Chief financial officer's report

Michael Fleming

Michael Fleming

In an environment of muted economic growth and low selling price inflation, Clicks Group delivered another year of strong growth with good margin management, tight expense control, efficient operating leverage, sound working capital management and enhanced returns to shareholders.

The group is highly cash generative, with cash from operations increasing by R480 million over the previous year to R2.9 billion. We have continued to support our organic growth strategy with ongoing investment in new stores, refurbishments, supply chain and information systems, and returned R1.2 billion to shareholders in dividends and share buy-backs.

The competitive trading performance, together with prudent capital management, contributed to growth of 16.8% in diluted headline earnings per share to 672 cents.

The board declared a total dividend of 445 cents per share, 17.1% higher than last year, with the dividend payout ratio being raised from 62% to 65%.

“The group has a strong balance sheet and the results reflect the resilience of the group’s brands.”

Financial performance

The analysis of the group’s financial performance for the year ended 31 August 2019 focuses on the key line items of the statements of comprehensive income and financial position which management consider material to shareholders’ understanding of the group’s performance.

The following review should be read together with the annual financial statements as well as the summary statements of comprehensive income and financial position, and the five-year analysis of financial performance respectively.

The group adopted IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers for the 2019 financial year. The financial results for the year ended 31 August 2018 have been restated following the adoption of these new accounting standards.

Statement of comprehensive income


Group turnover increased by 7.2% to R31.4 billion (2018: R29.2 billion). Selling price inflation for the group averaged only 1.2% for the year.

Turnover was again relatively consistent across the first half (49% of turnover) and second half (51% of turnover) of the year. There is usually minimal seasonal effect on the group’s turnover as the Christmas trading period in the first half of the financial year is counter-balanced by the winter season, which is the peak trading period for the health and wellness business.

Retail turnover, including Clicks, The Body Shop, GNC, Claire’s and Musica, increased by 9.7%. Retail selling price inflation has remained low during the year at only 1.5%, up 10 basis points on the previous year. Comparable stores sales grew by 6.4%.

Within the retail division, health and beauty sales increased by 10.5% reflecting the resilience of the core Clicks brand in the current constrained trading environment.

Growth in retail trading space accounted for 3.3% of the turnover growth with the net opening of 42 health and beauty stores and 35 pharmacies.

Distribution turnover grew by 4.0%, with price inflation of 0.9%, as the business experienced a slightly slower second half due to customers buying in stock ahead of the single exit price (SEP) increase in the first half of the year.

The trading performances of Clicks and UPD are covered in the business review.

Total income

Total income grew by 9.7% to R8.7 billion (2018: R7.9 billion) with the total income margin expanding by 60 basis points to 27.6%.

The retail total income margin was impacted by increased transport costs and product mix and reduced by 30 basis points to 33.3%.

UPD’s total income margin increased from 7.3% in 2018 to 8.2% in 2019. The business benefited mainly from gaining seven new bulk distribution contracts over the past 18 months as well as the slightly higher SEP increase of 3.78% granted in March 2019 compared to 1.26% in March 2018.

Operating expenditure

The group’s operating expenses increased by 8.1%.

Retail operating expenditure as a percentage of turnover improved to 25.1% from 25.5% in the prior year.

Retail expenses grew by 8.1% following the opening of new stores and pharmacies, and the refurbishment of 56 stores. Comparable retail costs were contained to an increase of 5.6%.

UPD expenses, which include the costs related to the new distribution contracts, grew by 10.2%, well below the 17.6% growth in total managed turnover.

Operating profit

Operating profit increased by 14.2% to R2.3 billion (2018: R2.0 billion) as both the retail and distribution businesses achieved operating leverage and benefited from increased scale.

The operating margin strengthened by 40 basis points to 7.4% which is at the upper end of the group’s medium-term target range.

Return on equity

Summary statement of comprehensive income

R’million 2019 % of turnover Restated*
% of turnover %
Turnover 31 352 29 239 7.2
     Retail 23 105 73.7 21 062 72.0 9.7
     Distribution 13 909 26.3 13 376 28.0 4.0
     Intragroup (5 662) (5 199)
Total income 8 650 27.6 7 885 27.0 9.7
Operating expenses (6 329) 20.2 (5 853) 20.0 8.1
     Retail (5 810) (5 375) 8.1
     Distribution (682) (619) 10.2
     Intragroup 163 141
Operating profit 2 321 7.4 2 032 6.9 14.2
     Retail 1 881 8.1 1 695 8.0 11.0
     Distribution 454 3.3 362 2.7 25.4
     Intragroup (14) (25)
Loss on disposal of property, plant and equipment (1)
Net financing income 40 2 >100
Share of profit of an associate 3 2
Income tax (661) (567) 16.4
Profit for the year 1 703 1 468 16.0

Summary statement of financial position

R’million 2019 Restated*
Non-current assets 2 952 3 234 (8.7)
     Property, plant and equipment 2 067 1 843 12.1
     Other non-current assets 885 1 391 (36.4)
Current assets 10 103 8 355 20.9
     Inventories 4 710 4 251 10.8
     Trade and other receivables 2 647 2 332 13.5
     Other current assets 2 746 1 772 54.9
Total assets 13 055 11 589 12.6
Equity 4 913 4 424 11.0
Non-current liabilities 392 448 (12.4)
Current liabilities 7 750 6 717 15.4
     Trade and other payables 7 303 6 227 17.3
     Other current liabilities 447 490 (8.9)
Total equity and liabilities 13 055 11 589 12.6
* Prior-period amounts restated for the adoption of new accounting standards. Refer to note 35 in the annual financial statements.

Statement of financial position

The ratio of shareholders’ interest to total assets declined marginally to 37.6% (2018: 38.2%) and the group largely maintained an ungeared balance sheet during the year.

The ratio of current assets to current liabilities at year-end was 1.3 times (2018: 1.2 times), indicating that working capital remains adequately funded. Other current assets include R2.6 billion in cash.

“The group plans to invest more than R2 billion over the next three years.”

The group continues to hedge direct exposures to foreign exchange rate fluctuations which impact approximately between 6% and 7% of the cost of sales in the retail business. In addition, the group hedged elements of the long-term incentive scheme for the 2019 to 2021 period. Further detail on the respective hedges and risk management is contained in note 28 in the annual financial statements on the group’s website.

Working capital

Working capital continues to be well managed and the group’s net working capital improved from 36 to 34 days. Trade debtor days, which relate primarily to UPD, reduced from 38 to 37 days while creditor days improved from 69 to 73 days.

Inventory days moved out from 67 to 70 days owing to higher inventory levels in retail and distribution. A single-pick retail facility will be commissioned in the Centurion distribution centre in the 2020 financial year which is aimed at improving stock efficiency.

Capital expenditure
Cash and capital management

Cash generated by operations increased by 19.5% to R2.9 billion, driven by the increase in operating profit and good working capital management.

The group’s capital management strategy is focused on investing in the organic growth of the business and returning surplus funds to shareholders through dividends and share buy-backs:

  • Capital expenditure of R337 million was invested in new stores and refurbishments, R160 million on expanding distribution centres and R150 million on IT and retail infrastructure.
  • The group returned R1.2 billion to shareholders through dividend payments and share buy-backs.

Cash resources increased by R1.1 billion over the previous year and the group ended the year with cash of R2.6 billion.

Cash Flow Analysis


The total dividend for the financial year was increased by 17.1% to 445 cents per share (2018: 380 cents), based on an increased dividend payout ratio of 65% (2018: 62%) of HEPS. This comprises the interim dividend of 118 cents (2018: 102.5 cents) and a final dividend of 327 cents (2018: 277.5 cents).

Information technology

Management aims to ensure IT systems and infrastructure are well maintained and remain relevant to future needs of the business.

During the year the group invested R80 million on computer hardware and R71 million on computer software.

Financial plans for 2020

Capital expenditure of R718 million is planned for the 2020 financial year:

  • R404 million will be invested in the store portfolio, which includes 25 to 30 new Clicks stores, 30 to 35 new pharmacies and 60 store refurbishments, to ensure stores remain modern and relevant to customers.
  • R314 million will be used for IT systems and infrastructure which includes R231 million in retail IT systems and infrastructure and R83 million on UPD IT systems and warehouse equipment.

The group plans to invest approximately R700 million in 2021 and R620 million in 2022 to support the expansion of the Clicks store footprint, improve efficiency in the distribution centres and invest in IT tools and systems.

Total retail trading space is expected to increase by approximately 5% in 2020.

“The group’s medium-term financial targets rank in the upper quartile relative to comparable global health and beauty retailers.”

Adoption of IFRS 16 – Leases

The group will adopt IFRS 16 – Leases during the 2020 financial year on a full retrospective basis, with the date of initial application being 1 September 2019.

The group has an extensive portfolio of leases across its retail stores and the new accounting standard will have a material impact on the group’s financial statements. The group expects to create a right-of-use asset and lease liability of approximately R2.0 billion and R2.3 billion respectively as at 1 September 2019.

Kindly refer to note 36 in the annual financial statements for detail on the expected impact of IFRS 16.

Medium-term financial targets

Financial targets are disclosed to provide guidance to shareholders on the group’s medium-term performance expectations. The targets are reviewed annually to take account of the group’s current performance and the medium-term outlook for trading.

The group’s medium-term financial targets have been revised to reflect the impact of the group’s adoption of IFRS 16.

Medium-term targets 2019
Return on equity (%) 36.9 50 – 60
Return on assets (%) 11.8 11 – 15
Net working capital days 34 30 – 35
Group operating margin (%) 8.0 7.5 – 8.5
     Retail 8.9 8.5 – 9.5
     Distribution 3.3 2.5 – 3.0
Dividend payout ratio (%) 65.9 60 – 65
* Restated comparative for the adoption of IFRS 16 in the 2020 financial year.

The return on equity (ROE) at 36.9% is below the targeted performance range owing to the impact in the short term of the group’s broad-based employee share ownership scheme. The scheme matured in 2019 and the ROE is expected to improve in the medium term.

While the distribution operating margin increased to 3.3% in 2019, management has maintained the medium-term target as distribution clients are contracted and the total UPD business, including wholesale and bulk distribution, is expected to deliver a sustainable operating margin of between 2.5% – 3.0%.

The group’s medium-term financial targets rank in the upper quartile relative to comparable global health and beauty retailers such as Walgreens Boots Alliance (USA), CVS (USA), Raia Drogasil (Brazil) and Celesio (Germany).


Thank you to our shareholders for their continued investment in the group over the past year and to the broader investor community locally and internationally for their interest and engagement. The finance teams across the business are committed to delivering a high standard of financial reporting and I thank them for a job well done.

Michael Fleming

Michael Fleming

Chief financial officer