Clicks Group: Fresh scent of cash

David Kneale.
Photographer: Trevor Samson

Image source: Financial Mail

Clicks' cash-only drugstore model has proved itself to be more than just resilient. It has enabled the group to produce the retail sector's highest return on equity - 53,7% in its year to August - and cash flow beyond its expansion funding needs.

Reflecting its cash generation power, Clicks has returned R3,3bn to shareholders over the past five years by way of dividends and share buy-backs. Put in perspective, this exceeded by far Clicks' shareholders' funds of R2bn at the end of its latest reporting period.

Clicks' consistent growth, high return on equity and cash flow have earned it a super rating. And investors are still paying up.

After the release of its annual results to August - which saw headline EPS rise by 14% and its final dividend by 23,7% - investors scrambled to buy, boosting the share price by 10% to a new high and its p:e to 27.

Investors clearly liked what they saw, not least the core Clicks chain's ability to sustain market share gains across all its key product categories: prescription pharmaceuticals, skin care, hair care, health care and baby products.

The Clicks chain is fighting for market-share gains through price promotions (accounting for almost a third of its sales). Countering this pressure on margins are rising sales of private label products and exclusive brands.

"They made up 25,7% of our front shop sales," says Kneale. It is a level to which most SA non-fashion retailers can only aspire.

Unlike many other retailers now growing trading space at the cost of sales of existing stores, Clicks has scope to expand store numbers into untapped locations. From its existing 486 Clicks store base, the retailer plans to add some 25 new stores annually.

"Our goal is to have 600 stores and a pharmacy in every store," says Kneale.

It now has 361 pharmacies and will add as many as 35 in the new financial year.

It is a tall order in a market in which pharmacists are in short supply. Kneale believes Clicks has the solution. "We are building our graduate pharmacist pipeline through a bursary scheme and training pharmacy assistants at our academy," he says. "We are starting to see the benefits of these initiatives."

The group is not limited to Clicks stores to grow its retail footprint. In its armoury are three brands under exclusive franchise agreements with major international groups.

First aboard was Body Shop in 2001, a franchise that has grown to 50 stores and has a presence in 86 Clicks stores.

In 2013 Clicks filled a gap in its product lineup through a new franchise agreement with GNC, the largest health supplement group in the US. With four GNC stores already in place and a presence in 257 Clicks stores, Kneale says: "We are pleased with the rate of sales growth."

In its latest move, Clicks opened the first Claire's store in July. Focused on fashion jewellery and accessories for the younger generation, the franchise comes with the backing of US group Claire's, which operates more than 3,000 corporate and franchise stores in 46 countries.

Also powering ahead is Clicks' UPD pharmaceutical distribution business, which brings in annual revenue of R8,6bn. "In the past five years we grew revenue at 25%/year and doubled operating profit," says Kneale.

Importantly, UPD's third-party business is growing fast, rising 35% in the latest financial year to 51% of total revenue. "We are operating at 70% capacity utilisation," says Kneale. "It leaves a lot of scope for further growth."

Clicks is an impressive company and, from a business execution perspective, is low-risk. However, there is risk in its heady rating. One profit growth slip and its share price could face harsh punishment.