Chief financial officer
Diluted headline earnings per share (HEPS), adjusted for insurance recoveries received in the prior year, increased by 11.5% to 1 045 cents per share. Diluted HEPS including insurance recoveries grew by 1.1%.
The directors declared a total dividend of 679 cents per share, 6.6% higher than the prior year and based on a payout ratio of 65.0% of HEPS. The final cash dividend of R1.2 billion will be paid to shareholders in January 2024.
The group remained strongly cash generative, with cash inflows from operations increasing by 37% to R5.9 billion. R2.3 billion was returned to shareholders in dividend payments and share buy-backs, and at year end the group held cash of R2.5 billion on the balance sheet.
Record capital expenditure of R930 million was invested in the expansion of the store network and integrated supply chain during the year.
All the group’s medium-term financial targets were achieved, a most pleasing performance as these targets rank in the upper quartile relative to comparable global health and beauty retailers.
In line with the group’s recent reporting practice, certain financial information for the prior period has been adjusted for insurance recoveries related to the impact of the 2021 KwaZulu-Natal civil unrest. These adjustments enable us to present a normalised view of the underlying operating performance of the group.
The analysis of the group’s financial performance for the year ended 31 August 2023 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.
Group turnover increased by 8.2% (excluding Covid-19 vaccinations) to R41.6 billion. Including vaccinations, turnover grew by 5.1%. Selling price inflation averaged 4.9% for the year.
Retail turnover (excluding vaccinations), including Clicks, GNC, The Body Shop and Sorbet, increased by 12.2%, with selling price inflation of 7.0%. Comparable store sales grew by 7.7% with volume growth of 0.7%. During the year Clicks administered vaccinations which generated turnover of R4 million compared to R1.1 billion in the prior year.
Growth in store and pharmacy trading space accounted for 4.5% of the retail turnover growth, with the net opening of 45 new Clicks stores and 38 pharmacies.
Distribution turnover grew by 1.5% for the year as UPD was impacted by lost sales opportunities to Clicks and private hospitals during the systems implementation in the first half, lower demand from independent pharmacies and the shift of products within UPD from the preferred supplier to the bulk distribution channel.
Total income on an adjusted basis grew by 10.8% to R12.2 billion (an increase of 7.6% including insurance recoveries).
The retail margin expanded by 130 basis points and continued to benefit from the strong growth in higher margin private label products and the recovery in the beauty category, while the low margin vaccination progamme came to an end.
The 20 basis points increase in the distribution margin reflects improved management of shrinkage and waste in UPD.
The group’s total income margin expanded by 150 basis points to 29.2% due to the stronger growth of retail relative to distribution.
Retail costs were impacted by higher insurance premiums, diesel costs, electricity price increases and higher depreciation on capital expenditure, increasing by 11.4%, with comparable retail cost growth of 7.4%.
Distribution costs increased by 13.4% due to higher insurance, transport and diesel costs together with higher labour costs to maintain service levels during the systems implementation.
The group’s diesel costs to operate generators during load shedding totalled R53.5 million.
Group operating profit excluding insurance recoveries increased by 9.0% to R3.6 billion (decreased by 0.7% including insurance recoveries) while the group’s adjusted operating margin increased by 30 basis points to 8.7%.
The retail operating margin expanded by 60 basis points to 10.0% due to the growth in higher margin product categories. UPD’s margin reduced by 50 basis points due to the combined impact of load shedding, higher insurance costs, the low SEP increase and labour inefficiencies in the first half. The margin recovered in the second half to reach 2.8% for the year and is back within management’s medium-term target range.
The ratio of shareholders’ interest to total assets moderated slightly to 31.3% (2022: 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 R2.5 billion in cash.
The group continues to hedge direct exposures to foreign exchange rate fluctuations which impact approximately 7.5% 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.
The group’s net working capital days improved from 36 to 34 days.
Inventory levels were well managed and grew by only 2.4%. Group inventory days reduced to 71 days (2022: 72 days), with the prior period benefiting from the faster stock turn of vaccines.
Trade creditor days were higher at 71 days (2022: 63 days) due to management’s decision to increase stock levels during August to support the stronger retail sales growth, translating into higher creditor days at year end.
Cash generated by operations increased by R1.6 billion to R5.9 billion.
The group’s capital management strategy remains focused on investing in the organic growth of the business and returning surplus funds to shareholders through dividends and share buy-backs:
At year-end, the group held cash resources of R2.5 billion. Shares totalling R834.8 million were repurchased post the year end.
Information technology (IT) 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 R140 million in computer hardware and R245 million in computer software. The group continues to focus a major portion of IT investment on replacement software solutions for core systems within Clicks and UPD.
The implementation of these new best-in-class IT systems continued during 2023 on a risk mitigated basis.
Capital expenditure of R880 million is planned for the 2024 financial year. This includes:
Retail trading space is expected to increase by approximately 6.0% in 2024.
Financial targets provide guidance to shareholders on the group’s medium-term performance expectations. An additional metric has been included from the 2023 financial year, being return on invested capital excluding the adjustment for IFRS 16. This has also been introduced as a new performance target for the long-term incentive scheme.
The targets are reviewed annually to take account of the group’s current performance and the medium-term outlook for trading.
While management acknowledges that the performance is at the upper end of certain of the targeted metrics, the ranges are unchanged for the 2024 financial year and will be reviewed again during the next strategic planning cycle.
Thank you to our local and international shareholders for your continued investment and to the broader investor community for your positive engagement with management over the past year. I also thank our group and divisional finance teams for their commitment and for continually striving to meet the highest standards of disclosure and corporate reporting.
Ernst & Young has completed their term of office as the group’s external auditor and we thank the partners and staff for their professional service and support over the past 11 years.
In closing, I extend my gratitude to the board for their support and the confidence they have shown in appointing me to lead the group’s finance portfolio.
Chief financial officer