Clicks vs Dis-Chem: Battle of pharmacy giants
With Dis-Chem’s listing in 2016, investors have a tough call to make between the rivals in the health and beauty sector
Reliably consistent growth in good and bad times, high returns and strong cash flow are usually the three essential attributes sought by long-term investors.
Clicks Group has been delivering them to its shareholders for over a decade.
"Clicks just keeps on powering ahead," says Nadim Mohamed of First Avenue Investment Management.
"Its management have done a superb job."
Clicks, which celebrates its 50th anniversary this year, kept up the pace in its half-year to February, turning in a 12.2% rise in operating profit to R942m, a 14.8% rise in headline EPS (HEPS) and a 16.5% rise in its interim dividend. Adding to the solid showing was an impressive 39.3% return on equity and cash flow after tax of R890m.
As always, health and beauty products were the big drivers of Clicks’s growth in its past half-year. Here Clicks excelled, lifting sales by 14.3% to an estimated R9.5bn.
"We achieved the health and beauty sales growth despite internal inflation of only 2.6%," says David Kneale, Clicks CEO since 2006. "On a same-store basis sales we’re up 8% and we gained market share in all categories."
Growth was heavily driven by promotions, which registered a 23.5% increase in sales and accounted for 37.6% of sales. "Consumers are looking for value," says Kneale.
Clicks’s sales performance left it and its close rival, Dis-Chem, running neck and neck. In its half-year to August, the then 118 primarily large-format store Dis-Chem achieved a 15% rise in retail sales to R8.78bn and an 8.6% rise in same-store sales.
From a retail operating profit perspective, in their latest half-year Clicks’s R793m put it ahead of Dis-Chem, with its R682m. From a profitability perspective, the two groups were again neck and neck, with Clicks’s operating profit margin at 7.5% and Dis-Chem’s at 7.8%.
Central to Clicks’s health and beauty product sales is its Clicks chain, which ended the latest half-year with 646 primarily smaller-format convenience-type stores. During the period 24 new stores were added.
Clicks still has big expansion plans. "Our target market is the LSM 6-10 segment. It accounts for 83% of retail spending and is growing at 3.5% annually," says Kneale. "We are aiming to have 900 Clicks stores, all with pharmacies, within the next seven to 10 years."
Clicks is expanding its pharmacy numbers apace, with the 500th pharmacy opened this month. It represented an increase of 154 in just three years.
Dis-Chem still has the edge over Clicks in the retail pharmacy market, holding a 22% market share compared with Clicks’s 20.8%. Both groups are continuing to take market share, with Clicks targeting 30% in the longer term.
Clicks is looking to enhance customer convenience to help drive its pharmacy sales by reducing in-store frustration.
"Lengthy queues at our in-store pharmacies are the biggest source of customer complaints," says Kneale.
Mobile technology has supplied the solution. Just introduced, says Kneale, is an app which enables customers to photograph their prescription and send it to a Clicks pharmacy for processing. In-store customers are notified by SMS when their medication is ready for collection.
Clicks is also investing heavily to support its growth strategy, says Kneale. For the full year to August, capex will come in at a record R704m, of which R330m will have been spent on stores and R374m on distribution and IT infrastructure.
Though Dis-Chem did not disclose its capex target for its full financial year, on an annualised basis it stood at R424m in its latest half-year. In the half-year 10 new stores were opened, with a further 11 coming in the second half.
With Dis-Chem’s listing in November 2016, investors now have to make a call between the two rivals. It is not an easy one.
In the profit growth stakes, Dis-Chem was the clear winner in its past half-year, with operating profit lifting 21.5% to R651m and HEPS up 38.1%.
In the share price stakes, Clicks was the winner over the past 12 months with a gain of 63% compared with Dis-Chem’s 58%.
The share price runs have left the ratings of both groups looking very stretched. Clicks, which expects full-year HEPS to be up by 12%-17%, is trading on a historical 35.8 p:e and Dis-Chem on a 42.6 p:e.
From these levels, further big share price gains appear unlikely for now.