The transition of New Clicks has continued over the period, with financial performance improving and turnover growing at satisfactory levels.
The decisive management action taken in Clicks over the past year is starting to reflect in an improved operating performance, evidence that the business is stabilising. Discom, the Entertainment division (Musica and CD Wherehouse) and wholesale distributor, UPD, continued to deliver strong performances.
Following the appointment of David Kneale as chief executive officer in January 2006, a new executive team was formed to lead the group, comprising Kneale, Keith Warburton as chief financial officer and Michael Harvey as managing director of Clicks. In addition, Peter Eagles and Martin Rosen were appointed as non-executive directors with effect from 10 April 2006.
During the reporting period the following resigned as directors: Raymond Godfrey as an executive director on 31 December 2005; Trevor Honneysett as an executive director on 23 January 2006; and Peter Swartz and Allen Zimbler as non-executive directors on 10 April 2006.
Management has focused on embedding the new information systems platform implemented during 2005, with business processes being adapted accordingly and the quality of management information starting to improve.
Group turnover increased by 14.2%. UPD maintained its strong performance with growth of 28.9%. Retail turnover increased by 9.0% (9.5% on a comparable store basis) despite a benign inflationary environment.
Total income (gross profit and other revenue) grew by 9.8%, with gross profit up 8.2% and other revenue up by 18.9%. Gross margin declined by 1.1% to 20.7% as a result of the increased proportion of UPD within the mix. Retail operations maintained a stable margin despite the inclusion of a group surplus shrinkage provision of R28 million. Management has taken the prudent view that this amount should not be released to income until the year-end inventory count has been concluded.
Operating expenses grew by 10.1%.
Profit before interest and taxation, despite the inclusion of the group surplus shrinkage provision, grew by 11.6%.
Interest paid increased by R3.4 million on the previous year, reflecting the higher levels of borrowings to support additional working capital requirements.
Headline earnings grew by 8.1% with diluted headline earnings per share up by 7.8% to 40.2 cents.
Capital expenditure in the group decreased to R63.7 million from R72.4 million in the last six months, while working capital needs increased by R582 million in the period. This increased requirement is primarily attributable to additional funding of accounts receivable in UPD following the acquisition of hospital supply contracts and timing differences in the levels of funding provided by suppliers.
Inventories increased by 4.2% despite the 14.2% increase in turnover, reflecting the greater focus on stock management. Consequently inventory turn increased to 6.7 times from 6.5 times in 2005.
Clicks increased turnover by 7.3%, with comparable stores increasing by 10%. This reflects the impact of the closure or conversion of most of the remaining non-integrated pharmacies, with only 12 left at the end of February and this has since been further reduced to six.
13 new Clicks stores opened in the period, bringing the total store base to 308, including 92 dispensaries. Clicks opened its 100th dispensary in late April.
Despite current pharmacy pricing, healthcare sales grew by 9.1% with pharmacy sales building to plan. Operating profit of R186.4 million is an improvement of 10.6% on last year.
Discom increased turnover by 10.1%, with comparable stores growing by 5.7%. The total number of stores at end-February 2006 was 183, a net increase of three over the six months. Operating profit grew by 51.2% to R30.1 million, with operating margin improving from 4.1% to 5.6%.
The Entertainment division enjoyed another successful trading period and increased turnover by 18.5%, with comparable stores growing by 12.2%. The contribution of DVD, gaming and lifestyle merchandise continues to increase with these categories now accounting for 33% of total sales. A net two stores were opened, with stores totalling 141 at period-end. Operating profit of R46.4 million was up 52.2% on last year.
The Body Shop turnover increased by 5.4%, with comparable stores up 1.6%. Operating profit was up by 3.2%.
UPDís turnover growth of 28.9% was driven mainly by the new hospital supply contracts and 35% growth in sales to Clicks stores. Gross margins are lower on the hospital business, although this was offset by improved efficiencies. Operating profit grew by 29.1%.
- Trading in March and April has been in line with managementís expectations and is anticipated to continue at current levels for the remaining four months of the financial year.
- 21 new stores are planned to be opened by the financial year-end.
- The pharmacy rollout in Clicks will continue, but at a more measured pace as the business focuses on building volume and improving operating efficiencies.
- Management will continue to focus on embedding the new systems into the business to provide the foundations for future operations.
- Improvements in working capital will be generated from the ongoing focus on inventory management.
- The directors and management are confident that the continued improvement in the operating performance will result in increased profitability for the full year.