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  • Comprehensive
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  • Statement of
    Financial Position
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  • Statement of
    Changes in Equity
  • Segmental
    Analysis
  • Supplementary
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  • Notes
  • Commentary

Commentary

Trading environment

The six month period to 29 February 2012 was characterised by tough trading conditions.

The retail trading environment has been highly competitive, with increased promotional activity to attract value conscious consumers. Low or negative selling price inflation has also led to a slowdown in the growth of the health and beauty market.

In this challenging climate the group has nevertheless increased its volumes and share of the total health and beauty market, thereby maintaining its competitive advantage.

Financial performance

Group turnover increased by 6.8% to R7.7 billion, with selling price deflation of 0.2% for the period. Retail turnover grew by 8.3% with price inflation of 0.1%, while UPD increased turnover by 5.0% as price deflation averaged 0.5%. In this low inflationary environment all the group’s businesses showed real growth in sales.

Total income, comprising gross profit and other income, increased by 6.9% and the total income margin at 28% was consistent with the comparable period.

The group has focused on cost management and operating expense growth was well contained at 7.3%. Retail costs increased by 7.4% (comparable costs up 2.7%) despite the opening of 30 new Clicks stores and 29 dispensaries in the past 12 months. UPD’s cost growth of 10.2% includes further investment in distribution capacity, while comparable costs grew by 5.0%.

Operating profit increased by 5.8% for the period and the group’s operating margin declined slightly from 6.5% to 6.4%.

Headline earnings increased by 3.2% to R333 million. Diluted headline earnings per share benefited from the group’s share buy-back programme and grew by 7.6% to 131.5 cents.

The interim dividend was increased by 19.2% to 44.1 cents per share. As previously advised to shareholders, the board has reduced the distribution cover from 2.0 times to 1.8 times for the 2012 financial year, in line with the commitment to return surplus cash to shareholders.

Inventory days in stock moved from 59 to 66 days. Inventory levels were 20.4% higher at the end of the period as Clicks and UPD bought additional stock ahead of supplier price increases. Stock levels are expected to normalise by year-end.

The group remains strongly cash generative with cash inflow from operations totalling R214 million.

Return on shareholders’ equity (ROE) increased to 60.7% from 55.8% in 2011.

Trading performance

The Clicks chain grew turnover by 9.6% and benefited from new store openings during the period. Comparable store sales increased by 5.5%. The store base increased to 412 following the addition of 12 new stores in the past six months, while the pharmacy footprint was expanded by 12 to 295. Clicks increased its retail pharmacy market share to 16.1% (2011: 14.5%). The operating margin came under pressure from an aggressive promotional programme and changed sales mix, with operating profit increasing by 5.7%.

Musica performed well in a declining market and was impacted by industry deflation and continued store closures. The brand increased market share in CDs, DVDs and gaming and grew operating profit by 11.7%. The Body Shop posted a strong performance for the first half, with turnover increasing by 14.5% and operating profit by 18.4%.

UPD grew wholesale turnover by 5.0% and increased its share of the private pharmaceutical market to 23.2% (2011: 22.9%). Four new distribution agency contracts were taken on during the period. Operating profit increased by 3.3%.

Prospects

The health and beauty markets are expected to remain highly competitive. Selling price inflation is anticipated to be less than 2% for the full year.

In these market conditions, the group’s focus will be on driving volume growth and containing costs. Management is committed to maintaining the investment in the longer term growth of the business, with capital expenditure of R183 million committed for the second half of the year.

The group remains well positioned in the medium-term through the market leadership and growth potential of both Clicks and UPD.

Full-year earnings forecast

The group currently anticipates that diluted headline earnings per share for the year to 31 August 2012 will increase by between 6% and 11% over the previous financial year.

This forecast is based on the following assumptions: The health and beauty markets will remain highly competitive; selling price inflation will be below 2% for the financial year; further organic growth will be generated from store expansion, the opening of additional pharmacies and the benefit of distribution agency contracts; and there will be no marked changes in trading conditions, the regulatory environment and in the macro-economy that will impact on consumer spending.

Shareholders are advised that this forecast has not been reviewed or reported on by the group’s independent auditor.

Interim dividend

The board of directors has approved and declared a gross interim ordinary dividend of 44.1 cents per share (2011: 37.0 cents per share). The source of the dividend will be from distributable reserves and paid in cash.

Additional information

In determining the Dividends Tax (“DT”) to withhold in terms of the Income Tax Act, Secondary Tax on Companies (“STC”) credits amounting to 44.1 cents per share, utilised by the company should be taken into account. Shareholders will therefore receive a dividend of 44.1 cents net of DT. The company has 276 123 498 ordinary shares in issue and its income tax reference number is 9061/745/71/8.

Shareholders are advised of the following salient dates in respect of the interim dividend:
  2012
Last day to trade “cum” the dividend Friday, 22 June
Shares trade “ex” the dividend Monday, 25 June
Record date Friday, 29 June
Payment to shareholders Monday, 2 July

Share certificates may not be dematerialised or rematerialised between Monday, 25 June 2012 and Friday, 29 June 2012, 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, 22 June 2012, 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

26 April 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), MJ Harvey, 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