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Dis-Chem defers dividend to buy Baby City

Citing the uncertainty caused by Covid-19 as a reason for needing to conserve its cash.
The pharmacy giant has been eyeing Baby City for two years. Image: Waldo Swiegers, Bloomberg

Dis-Chem Pharmacies has deferred its final dividend in light of the uncertainties caused by the Covid-19 pandemic, and will preserve its cash to potentially fund its R430 million acquisition of Baby City.

It paid about R115 million in final dividends for its 2019 year.

“The dividend payment will be deferred until the next dividend cycle, once the group better understands normalised trading conditions and considers the funding sources for the Baby City transaction,” it said.

It has been eyeing Baby City for the past two years and believes there is an overlap in how the two brands are positioned in the market.

“The characteristics of the baby product industry [are] aligned with the pharmacy industry, which is defensive and highly resilient,” it said.

“The industry is worth an estimated R24 billion annually,” says Rui Morais, chief financial officer at Dis-Chem. “There are over 900 000 births a year, with the new mothers wanting to purchase baby clothes and equipment.”

Increase in wholesale

The group said revenue grew 12% to R24 billion in the year to end-February 2020, with wholesale revenue up 23.3% due to the contribution from the Western Cape’s Quenets Pharmaceutical Wholesalers, which it acquired in November 2018.

The pharmaceutical giant did however not disclose what the organic growth in the wholesale environment was, so it cannot be determined what happened internally and externally.

What is evident is that subsequent to its year-end, the group has experienced different trading patterns to those of previous years as a result of the Covid-19 pandemic.

It says before the lockdown came into effect in March, retail stores experienced “a substantial” increase in revenue – up 45.6% compared with the prior period – as customers stocked up on products.

“Increased revenue was seen across all categories, but especially in the pharmacy, healthcare and nutrition category,” Dis-Chem says.

It then saw a decrease of 20% in sales during the lockdown, when only essential products could be sold. When Level 4 lockdown restrictions came into effect the group started to see a recovery, with retail revenue increasing 2.8% between May 1 and May 16.

Earnings not looking so good

Headline earnings per share fell nearly 17% to 69.6 cents for the year.

The group says this is because of inventory rationalisation, that took place in the first half of the financial year, decreasing by 37.4%.

“As more normalised purchases took place in the second half of the year, earnings increased by 16.7% compared to the corresponding period. Earnings, excluding one-off items, decreased by 5.9% over the corresponding period,” Dis-Chem says.

Dis-Chem share price over the past five years


Wayne McCurrie, senior portfolio manager at FNB Wealth and Investment, says this is not the first time Dis-Chem has disappointed the market in terms of growth.

Bad press

Dis-Chem CEO Ivan Saltzman says the company has been the subject of smear campaigns in the media pertaining to its decision not to pay rent for its stores in full in April, and for price gouging.

“Lately, we have [had] unwanted and unfair press,” he says. “I feel that it was unwarranted. Firstly, it was due to the rent for April, and secondly, it was due to price gouging … 88% of the rental has been paid for April, and it goes without saying that 100% of the rental will be paid for May and moving forward.”

Saltzman has denied allegations that Dis-Chem increased mask prices to exploit the Covid-19 pandemic, saying that the company had increased the prices on these items prior to the government declaring a state of disaster.

Dis-Chem denies exploiting Covid-19 for mask price increases
Dis-Chem rejects claim it hiked prices of surgical masks

The group is still waiting to hear the Competition Tribunal’s ruling concerning allegedly hiking mask prices.

Listen to Moneyweb editor Ryk van Niekerk’s interview with Dis-Chem CFO Rui Morais:

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Saltzman should not worry about all the sour keyboard warriors on Moneyweb spurting their BS about his chain. Its not as if these palookas have any money left to spend on vitamins, supplements and health foods after splurging their wages on booze and drugs!

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