commentary

Overview

The trading and financial performance over the past year reflects the benefits of a clear strategic focus which has entrenched the group’s market leadership in healthcare retail and supply through Clicks and UPD.

The high levels of real growth in retail turnover and earnings also highlight the defensive nature of the business in the current tough economic climate.

The key indicator of diluted headline earnings per share (HEPS) increased by 26.2% through improved trading and efficient cash and capital management. Diluted HEPS has grown at a four-year compound rate of 30.4%.

Return on shareholders’ interest (ROE) rose strongly from 32.8% to 42.3% and has increased threefold since 2005. The group has set a revised medium-term target range for ROE of 40% – 50%.

Financial performance

Group turnover from continuing operations increased by 8.8% to R12.2 billion (2008: R11.2 billion). Retail turnover rose by 15.4% as the Clicks chain produced another year of excellent growth and lifted turnover by 17.7%. Selling price inflation for the retail businesses was 8.6%.

Turnover in UPD increased by 4.4% as the business was repositioned during the year to focus on customer profitability and better operating efficiencies. Price inflation was 9.2%.

Total income, consisting of gross profit and other income, increased 13.8% to R3.1 billion.

Operating expenses increased 12.0%, with continued investment in stores, pharmacies and the acquisition of Direct Medicines.

Operating margin increased from 5.3% to 5.8%, with the margins of Clicks and UPD both benchmarking favourably against comparable international businesses. The enhanced margin translated into growth of 20.1% in operating profit from continuing operations to R709 million.

Headline earnings increased 19.7% to R478 million. Diluted HEPS increased 26.2% to 165.9 cents per share, in line with the earnings guidance provided in the group’s trading statement on 30 September 2009.

A final distribution of 59.5 cents per share has been declared, bringing the total distribution for the year to 84.0 cents, an increase of 37.5% on the previous financial year. As previously advised to shareholders, distribution cover has been reduced to two times undiluted headline earnings from the 2009 financial year.

Inventory continued to be well managed, with the group’s inventory days improving from 55 to 54 days while the increase in inventory levels was contained to 3.7%, well below the rate of turnover growth.

The group generated net cash of R309 million after capital expenditure (R225 million), distributions (R191 million) and share buy-backs (R338 million).

Trading performance

Clicks produced another strong all-round trading performance as turnover increased by 17.7%, with second half sales growing by 20.1%. Comparable store sales rose 15.3%. Clicks increased its national pharmacy base to 207 following the opening of 50 in-store dispensaries during the year. Improved inventory management and enhanced efficiencies lifted the operating margin to 6.5% (2008: 6.1%), resulting in operating profit growth of 25.9%.

UPD’s strategy to focus on loyal, profitable customers has seen sales to the core customer groups of Clicks, Clicks Direct Medicines, hospitals and Link pharmacies increasing to 76% (2008: 65%) of UPD’s wholesale sales. The repositioning has realised further operating efficiencies and helped lead to a 12.4% improvement in operating profit. During the year UPD invested R30 million to further develop the capability to grow its third party distribution agency business.

The slow-down in discretionary spending continues to impact Musica as turnover grew by 0.8%. Musica remains the leading entertainment retailer and continues to gain market share. Operating profit for the period increased 0.5%, a creditable performance in the prevailing market conditions.

The Body Shop benefited from new store openings and increased turnover by 8.7%, with operating profit up 4.7%.

Strategy and outlook

The integrated healthcare retail and supply model provides a unique positioning for the Clicks Group in South Africa. Growth and performance will be driven through the core strategic objectives of creating pre-eminence in health and beauty retailing and pre-eminence in healthcare supply and pharmacy management.

Good organic growth prospects should lead to market share increases through the expansion of the Clicks store base and roll-out of in-store pharmacies, and continued growth in the health and beauty markets, while UPD is expected to benefit from sales growth in Clicks and Link, as well as new revenue opportunities in export sales and third party distribution agencies.

Management does not expect an increase in consumer spending in the short term. Trading for the first seven weeks of the new financial year has continued in line with the performance for the 2009 financial year.