Clicks took all its vitamins this year

Clicks released a voluntary trading statement today. Voluntary statements generally mean good news, because JSE executives in general aren’t famous for shouting from the rooftops when things are going badly.

Clicks is an interesting business, operating an iconic retail business and a powerful wholesale business. The group also has a number of smaller retail chains.

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Margin mix is life

Clicks operates a compelling business model in its pharmacies. With strategic sites across the country that offer convenience shopping to customers, Clicks will make a low margin off you at the pharmacy dispensary and then make the real money on your way out as you buy shampoo, a kettle and a packet of sweets.

Pharmacy is by no means a high margin business, but it’s great for getting feet in the door. Very few people know this, but Clicks is the market leader in South Africa for small household appliances. Retail categories like General Merchandise or Health and Beauty offer much juicier margins than Pharmacy, so Clicks’ retail success depends entirely on how well they get you to part with your money in the “front of house” section – everything other than Pharmacy.

Clicks also owns UPD, the leading pharmaceutical wholesaler in South Africa. Independent pharmacies remain a feature of the South African landscape and Clicks participates in that economic profit pool by supplying many of these pharmacies at a wholesale level.

Wholesale requires significant scale to be profitable and UPD has been at it for ages, so it pays to be the market leader in this space (vs. the likes of Dis-Chem who have struggled in the wholesale business with their efforts).

Other retail brands in the Clicks Group include The Body Shop, GNC and Claire’s, as well as Musica (which remains a strategic struggle).

23-week period – 1st March to 9th August

Trading from 1st March to 9th August was robust despite lockdown, as Clicks grew retail sales by 6.3%. Importantly, the higher margin Health and Beauty category grew by 7.7%, so shareholders will expect an improvement in retail gross margin over this period as the relative participation of Health and Beauty will be higher than it has been previously.

The slow growth in Pharmacy sales was ironically attributed to the lack of a cold and flu season in South Africa! That’s quite incredible given the context we all find ourselves in. If you don’t come into contact with people, you don’t get sick.

The group level margin picture remains to be seen, as the lower-margin wholesale business grew revenue 11.4%, well ahead of retail growth. The “mix effect” of a company is the impact of different divisions growing at different rates, resulting in a change to the blended overall margin.

Group turnover over this 23-week period grew 10.2%. That’s a strong performance in my view and shows how defensive the Clicks business is.

Clicks did not give details around online sales but noted that they “grew significantly” – no surprise there. Disclosure in prior years suggested that Clicks’ entire online sales equated to one large store, so it remains small in the overall picture.

Basket size was up, which means people bought more on each trip. Again, no surprise there. Infrequent trips to the shop were a guarantee when people spent April and May stressing about being arrested on their way to buy vitamins.

49-week period to 9 August

This is nearly a full year result, with only a couple of weeks of this financial year still to run.

Clicks Group turnover grew 10% for the 49 weeks, which is particularly interesting because it means that Clicks did better under lockdown conditions than in the earlier part of the year (the 23 week lockdown result was 10.2% up).

There aren’t many bricks-and-mortar retailers (i.e. physical stores rather than online) who can say that.

Retail grew 7.5% and wholesale 11.7%, highlighting the importance of UPD within Clicks Group.

Headline Earnings is expected to be 10% to 15% higher than last year, which is an excellent result in this environment. Clicks confirmed that a full year dividend will be declared.

The share price was up 4.99% today and I’m not surprised. Clicks trades at a demanding valuation (P/E around 35x) and takes a lot of flack from market observers on Twitter as a result, but the fundamentals of the business are rock solid.

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