Doing more of the same – this is how Clicks Group (Clicks), the beauty and pharmaceutical retailer, intends to shield itself from precarious trading conditions as consumer spending remains constrained.
Living costs are escalating as a result of the rise in interest rates and credit extension, which has been reined in, is putting pressure on disposable income and consumer activity.
Despite this, Clicks continues to take consumer drag in its stride. For the six months to February 28, group turnover increased by 14.1% to R10.7 billion and retail sales grew by 9.9%.
Clicks CEO David Kneale is cautious about the group’s fortunes ahead.
“We have to continue to trade in this market and adapt the business model to trading in those circumstances. In truth, that is more of the same of what we have been doing for the past couple of years,” Kneale admits.
Not only does Clicks have to adapt its business model, but it also has to fend off perceptions that its business is too safe and predictable. Kneale quips: “I have to make safe and predictable sound sexy.”
In doing that, he says Clicks trades in the health and beauty which is a resilient retail category in light of difficult economic conditions, as consumers still “want to feel and look good.”
“We have a trading style that appeals to consumers because it is founded on value. I think it is that consistency in value that enables us to deliver consistent results. But I prefer consistent to safe and predictable,” he says.
Operating profit for the period grew by 12.2% to R640 million, with the retail business improving operating margins by 10 basis points to 7.3%. Clicks’ operating expenses in retail were 11.5%.
Doing more of the same this time around includes rolling out new stores and offering value to consumers through in-store markdowns and specials to drive sales.
For the period, capital expenditure (capex) of R148 million was committed during the first half of the year; R231 million in the second half and R379 million is targeted for the year. Capex will be deployed in further store expansions, refurbishments to existing stores and investing in more IT infrastructure.
Its store footprint now stands at 473, with 346 dispensaries and 150 clinics.
In the financial year, Clicks will open 24 new stores and further refurbish over 30 stores.
But is Clicks rolling out too many stores and not building efficiencies on existing stores? Kneale says this is not the case, as “we do open stores at a steady pace”.
“We are very much focused on the existing stores and that’s also why we are refurbishing 30 stores this year, so that the existing stores stay fresh, relevant and appealing to consumers,” he says.
Performance of Clicks units
UPD, Clicks’ wholesale pharmaceutical distribution business, continued to be a star performer, with retail sales growing by 20.7%. It benefited from growth in supply chain contracts. UPD expenses grew by 9.4% owing to increased costs from the growth in the distribution business. UPD has grown its market share to 26% and now represents 17% of the group’s profits.
Clicks’ pharmacy business is seemingly benefitting from supermarkets going quiet on the pharmacy market, as it boasts a 18% market share.
“Consumers prefer to go to a specialist health and beauty retailer for their prescription requirement rather than a food retailer. This is not uniquely South African. But we are the market leader,” Kneale says.
The Body Shop, which Clicks manages under a franchise agreement, increased turnover by 12.2%, with the brand facing margin pressure from the depreciation of the rand.
The group’s Musica brand increased sales by 2.4% and continued to gain market share. In line with global trends, consumers are migrating to digital formats for music and video, which has cannibalised the market.
“We are the last man standing in entertainment retail,” as Look & Listen has filed for business rescue. Musica, Kneale says, is efficient in selling accessories such as speakers and headphones, which is 70% of the business.
While many companies are bullish on Africa expansion strategies, Clicks is treading cautiously. With 22 stores spread across Lesotho, Swaziland, Botswana and Namibia, Kneale says there is a capacity to grow its store base. This capacity lies in Namibia and Botswana, where it has 15 and three stores, respectively. Over time, he says the stores in Namibia could grow to 20 and in Botswana to 12.
Clicks declared an interim dividend of 65.5 cents up 22.4%.