The group increased turnover from continuing operations by 24.9% to R4.4 billion in the six-month period, with the retail brands growing 29.2% and wholesale distribution increasing by 36.1% including sales to group companies. The year-on-year comparison of the group's performance has been impacted by the inclusion of the pharmacy operations for the current period and not for the corresponding period in 2004.
However, the results were adversely impacted by a 28.1% decline in operating profit in the core Clicks brand from R177.5 million to R127.7 million. This is attributable to a loss in pharmacy of R38.0 million for the period, turnover growth being slightly below expectations, higher than budgeted stock shrinkage and increased expenses.
The pharmacy losses are mainly in the smaller and non-integrated pharmacies and can largely be ascribed to the reduction in margin from the low dispensing fee prescribed by the medicine pricing regulations.
Discom continued its return to sustainable profitability and the Entertainment Division more than doubled operating profit in the period.
New United Pharmaceutical Distributors (UPD), the group's wholesale distributor, also achieved a strong increase in earnings.
The Clicks performance contributed to a decline in the group's operating profit from continuing operations of 5.9% from R222.1 million to R209.0 million.
Diluted earnings per share for the group declined 14.5% to 37.2 cents per share and diluted headline earnings per share reduced by 16.8% to 37.6 cents per share. The results of New Clicks Australia were included for four months in the previous year.
This performance is in line with the trading statement issued on 6 April 2005.
Turnover in Clicks, including pharmacy, increased by 35.6% for the six-month period. When the contribution from the pharmacy operations is excluded, the core Clicks brand increased turnover by 8.4%.
Margins in Clicks declined owing to the lower than budgeted turnover growth, higher than expected shrinkage, as well as the change in the margin mix with the introduction of lower margin dispensary and healthcare products and slower sales of high margin imported lifestyle merchandise.
Pharmacy turnover held steady but continues to report trading losses owing to the impact of the pricing regulations referred to above and the under-performance of smaller pharmacies that have not yet been integrated into Clicks stores.
The pharmacy model is proving successful in the large Clicks stores where dispensaries have been introduced, reflected in higher front shop turnover through increased footfall. The group is continuing to implement its pharmacy plans and has to date integrated 37 stores. A further 23 are expected to be operational by the end of the financial year.
The legislative uncertainty in the pharmacy sector continues and the group has continued to follow the legal process in order to obtain a more equitable arrangement for retail pharmacy. We await the outcome of the Constitutional Court hearing which took place in mid-March. During the period the group adopted the R26/26% dispensing fee in order to meet competitive pressures.
African beauty and hair care specialist, Discom, increased turnover by 8.6%. The strong increase in profit from R2.7 million in the previous year to R14.6 million was driven by improved margin, reduced shrinkage and tight expense control. The brand increased sales of higher margin toiletries and electrical appliances.
The Entertainment division, comprising Musica and CD Wherehouse, recorded a 24.1% increase in turnover, which was boosted by a particularly strong performance over the festive season. Operating profit increased 113.1% to R23.3 million, despite margin pressure owing to the top 20 CD pricing strategy and a change in mix to lower margin DVD and gaming merchandise.
The Body Shop lifted turnover by 15.7%, although comparable store growth was down 3.3%. The opening of new stores has negatively affected turnover of stores in nearby locations. Operating profit declined 23.7% owing to increased expenses and reduced margins.
UPD increased turnover by 36.1% to R1.4 billion. This strong growth can be attributed to increased support from independent pharmacies that have moved away from single channel distributors, continued growth from Clicks Pharmacy and increased sales to private hospitals. Operating profit increased by 38.3% to R40.7 million. Although the margin was impacted by the introduction of single exit pricing, this was largely neutralised by increased sales volumes. UPD continues to be well managed, evidenced by the increase in expenses being contained to 4.4%.
The group recommenced its share repurchase programme from the start of the new financial year in September 2004, buying back an additional 13.9 million shares for R126.5 million. The last trade was conducted on 20 December 2004. A total of 26.9 million shares have been repurchased for R225.3 million at an average price of R8.37 since the programme was initiated and these shares are being held in a subsidiary company as treasury shares. The share repurchase programme has positively impacted headline earnings per share and the group's return on equity.
Addressing the performance of Clicks and Pharmacy is the main priority for the group. Areas of under-performance in Clicks have been identified by the new management team under the leadership of Michael Harvey and strategies are being implemented to address each of these issues. However, it will take time before the full benefit of these actions is reflected in the performance of the brand.
The performance of the integrated Clicks/pharmacy stores supports the pharmacy business model that both front and back shop sales will increase once a dispensary is introduced into a Clicks store.
The integration process is being accelerated and the long-term aim of the group is to open a dispensary in most Clicks stores. This is dependent on the granting of licences.
Discom is expected to improve profitability as it further entrenches its value proposition and positioning as the leading African beauty and lifestyle retailer. The Entertainment division will continue its aggressive pricing and promotional strategy, and the brand is developing further innovative strategies to grow turnover following the anniversary of the implementation of the top 20 CD pricing strategy in April.
UPD will be actively pursuing volume growth and expansion of its client base as it looks to capitalise on consolidation in the industry. The outlook for increased profitability is positive.
The re-engineering of the enterprise-wide information systems is scheduled to be completed by the end of 2005. The new systems platform will lead to more efficient merchandise management - including stock flow, availability and shrinkage control - and is expected to enhance both brand performance and customer service. The implementation will also lead to improved and more timeous reporting by the group.