Clicks: Holding onto pole position

Clicks might have been the JSE’s one sure thing. But CEO Vikesh Ramsunder says its latest results are a bittersweet moment "because we’re all worried about the people around us, the economy and the loss of life globally".

While its own sales boomed into and, initially, during lockdown, Ramsunder says: "It’s extraordinarily challenging to maintain motivation levels of staff who’re struggling to get to work with transport, suppliers who’re concerned whether they will get paid and customers as to how they will service their debt."

Clicks has been a consistently strong performer in the local market for the past 12 years or so. In the six months to end-February group turnover rose 9.9% to R16.9-billion and profit after tax went up 12.9% to R850m.

After year-end, and in the weeks leading up to the shutdown, Clicks says customer demand was unprecedented. That helped turnover at its pharmacy division, UPD, soar 31.2%, while health and beauty sales grew 9.3%.

Its loyalty programme is also regarded as the "richest" in SA, with 8.4-million members.

But while Clicks is swimming in cash (R2.3bn as of its half-year) it held back on paying out a dividend, given the uncertainty facing all businesses in the time of Covid.

That’s not gone down well with a market that had bet on Clicks as the one share on which to ride out the apocalypse.

Having crested at highs of R274 just under a month ago — incredibly, while the rest of the market was being savaged — Clicks plunged 14% in two days last week, to settle at around R230.

That still gives it a p:e of 32 against an average of 20.3 for the food and drug retail sector.

But the company’s clearly betting on a brighter future and won’t pull back on store expansion plans.

"We haven’t changed our outlook because we don’t know enough but we have to believe Covid-19 won’t be with us forever," says Ramsunder.

He believes Clicks could get to its target of 900 stores over the next seven to eight years.

"In a market like this it may also create an opportunity," he says. Last week, for instance, Clicks signed a lease in a shopping centre it had been trying to get into for a decade.

Clicks is still planning to open 38 new Clicks stores and 40 pharmacies in the financial year, though it is bracing for weak post-lockdown sales because consumers will be cash-strapped.

So just what are customers, now restricted to essentials, buying?

Clicks says that in the run-up to lockdown there was a surge in purchases of health-care, hygiene and domestic goods.

Once the panic buying subsided, purchasing patterns normalised across various categories.

The decision to increase inventory in anticipation of the pandemic’s impact also paid off.

"We didn’t start planning for Covid-19 when it hit SA, we started when it hit China. That’s assisting us now," says Ramsunder.

Clicks also decided, before lockdown, to close its stores at Netcare hospitals.

The only other store it has closed because of Covid-19 was in Ceres last week, when one staff member tested positive and the store was shut for deep cleaning before reopening.

"I think you have to recognise this will be the norm across retailers," warns Ramsunder.

He says all staff are being paid, though not all employees will get 100% of their salaries.

"The challenge will be in May, for people who haven’t worked in lockdown."

Richard Cheesman, senior investment analyst at Protea Capital Management, says the results were "classic Clicks": volume and sales growth and cash generation were good, while the balance sheet was ungeared.

But is this a peak in earnings for Clicks?

After all, before lockdown, the group had a surge in buying activity, but since the lockdown this has reversed.

Cheesman says he’d be hesitant to call that and would have to see.

"Everyone admires the business, it’s just the valuation that is the tough part. It’s trading at about 38 times historical earnings."

There’s a reason for that.

Clicks is one of the few businesses on the JSE that hasn’t faltered since the financial crisis.

"It’s the last one standing with such quality — we’ll see if this will this be maintained or if it will succumb to the larger economic issues of this time," says Cheesman.

Unlike its main rival, Dis-Chem, Clicks has also honoured and paid for April rents, though it’s now negotiating with landlords for reduced rentals where it starts having a decrease in turnover.

The company has requested relief for brands that haven’t traded during the lockdown. These include Musica, which sells music and gaming, The Body Shop and accessories store Claire’s.

"We took a view that we knew we would be affected but effectively the economy is circular," says Ramsunder. "If we don’t pay our landlords they can’t pay their service providers and their people can’t shop at our stores. Though we have been prejudiced to some degree it’s very important to pay the landlords so they have the money to pay for security, cleaning and other services — and then negotiate with them."

As for suppliers, Ramsunder says: "We’ve paid every one. If they’re essential they can continue manufacturing … we need money to circulate through the economy. You have to take a big-picture approach."

If anything, the coronavirus is changing that big picture rapidly.

Last week, the Financial Times editorial board argued that companies need to shift from "just-in-time" to "just-in-case".

"Too late, many executives and owners have realised that by pursuing the holy grail of ever-greater efficiency, they sacrificed robustness, resilience and effectiveness. In many cases, they will turn out to have sacrificed the business itself."

It’s one reason, says Ramsunder, that Clicks decided to withhold the dividend. "The future is uncertain. We’re a business that relies on information and data before making decisions … if the lockdown is anything to go by it’s prudent to hold onto cash. We’ve promised to reconsider this at year-end."