The group continues to make steady progress in its turnaround towards sustainable performance, with encouraging turnover growth over the past year and improvements in several key performance measures.
The operational performance of Clicks is reflected in improved turnover growth and profitability, while the groupís wholesale pharmaceutical distributor, UPD, continued to perform well.
During the year under review a new group executive was formed and the board of directors was extensively restructured and strengthened.
The implementation of the enterprise-wide systems platform has proved challenging. After addressing systems stability issues in the early months of the financial year, business processes have had to be adapted to the requirements of the new systems. Operational compliance with these processes has taken longer than expected. As compliance improves, we anticipate further benefits in the quality of reporting and analysis.
As a consequence of the above, the year-end financial reporting and audit process has taken longer to complete than anticipated. KPMG Inc.ís modified review report on the preliminary results presented is available for inspection at the companyís registered office. The board and management have decided to publish unaudited results and are confident that the audited results will not materially differ.
Group turnover increased 14.8% to reach the R10 billion mark for the first time. Retail turnover grew 10.0% in a period when both Clicks and Discom experienced price deflation. UPD lifted turnover by 26.8%.
Gross profit margin declined by 90 basis points as a result of the increased contribution of UPDís sales within the group. By the nature of its business, UPD operates at much lower gross margins and its decline in margin from 4.0% to 2.9% reflects the higher volume of ethical product distributed. Retail gross margin increased by 30 basis points to 27.1%.
Operating expense growth was contained at 9.5%, resulting in an increase in operating profit before capital items of 19.6%. Operating profit margin increased to 3.9% from 3.8% in 2005.
Headline earnings grew by 25.5% with diluted headline earnings per share increasing by 23.7% to 71 cents per share.
Return on equity improved from 14.2% in 2005 to 16.7%.
R220 million in cash was generated by operating activities during the year. This was driven by a significant improvement in the second half of the year, where the group generated R563 million compared to R295 million last year. This improvement in cash flow management is largely attributable to better working capital management.
The efficient management of stock is reflected in inventory levels only increasing by 0.2% despite the 14.8% increase in turnover. Inventory turn increased from 6.1 times in 2005 to 6.9 times.
Clicks increased turnover by 8.8%, with the core categories of healthcare growing by 11.7% and beauty rising 9.4%. Comparable store turnover increased by 10.8%, reflecting the impact of the closure or conversion of the remaining non-integrated pharmacies. Operating profit improved by 13.3% to R207 million.
The drugstore model adopted by Clicks is proving effective, evidenced by a 19% increase in turnover in stores with dispensaries. Clicks opened 45 dispensaries during the year and now has 110 in-store dispensaries.
Discom continues to realise its potential as a health, beauty and lifestyle retailer for the lower to middle income groups. Turnover increased by 10.5%, with comparable stores growing by 5.7%. Discomís operating profit grew by 37.8% to R34 million.
Musicaís turnover growth of 17.6% was driven mainly by a strong increase in DVD and gaming sales. Comparable stores grew 10.8%. Entertainment-related merchandise categories now account for 34.5% of total sales. Operating profit increased 11.0% to R26 million.
The Body Shop increased turnover by 11.8% as sales in the second half of the year grew by 20%. Comparable store sales rose 3.1%. Operating profit increased 19.3% to R11 million.
UPDís turnover growth of 26.8% is mainly attributable to two major hospital supply contracts received during the year and to increasing sales to Clicks. Continued tight expense management contributed to a 28.0% increase in operating profit.
Trading in the first two months of the new financial year has been satisfactory. However, the trading environment for 2007 is likely to be affected by increasing interest rates, although it is too early to determine the impact on spending patterns and consumer confidence levels. Modest levels of price inflation are expected in the year ahead.
The group has developed clear plans for each business to improve its offer to its customers. 34 new stores are planned for the year ahead. Operationally the group will have the benefit of its new systems for a full year in 2007 and will focus on improving distribution efficiency and expense control.
The directors and management are confident of delivering real earnings growth in 2007.