Chief financial officer’s report

Group diluted headline earnings per share (HEPS) from continuing operations increased by 33.5% to 1 033 cents. Adjusting for the impact of the civil unrest, diluted HEPS increased by 11.9% (refer to Impact of civil unrest below).

The group declared a total dividend of 637 cents per share, 30.0% higher than the prior year and based on a payout ratio of 61.7% of HEPS. The final cash dividend of R1.1 billion will be paid to shareholders in January 2023.

The return on equity increased from 38.2% to 48.0% and is now at the upper end of the group’s medium-term target range of 40% – 50%.

Financial reporting for impact of civil unrest

The civil unrest in KwaZulu-Natal in July 2021 had a significant impact on the group. Certain of the group’s reported financial information has been adjusted for the impact of the civil unrest and the subsequent insurance recoveries to present a normalised view of the underlying operating performance of the group.

Impact of civil unrest

The group was fully insured against the risk of civil unrest and political violence. After the first payment of the insurance claim of R217 million was accounted for in the 2021 financial year, the South African Special Risks Insurance Association (SASRIA) paid the following amounts during the year in final settlement of the claim:

• R325 million for loss of inventory and other costs incurred, reflected in ‘other income’
• R167 million for replacement of damaged fixed assets, recorded as ‘proceeds received on capital items’.

Adjusting the reported results for the 2021 and 2022 financial years by reversing the inventory written off and other costs incurred as well as the insurance proceeds received, diluted HEPS increased by 11.9% for the year.

The impact on the major line items in the statement of comprehensive income are as follows:

Financial performance

The analysis of the group’s financial performance for the year ended 31 August 2022 covers the key line items of the statements of comprehensive income and financial position which management consider material to shareholders’ understanding of the group’s performance.

The following review should be read 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

Turnover

Group turnover increased by 6.0% to R39.6 billion (2021: R37.3 billion). Selling price inflation averaged 3.0% for the year.

Retail turnover, including Clicks and The Body Shop, increased by 11.7%, with selling price inflation of 4.0%. Comparable store sales grew by 8.4% with volume growth of 4.4%.

During the year Clicks administered 2.9 million Covid-19 vaccinations which generated turnover of R1.1 billion. This resulted in an uplift of 3.5% in retail sales and 2.5% in group sales.

Growth in store and pharmacy trading space accounted for 3.3% of the retail turnover growth, with the net opening of 58 new Clicks stores and 52 pharmacies.

Distribution turnover declined by 2.6% due to the base effect caused by strong demand for medicines during the severe Beta and Delta variant waves of Covid-19 in the 2021 financial year.

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

Total income

Total income on an adjusted basis grew by 9.8% to R11.0 billion (2021: R10.0 billion).

The retail total income margin reduced by 30 basis points (bps) due to the impact of the lower margin vaccinations and the return of the cold and flu season for the first time since 2019.

UPD’s total income margin strengthened by 50 bps due to the growth in the bulk distribution business, with three new contracts secured during the year.

The group total income margin expanded by 90 bps to 27.7% due to the faster growth of retail as the economy recovered from the impact of Covid-19

Operating expenditure

Adjusted retail operating expenditure as a percentage of turnover improved to 23.4% (2021: 23.7%) reflecting the increasing efficiency in the retail cost base.

Adjusted retail expenses were held below retail turnover growth and grew by 10.5%. In addition to the new stores, pharmacies and depreciation on capital expenditure, the administration of Covid-19 vaccinations added significant costs. These costs were ultimately recovered by fees paid to Clicks by medical aid schemes and the Department of Health. Comparable retail costs, excluding new stores and Covid-19 vaccination costs, were contained to an increase of only 5.0%.

UPD expenses on an adjusted basis were impacted by the new bulk distribution contracts as well as higher fuel, security, insurance and electricity costs and increased by 6.2%, below the 7.6% growth in total managed turnover.

Operating profit

Adjusted group operating profit increased by 9.2% to R3.3 billion (2021: R3.0 billion), with the group’s adjusted operating margin increasing by 20 bps to 8.4%.

Retail grew adjusted operating profit by 10.3% with the margin 10 bps lower primarily due to the high volume of low margin vaccinations administered. Ongoing cost pressure, combined with lower wholesale turnover, contributed to UPD’s adjusted operating profit declining by 1.2%.

Statement of financial position

The ratio of shareholders’ interest to total assets improved from 28.0% to 31.9%. The ratio of current assets to current liabilities at year end was consistent with the prior year at 1.1 times, confirming that working capital remains adequately funded. Other current assets include R2.0 billion in cash.

The group continues to hedge direct exposures to foreign exchange rate fluctuations which impact approximately 8% of the cost of sales in the retail business. In addition, the group hedged elements of the long-term incentive scheme for the 2022 to 2024 period. Further detail on the respective hedges and risk management is contained in note 27 in the annual financial statements on the group’s website.

Working capital

The group’s net working capital days increased from 30 to 36 days.

Group inventory days increased to 72 days (2021: 66 days) owing to the inventory levels in UPD increasing by 13 days due to lower than expected demand from the hospital channel arising from the reduced Covid-19 hospitalisations and the slow return of elective surgical procedures. Inventory levels have continued to normalise subsequent to the year end as hospital occupancy rates improve. Retail inventory days were three days lower owing mainly to the Covid-19 vaccine stock on hand at the 2021 financial year end.

Cash and capital management

Cash generated from operating activities before dividends paid totalled R3.2 billion.

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 R838 million was reinvested across the group. This included R470 million for new stores, pharmacies and the refurbishment of 84 Clicks stores, including restoring the stores damaged during the 2021 civil unrest. A further R246 million was invested in information technology and other retail infrastructure, and R122 million in distribution centres, including the installation of solar panels on all owned distribution centres;
• The group returned R1.7 billion to shareholders through dividend payments of R1 287 million and share buy-backs of R446 million.

At year-end, the group held cash resources of R2.0 billion.

Information technology

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

During the year the group invested R126 million in computer hardware and R140 million in computer software.

The group continues to focus a major portion of IT investment on replacement software solutions for certain core systems within Clicks and UPD.

The implementation of these new best-in-class IT systems continued during 2022 on a risk-mitigated basis.

• The integrated retail merchandising system, incorporating demand forecasting and fulfilment, pricing and promotions, category assortment optimisation and space management modules, has been implemented, thereby allowing the retail business to focus on improving sales, enhancing margins and reducing inventory levels in the year ahead.
• In UPD the new warehouse management system and cloud hosted enterprise resource planning (ERP) system have been rolled out to the KwaZulu-Natal and Eastern Cape wholesale distribution centres. During 2023 these systems will be rolled out to the Cape Town, Johannesburg and Free State distribution centres. The project will be concluded with the rollout of these systems to bulk distribution clients during the first half of the 2024 financial year.

Summary statement of comprehensive income

Summary statement of financial position

Financial plans for 2023

Capital expenditure of R936 million is planned for the 2023 financial year. This includes the following:

• R477 million will be invested in the store portfolio, mainly on 40 to 50 new Clicks stores and 40 to 50 new pharmacies. As part of the ongoing store refurbishment programme, 60 stores will be modernised to remain appealing and relevant to customers, while the last four stores damaged in the civil unrest will also be restored.
• R459 million for infrastructure which includes R270 million on retail systems and infrastructure and R189 million on UPD IT systems and warehouse equipment.

Retail trading space is expected to increase by approximately 6% in 2023.

Medium-term financial targets

Financial targets provide guidance to shareholders on the group’s medium-term performance expectations.

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 McKesson Europe.

In the 2022 financial year the group achieved its medium-term targets with the exception of the net working capital days target which was marginally outside the range due to UPD’s higher inventory levels.

The targets are reviewed annually to take account of the group’s current performance and the medium-term outlook for trading, although no financial targets have been amended for the 2023 financial year.

Appreciation

Thank you to our shareholders for your continued support and belief in our investment case. We have welcomed the opportunity to meet in person once again with our shareholders since the opening up of the economy post Covid-19. I also thank our group and divisional finance teams who continually strive to meet the highest standards of disclosure and corporate reporting.

As this is my final report to shareholders ahead of my retirement in December 2022, I would like to personally thank our shareholders and the broader investor community both locally and internationally for your positive engagement and support over the past 11 years of my tenure as CFO. I have found the interaction with investors stimulating, thought-provoking and mutually beneficial and wish you all continued success.

I also extend my personal thanks to the board, my fellow executives and all my colleagues for the privilege of being part of the Clicks Group success story. Together, we can be extremely proud of the group, a remarkable health and beauty business passionate about serving its customers.

Lastly, I wish my successor, Gordon Traill, everything of the best in his new role as chief financial officer of the Clicks Group.

Michael Fleming
Chief financial officer