COMMENTARY

Overview

Clicks Group has continued to deliver a sustained financial performance through the focus on its core strategic objectives of building pre-eminence in

While there has been no marked improvement in consumer spending over the period, the health and beauty markets in which the group operates have continued to show their resilience and grown well ahead of the overall retail sector.

All the group’s businesses traded well during the period and strengthened their market-leading positions.

Financial performance

Retail turnover increased by 15.2% to R4.8 billion for the six months to February 2010 as the Clicks chain continued its strong growth trend and lifted turnover by 17.5%. Selling price inflation for the retail businesses was 7.9%.

UPD’s turnover grew by 6.7%, (by 14.9% on a comparble basis as the wholesaler’s distribution agency business is no longer reflected in turnover).

Group turnover increased by 9.5% to R6.6 billion.

Total income, comprising gross profit and other income, rose by 15.4% to R1.7 billion.

Operating expenses increased by 16.4%. Retail costs were 17.7% higher, impacted by the continued investment in new stores and dispensaries, and increased performance-related costs which were partially offset by the increase in valuation of the share incentive hedge. Excluding these costs, underlying retail expense growth was contained at 12.1%. UPD’s cost growth was well managed at only 4.2%.

The group’s operating profit margin improved from 5.9% to 6.0%, resulting in an 11.9% increase in operating profit to R397 million.

Headline earnings increased by 18.7% to R275 million. Diluted headline earnings per share for the period increased by 24.5% to 100 cents per share, in line with the earnings guidance provided in the trading statement on 30 March 2010.

The board declared an interim distribution of 30.5 cents per share, an increase of 24.5% over the previous interim period.

The group’s return on equity has continued to show pleasing improvement and increased from 38.1% to 46.2%.

Inventory levels were again tightly managed across the group and reduced by 10.8%, while inventory days in stock improved from 67 to 56 days.

Trading performance

Clicks increased turnover by 17.5%, with strong real sales growth of 8.6%. Comparable store sales grew by 13.3%. Clicks recorded market share gains across all core merchandise categories. A further 17 in-store dispensaries were opened which extended the pharmacy network to 224 out of a total store base of 354. The operating profit margin increased to 6.6% (2009: 6.5%) through improved inventory management, good control of shrinkage and waste, and better margins on front shop products. This translated into operating profit growth of 18.1%.

UPD grew wholesale turnover by 14.9%. This performance was driven by the focus on the core customer groups of Clicks, hospitals, Link pharmacies and the export business, which collectively accounted for 81% of wholesale turnover. UPD has continued to improve its cost efficiency ratio. The 4.5% decline in operating profit is a result of the annual increase in the single exit price of medicines only being effective from May this year and not from February as in the previous year.

Musica continued to show its resilience by increasing turnover by 0.5% in an entertainment market which experienced negative growth. Musica continues to gain market share and remains the country’s leading music and entertainment retailer. The business maintained its operating margin at 6.7%.

The Body Shop increased turnover by 7.7%, lifted by new store openings, with operating profit up 19.8%.

Prospects

The retail trading environment is expected to remain challenging and any recovery in consumer spending is unlikely to benefit the group in the second half of the financial year. The impact of the 2010 FIFA World Cup on retail spending remains an unknown factor. Price inflation for the group should moderate in the months ahead.

Trading for the first seven weeks of the second half of the financial year has continued in line with the performance for the first half. Management will continue to maximise organic growth opportunities in the health and beauty markets with a clear value proposition for customers, and are confident of sustaining the current performance levels in the second half.

Employee share scheme

The group is currently evaluating the viability of a broad-based employee share ownership scheme. Extending equity ownership to employees will accelerate transformation and build on the progress that has been made across all other areas of black economic empowerment within the group. In addition, this will enable the group to attract and retain scarce and specialist skills. Any proposed share ownership scheme will be subject to shareholder engagement and approval.

Full-year earnings forecast

The group currently anticipates that diluted headline earnings per share for the year to 31 August 2010 will increase by between 20% and 25% over the previous financial year.

This forecast is based on the following assumptions: The group’s operational and trading performance for the second half will continue in line with the results achieved for the period under review; further organic growth will be generated from store expansion and the opening of additional pharmacies; and there will be no marked changes in trading conditions, the regulatory environment and in the macroeconomy that will impact on consumer spending.

Interim distribution

The board of directors has approved an interim distribution of 30.5 cents per share (2009: 24.5 cents per share). The source of the distribution will be either from distributable reserves and paid as a cash dividend or a capital reduction out of share premium. The source of the distribution will be made known on or before Friday, 18 June 2010.

Shareholders are advised of the following salient dates in respect of the interim distribution:

Last day to trade “cum” the interim distribution Friday, 25 June 2010
Shares trade “ex” the interim distribution Monday, 28 June 2010
Record date Friday, 2 July 2010
Payment in respect of the interim distribution Monday, 5 July 2010

Share certificates may not be dematerialised or rematerialised between Monday, 28 June 2010 and Friday, 2 July 2010, both days inclusive.

By order of the board
David Janks, Company Secretary
22 April 2010


Registered address: Cnr Searle and Pontac Streets, Cape Town 8001
PO Box 5142, Cape Town 8000

Directors: DM Nurek* (Chairman), F Abrahams*, JA Bester*, BD Engelbrecht, MJ Harvey, F Jakoet*, DA Kneale# (Chief Executive Officer), M Rosen*, KDM Warburton (Chief Financial Officer)
* 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

Formerly New Clicks Holdings Limited