacy results for the full financial year. When the turnover from the pharmacy operations is excluded, the core Clicks brand increased turnover by 9%.

The performance of the brand stabilised in the second half of the year and Clicks has started to show the early signs of a turnaround. The shrinkage trend has continued, while the margin was negatively impacted when Clicks adopted the medicine pricing regulations. Expense control improved in the second six months.

Clicks has significantly advanced the implementation of its strategy following the integration of pharmacy into the brand. The brand aims to be the "best discount drugstore in South Africa" by dominating mass market pharmacy health and beauty products and services. This core health and beauty range will continue to be supported by a homeware offering.

Following the Constitutional Court's judgment on the medicine pricing regulations, Clicks will continue to charge a dispensing fee of R26/26% in the interim period while a more workable pricing model is being sought. Clicks will continue to adopt a competitive pricing stance, supporting its value proposition of "You Pay Less at Clicks".

The performance of the integrated Clicks stores with dispensaries is proving the model that front shop sales will increase from the higher footfall through stores from pharmacy customers. Front shop sales from the integrated stores have increased 15.9% since being converted to include pharmacy.

Discom increased turnover by 11% to R975.2 million and lifted operating profit seven-fold to R28.9 million. The benefits of the brand's restructuring over the past few years are becoming increasingly evident, with continued improvement in margin, shrinkage and expense management.

An aggressive pricing strategy and increased sales of entertainment merchandise contributed to a 21.7% sales growth in the Entertainment division. In line with diversifying the income stream, sales of DVD, gaming and lifestyle merchandise now account for 39% of total turnover (2004: 29%). Operating profit increased 45.1% to R27.6 million.

The Body Shop increased turnover 14.0% to R58.4 million, although comparable store growth declined by 1.5%. The brand experienced a stronger performance in the second half but this was not sufficient to overcome the disappointing first six months and profit declined 5% to R9.5 million for the year.

New Clicks has grown its store base by a net 12 stores over the year to 663. An aggressive store expansion programme is planned for 2006 with a further 30 stores scheduled to be opened across Clicks (13), Discom (9) and Entertainment (8).

Wholesale distribution

UPD increased turnover by 33.3% to R3.0 billion for the year, driven by strong growth in sales to independent pharmacies. Growth in turnover from Clicks Pharmacy has increased as the rate of pharmacy integration increases, while sales to private hospitals is a major growth area. Margins were impacted by the lower logistics fee owing to the introduction of single exit pricing, but this was compensated by the increased sales volumes. Expenses were well managed at 6.6% of turnover (2004: 8.3%).

Prospects

The performance of Clicks is critical to the overall success of the group and the turnaround in Clicks remains management's main priority. While the brand showed an improved trading performance in the second half of the year and this upward trend is expected to continue, management considers that the full benefits of the recovery are realistically not likely to be achieved in the short term.

Discom will build on its recent success and expand into the health and wellness market, while the Entertainment division will focus on growing gaming, DVD, lifestyle merchandise and local music, as well as exploring opportunities in the cellular market.

UPD will continue to target volume growth. While the regulatory environment remains challenging with the expected capping of logistics fees and uncertainty on the retail pharmacy dispensing fee, UPD is well positioned for strong profit growth.

Following the migration to the enterprise systems platform, the group will focus on leveraging the benefits of the system and adapting to this new way of managing the business. The new systems will ultimately provide daily sales, margin and stock information, more timeous performance information, stock take results within 48 hours and also facilitate efficient end-to-end processing in the supply chain.

The directors and management believe that the group now has a clearer focus, a more experienced management team and a stronger platform for growth which is expected to contribute to improved profitability and earnings in the year ahead.