Commentary

Trading environment

Middle income consumers in the Clicks target market have remained under financial pressure over the past year. The health and beauty markets in which the group operates have been reliant on promotional activity to sustain sales volumes and attract value-conscious consumers. As anticipated, selling price inflation has remained low.

In this environment the group has focused on staying competitive and maintaining tight expense control while continuing to invest for long-term growth.

Despite the trading challenges, the appeal of the Clicks brand remains strong and the chain gained market share in all key product categories. The Clicks ClubCard loyalty base grew by over 300 000 to 3.9 million active members.

Musica and The Body Shop both performed well.

UPD showed an improved performance as the distribution agency business gained further momentum. This assisted UPD in growing its share of the private pharmaceutical wholesale market from 23.1% to 24.3%.

Financial performance

Group turnover increased by 9.2% to R15.4 billion, with selling price inflation of 0.5% for the year. Retail turnover grew by 8.2% with inflation of 0.7%, while UPD increased turnover by 11.1% with price inflation averaging only 0.1%. All the group's businesses showed real sales growth in this low inflationary environment.

Total income increased by 8.4% and the total income margin was 20 basis points lower at 27.7%, reflecting the impact of the strong promotional programme in Clicks and the faster growth of UPD.

Operating expenses were 8.5% higher. Retail costs increased by 8.1% with the continued investment in new stores, pharmacies and IT systems. On a comparable basis, retail cost growth was contained to 5.0%. UPD's cost growth of 13.0% includes further investment in distribution capacity, with comparable costs increasing by 6.7%.

Operating profit increased by 7.9% and exceeded R1 billion for the first time. The group's operating margin was maintained at 6.6% despite the trading pressures encountered during the year.

Headline earnings increased by 5.6% to R692 million. Diluted headline earnings per share grew by 9.5% to 273.4 cents, in line with the earnings growth forecast provided with the group's interim results in April 2012.

Inventory days in stock moved from 60 to 63 days. Inventory levels were 15.4% higher at year-end as Clicks increased stock levels to improve availability and introduce more new products. UPD stock levels were higher owing to the new distribution contracts taken on during the period.

Cash generated by operations (before interest and taxation) increased to R1.1 billion. The group returned R349 million to shareholders through distribution payments and share buy-backs while R256 million was invested in capital expenditure.

The total distribution to shareholders for the financial year was increased by 21.6% to 152.0 cents per share, based on a reduced distribution cover of 1.8 times.

Return on shareholders' equity (ROE) remains at an industry leading level of 59.9%.

Trading performance

Clicks increased turnover by 9.2% as inflation averaged only 1.2% for the year. Comparable store sales grew by 5.9%. The chain's store footprint was expanded to 420 following the opening of a net 20 new stores. The pharmacy base was extended by 23 to 306. Operating profit increased by 4.9% and the operating margin of 7.4% remains within the medium-term target range of 7% to 8%.

Musica gained market share in CDs, DVDs and gaming. The ongoing right-sizing of the brand which resulted in the net closure of a further 14 stores contributed to operating profit increasing by 36.3%. The Body Shop increased turnover by 14.1% with price deflation of 1.9%, and grew operating profit by 15.9%.

UPD increased wholesale turnover by 11.1%. Ten new agency distribution contracts were awarded during the year and this trebled the notional turnover of the distribution business to R1.7 billion. UPD increased its operating margin to 2.5% and lifted operating profit by 18.5%.

Prospects

Growth in consumer spending is expected to remain muted in the year ahead and the health and beauty markets will continue to be promotionally driven. Selling price inflation is currently anticipated to remain at low single-digit levels.

The group's focus in this trading environment will therefore be on growing sales volumes and containing costs.

Capital expenditure of R356 million has been committed for 2013 for new stores, new pharmacies, store revamps, IT systems and the expansion of UPD's distribution infrastructure. Trading space is planned to increase by 4% to 5%.

The group's brands are all leaders in their respective markets and have proven track records of gaining market share. Based on the growth potential of Clicks and UPD, together with the group's strong cash generating ability, management is confident of achieving its medium-term financial targets.

Final dividend

The board of directors has approved a final ordinary dividend of 107.9 cents per share (2011: 88.0 cents per share) and a 15.2 cents per ordinary "A" share (2011: 12.5 cents per share). The source of the dividends will be from distributable reserves and paid in cash.

Additional information:

No Secondary Tax on Companies ("STC") Credits have been utilised as part of these declarations.

Dividends Tax ("DT") amounting to 16.185 cents per ordinary share and 2.28 cents per ordinary "A" share will be withheld in terms of the Income Tax Act. Ordinary shareholders who are not exempt from DT will therefore receive a dividend of 91.715 cents net of DT and ordinary "A" shareholders will receive a dividend of 12.92 cents net of DT.

The Company has 276 123 498 ordinary shares and 29 153 295 ordinary "A" shares in issue. Its income tax reference number is 9061/745/71/8.

Shareholders are advised of the following salient dates in respect of the final dividends:

Last day to trade "cum" the dividend Friday, 18 January 2013
Shares trade "ex" the dividend Monday, 21 January 2013
Record date Friday, 25 January 2013
Payment to shareholders Monday, 28 January 2013

Share certificates may not be dematerialised or re-materialised between Monday, 21 January 2013 and Friday, 25 January 2013, both days inclusive.

The directors of the company have determined that dividend cheques amounting to R50.00 or less due to any ordinary shareholder will not be paid unless a written request to the contrary is delivered to the transfer secretaries, Computershare Investor Services (Proprietary) Limited, by no later than close of business on Friday, 18 January 2013, being the day the shares trade "cum" the dividend. Unpaid dividend cheques will be aggregated with other such amounts and donated to a charity to be nominated by the directors.

By order of the board

David Janks
Company Secretary

18 October 2012

 
   
Registered address: Cnr Searle and Pontac Streets, Cape Town 8001. PO Box 5142, Cape Town 8000
   
Directors: F Abrahams*, JA Bester*, BD Engelbrecht, M Fleming (Chief Financial Officer), F Jakoet*, DA Kneale# (Chief Executive Officer), N Matlala*, DM Nurek* (Chairman), M Rosen* * Independent non-executive # British
 
Transfer secretaries: Computershare Investor Services (Proprietary) Limited, 70 Marshall Street, Johannesburg 2001. PO Box 61051, Marshalltown 2107
   

Sponsor: Investec Bank Limited

Registration number: 1996/000645/06   Share code: CLS   ISIN: ZAE000134854