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Michael Fleming

Michael Fleming

Chief financial officer's report


Clicks Group continued its strong growth momentum with robust turnover growth supported by good management of margins, expenses and working capital, and continued strong cash generation.

The performance for the year translated into growth of 15.1% in diluted headline earnings per share (HEPS) to 578 cents. Shareholders will receive a total dividend of 380 cents per share, an increase of 18% on last year, with the dividend payout ratio being raised from 60% to 62%. The group generated a total shareholder return of 39.0%, based on dividends paid and the growth in the share price over the year.

The group continues to deliver a high return on equity which has averaged 43.8% over the past three years.

Medium-term financial targets

Financial targets are disclosed to provide guidance to shareholders on the group’s medium-term performance expectations. The targets are reviewed annually to take account of the group’s current performance and the medium-term outlook for trading.

Achieved in FY2018 Medium-term target
Return on equity (%) 38.2 50 – 60
Return on assets (%) 13.9 14 – 18
Net working capital days 36 33 – 38
Group operating margin (%) 7.0 6.5 – 7.5
     Retail 8.1 7.5 – 8.5
     Distribution 2.7 2.5 – 3.0
Dividend payout ratio (%) 62 60 – 65

The performance for the 2018 financial year is within the target ranges for most metrics, excluding the return on equity and the return on assets which have been impacted in the short term by the group’s broad-based employee share ownership scheme. These ratios are expected to trend upwards after the scheme matures in the 2019 financial year.

Management has introduced a net working capital target to replace the inventory target in order to provide guidance on broader working capital efficiency across the group. The operating margin target range for the distribution segment has been increased from 2.2% – 2.7% to 2.5% – 3.0% to reflect the expected margin benefit from UPD securing additional bulk distribution contracts.

The group’s medium-term financial targets rank in the upper quartile relative to comparable global health and beauty retailers such as Walgreens Boots Alliance (USA), CVS (USA), Raia Drogasil (Brazil) and Celesio (Germany).

Financial performance

The following review of the group’s financial performance for the year ended 31 August 2018 focuses on the key line items of the statements of comprehensive income and financial position which management consider material to the group’s performance.

The following review should be considered together with the annual financial statements as well as the summary statements of comprehensive income and financial position, and the five-year analysis of financial performance.

Statement of comprehensive income


Group turnover increased by 9.1% to R29.2 billion (2017: R26.8 billion). Selling price inflation for the group averaged only 1.9% for the year compared to 5.3% in the previous year.

Turnover was again relatively consistent across the first and second halves of the year. There is generally minimal seasonal effect on the group’s turnover as the festive season in the first half of the financial year is counter-balanced by the winter season, which is the peak trading period for the health and wellness business. However, the incidence of colds and flu in 2018 was lower than last winter which depressed medicine sales.

Retail turnover, including Clicks, The Body Shop, GNC, Claire’s and Musica, increased by 10.8%. Retail selling price inflation was low at only 1.4%. Comparable stores sales grew by 5.5%.

Within the retail division, health and beauty sales increased by 11.7%, reflecting the resilient nature of the core Clicks business. Musica’s sales were 8.4% lower owing to the pressure on discretionary consumer spending and the increase in digital consumption of music and movies.

Growth in retail trading space accounted for 5.3% of the turnover growth with the net opening of 42 retail stores and 37 pharmacies.

Distribution turnover grew by 8.4% as UPD experienced a moderately stronger second half performance.

The trading performances of Clicks and UPD are covered in the business review.

Total income

Total income grew by 10.5% to R7.9 billion (2017: R7.1 billion).

The retail total income margin expanded by 20 basis points to 33.6% by optimising the promotional product mix and effectively managing promotional campaigns.

UPD’s total income margin was impacted by the low increase in the single exit price (SEP) of medicine of only 1.26% in March 2018 compared to 7.5% in March 2017. However, the impact was partially off-set by UPD onboarding three new distribution clients in the second half of the year and the margin declined by 10 basis points to 7.3%.

Owing to the favourable mix impact from the faster growth in retail, the group’s total income margin strengthened by 30 basis points to 27.0%.

Operating expenditure

Retail operating expenditure as a percentage of turnover improved to 25.5% from 25.6% in the prior year.

Retail expense growth of 10.3% was contained below sales growth despite the extensive investment in new stores and pharmacies. Comparable retail costs increased by 5.1%, reflecting the tight management of costs.

UPD continued to demonstrate excellent cost control with expenses up 6.5% on last year notwithstanding the increased labour and transport costs relating to the onboarding of the three new distribution contracts.

The group’s operating expenses increased by 9.7%.

Operating profit

Operating profit increased by 12.6% to R2.0 billion (2017: R1.8 billion) as both the retail and distribution businesses achieved operating leverage and benefited from increased scale. The group margin strengthened by 20 basis points to 7.0%.

Retail increased its operating profit margin by 30 basis points to 8.1% and grew operating profit by 14.7% despite a reduction of R19 million in Musica’s profit. UPD maintained its operating margin at 2.7% despite the low SEP increase.

Turnover and margin
Return on equity

Summary statement of comprehensive income

R’million 2018 % of turnover 2017 % of turnover % change
Turnover 29 240 26 809 9.1
     Retail 21 063 72.0 19 015 70.9 10.8
     Distribution 13 376 28.0 12 334 29.1 8.4
     Intragroup (5 199) (4 540)
Total income 7 894 27.0 7 147 26.7 10.5
Operating expenses (5 852) 20.0 (5 333) 19.9 9.7
     Retail (5 375) (4 871) 10.3
     Distribution (619) (581) 6.5
     Intragroup 142 119
Operating profit 2 042 7.0 1 814 6.8 12.6
     Retail 1 705 8.1 1 486 7.8 14.7
     Distribution 362 2.7 329 2.7 10.2
     Intragroup (25) (1)
Loss on disposal of property, plant and equipment (1) (5)
Net financing income/(costs) 2 (37) (105.5)
Share of profit of an associate 2 3
Income tax (570) (497) 14.7
Profit for the year 1 475 1 278 15.5

Summary statement of financial position

R’million 2018 2017 % change
Non-current assets 3 233 2 854 13.3
     Property, plant and equipment 1 844 1 534 20.2
     Other non-current assets 1 389 1 320 5.2
Current assets 8 331 6 867 21.3
     Inventories 4 227 3 754 12.6
     Trade and other receivables 2 331 2 213 5.4
     Other current assets 1 773 900 96.9
Total assets 11 564 9 721 19.0
Equity 4 428 3 300 34.2
Non-current liabilities 447 402 11.3
Current liabilities 6 689 6 019 11.1
     Trade and other payables 6 199 5 475 13.2
     Other current liabilities 490 544 (9.8)
Total equity and liabilities 11 564 9 721 19.0

Statement of financial position

The ratio of shareholders’ interest to total assets increased to 38.3% (2017: 34.0%) and the average gearing level declined from 14.8% in 2017 to an average ungeared position for the year.

The ratio of current assets to current liabilities at year-end was 1.2 times (2017: 1.1 times), indicating that working capital remains adequately funded. Other current assets include R1.5 billion in cash.

The group continues to hedge direct exposures to foreign exchange rate fluctuations which impact approximately between 6% and 7% of the cost of sales in the retail business. In addition, the group hedged elements of the long-term incentive scheme for the 2018 to 2020 period. Further detail on the respective hedges and risk management is contained in note 28 in the annual financial statements.

“The group’s medium-term financial targets rank in the upper quartile
relative to comparable global heath and beauty retailers”
Working capital

Working capital continues to be well managed and the group’s net working capital improved from 37 to 36 days. Trade debtor days, which relate primarily to UPD, reduced from 40 to 38 days while creditor days improved from 68 to 69 days. Inventory days moved out from 65 to 67 days owing to higher retail inventory levels to ensure stock availability. Inventory levels are expected to normalise in the new financial year. Distribution’s inventory days were unchanged from last year at 38 days.

Capital expenditure
Cash and capital management

Cash generated by operations increased by 20.7% to R2.5 billion, driven by the increase in operating profit and good working capital management.

The group’s capital management strategy is focused on investing in the organic growth of the business and returning surplus funds to shareholders through dividends and share buy-backs:

  • Capital expenditure of R350 million was invested in new stores and refurbishments; R198 million on expanding distribution centres, including the first phase of the Clicks distribution centre in Centurion, Gauteng, and UPD’s Cape Town and Johannesburg warehouses; and R123 million in IT and retail infrastructure.
  • The group returned R812 million to shareholders through dividend payments.

Cash resources increased by R823 million over the previous year and the group ended the year with cash of R1.5 billion.

Cash flow analysis


The total dividend for the financial year was increased by 18.0% to 380 cents per share (2017: 322 cents), based on an increased dividend payout ratio of 62% (2017: 60%) of HEPS. This comprises the interim dividend of 102.5 cents (2017: 88 cents) and a final dividend of 277.5 cents (2017: 234 cents).

A dividend of 38.0 cents per “A” share (2017: 32.2 cents) was declared for participants in the employee share ownership programme.

“The group plans to invest between R650 million and R700 million per year
for the next three years”

Information technology

Management aims to ensure IT systems and infrastructure are well maintained and remain relevant to future needs of the business.

Key areas of focus in the financial year included improving the customer loyalty management system, master data management projects and planning for the replacement of legacy IT systems.

In the omni-channel space, the group has continued to enhance the transactional website and the Clicks mobile app which offers customers the convenience of a virtual Clicks ClubCard as well as script management, pharmacy services and a store locator.

The group invested R54 million on computer hardware and R65.9 million in computer software which included replacing ageing IT hardware and software to improve processing capability and enhance capacity to support business growth.

Financial plans for 2019

Capital expenditure of R700 million is planned for the 2019 financial year:

  • R371 million will be invested in the store portfolio which includes 25 to 30 new Clicks stores, 30 to 35 new pharmacies and 60 store refurbishments.
  • R329 million committed for IT systems and retail infrastructure which includes:
    • the 20 900 m2 expansion of the Clicks distribution centre in Centurion. The project will be undertaken at a total cost of R230 million, with R123 million expected to be incurred in the 2019 financial year for the completion of the second phase of the project; and
    • R77 million for IT and warehouse equipment in UPD.

The group plans to spend between R650 million and R700 million per annum for the next three years to support the expansion of the Clicks store footprint, increase efficiency in the distribution centres and invest in IT tools and systems.

Total retail trading space is expected to increase by approximately 6% in 2019.


Thank you to our local and international shareholders as well as our funding institutions for their continued support. We also thank the broader investment community for their positive engagement with management. In closing, I extend my thanks to the finance teams across the group for their commitment to constantly delivering a high standard of financial reporting.

Michael Fleming

Michael Fleming

Chief financial officer