Chief executive officer’s report

It is a pleasure to report to shareholders for the first time following my appointment as chief executive officer of the Clicks Group in January this year.

It has been a challenging year in which trading was hampered by the ongoing impact of Covid-19, the July 2021 civil unrest, significantly higher levels of disruption due to load shedding and depressed consumer spending and confidence.

While our business is certainly not immune to the prevailing economic headwinds, our business model is resilient, our core product categories are defensive, our partnerships are strong and, most importantly, the quality of our people ensured that we continued to create value for our stakeholders.

While the South African economy opened up in the second half of the financial year once the final Covid-19 restrictions were lifted, the outbreak of the Omicron variant late in the 2021 calendar year was a major setback. This Covid-19 wave had a significant social and economic impact, with inbound and outbound tourism particularly affected, resulting in subdued sales over our peak festive season trading period.

The Covid-19 restrictions and the wearing of masks continued to curtail the transmission of acute infections well into the third quarter of the financial year. Once restrictions were finally lifted, consumers returned to shopping centres and the country experienced its first traditional cold and flu season since 2019.

The impact of the KwaZulu-Natal civil unrest extended way beyond the temporary closure of our 53 damaged stores, vandalised distribution centres and the disruption to the supply chain. The local economy was severely impacted, multitudes of livelihoods were impacted and the volume of looted stock in the province depressed retail demand for several months. The region struggled to recover and was further setback by widespread flooding in April 2022.

The higher levels of loadshedding had a significant impact on sales, especially during the final quarter of the financial year. The number of trading hours lost to loadshedding was three times higher than in the prior year and the group invested in battery packs, inverters and generators to partially mitigate the impact of the electricity outages.

Despite these challenges, retail turnover excluding vaccinations gained momentum and grew by 9.4% in the second half, compared to growth of 7.1% in the civil unrest impacted first six months.

Overall, retail turnover increased by 11.7% while the growth in group turnover at 6.0% was impacted by the slowdown in UPD due to the strong demand in the hospital channel during the severe waves of Covid-19 in the prior year and the slower than expected return of elective surgical procedures this year.

Turnover growth was supported by higher margins, tight cost control and continued strong cash flows, resulting in a highly competitive growth of 11.9% in adjusted diluted headline earnings per share for the year.

Delivering on our strategy

Long-term shareholders will be reassured that the group’s strategy was consistently applied throughout the past year, despite the change in executive leadership. As an executive director and member of the group executive committee I have been integrally involved in developing and supporting the execution of the group strategy for the past 15 years. I was therefore totally committed to supporting our strategy of creating sustainable long-term shareholder value through a retail-led health, wellness and beauty offering when I assumed office in January 2022.

Our organic growth strategy continues to be supported by favourable market dynamics and the drivers of our longer-term growth are outlined in the group strategy report.

Clicks’ strategy is premised on convenience, differentiation and personalisation, supported by our value offering, and we have made pleasing progress across these pillars in the past year.

Clicks opened its 800th store in March 2022, expanding its footprint to 840 with the opening of 58 new Clicks stores. The store opening programme was accelerated beyond the targeted number of new Clicks stores for the third successive year owing to opportunities for new space becoming available in existing shopping centres, mainly due to the impact of the Covid-19 pandemic on the retail and hospitality sectors.

Our convenience format stores comprise 75% of the portfolio. While Clicks has traditionally targeted mainly middle to upper income consumers, we have in recent years extended our market and 210 of our stores are located in lower income areas, accounting for 23% of retail turnover.

The baby category is a strategic growth vector for Clicks. Through our baby offering in all Clicks stores we hold a 19.2% share of the market. Our recently introduced standalone Clicks Baby stores are show rooms designed to stimulate online purchases and the fourth baby store was opened shortly after the year end. These stores also offer a range of baby hardware, including prams, car seats and cots, and are supported by the online baby offering.

Clicks is the country’s largest retail pharmacy chain and a further 52 pharmacies were opened, extending the national pharmacy presence to 673. Currently 50% of the country’s population live within 5.3 kilometres of a Clicks pharmacy, highlighting the convenience and accessibility of the pharmacy network.

Clicks was unwavering in its support of the national Covid-19 vaccination programme, enabled by our convenient network. We administered over 2.9 million vaccinations in the year, making us the largest private sector vaccinator in the country. Covid-19 vaccinations generated turnover of R1.1 billion, resulting in an uplift of 3.5% in retail sales.

Clicks ClubCard is one of the country’s most loved loyalty programmes and is an enabler of our personalisation strategy. ClubCard membership increased by 500 000 to 9.7 million active members in the past year and accounted for 80.2% of the brand’s sales. Our investment in our digital channel has seen the Clicks mobile app, which incorporates the digital ClubCard, downloaded by 3 million customers.

Our range of private label and exclusive brands in Clicks increases customer choice and offers an extensive range of trusted quality, great value products which are an alternative to a branded product. The contribution from private label and exclusive products declined marginally to 24.2% of total sales, with the goal to increase this to 25% of total sales.

UPD is the country’s leading pharmaceutical wholesaler and is a significant service provider in the distribution agency business, with a portfolio of 31 clients. UPD’s total managed turnover, which combines wholesale and bulk distribution, increased by 7.6% to R30.6 billion. Clicks and the private hospital groups account for almost 90% of UPD’s wholesale turnover, supporting the long-term sustainability of the business.

Our extensive store network and integrated supply chain provide competitive advantages which we aim to maintain through record capital investment of R936 million for the new financial year.

The group’s financial performance is covered in the chief financial officer’s report, and the trading performance of Clicks and UPD.

Integrating ESG practices

Environmental, social and governance (ESG) practices are integrated into strategic planning and operational processes. The group’s core business creates meaningful social impact through the provision of health products and improving access to reliable and affordable healthcare. The group’s sustainability strategy is based on four focus areas which are aligned to specific Sustainable Development Goals.

The group was included in the FTSE4Good Index Series for the sixth consecutive year, measuring our ESG practices against global standards. In the index ratings the group far outperformed the sector and industry averages which include major international healthcare companies.

In response to the growing threat posed by climate change, the group increased its investment in renewable energy solutions. During the year solar installations were completed at the eight Clicks and UPD distribution centres around the country. The board has approved an environmental management policy which includes a commitment to carbon neutrality.

As a proudly South African company with a diverse workforce and a predominantly female customer base, inclusive transformation has always been integrated into our strategic plans. The group’s sustained rating as the top BBBEE and gender empowered company in the health, pharmaceutical and retail sector bears testimony to our commitment to transformation.

Refer to the sustainability report or detail on the group’s ESG focus areas.

Executive leadership

My fellow executive director and our chief financial officer (CFO) for the past 11 years, Michael Fleming, will be stepping down from his role in December 2022 and taking early retirement from the group. Michael has been an integral member of our group executive committee which has led the group’s growth over the past decade and on behalf of the group I thank him for his unwavering commitment, diligence and exemplary financial management.

We are pleased to appoint an accomplished internal successor in Gordon Traill, with effect from 1 January 2023. He has been with the group for 16 years and is currently chief of support services in Clicks with responsibility for supply chain, retail distribution centres, our vast property portfolio and information technology. During his career with the group he has been head of internal audit, head of group finance and head of finance for the retail business, serving as a member of the Clicks executive committee since 2014.

As part of his career development Gordon has participated in programmes aimed at accelerating his readiness for a senior executive role and he is eminently qualified for this new opportunity. I look forward to working with Gordon and benefiting from his vast financial, strategic and operational experience.

Outlook

We anticipate trading conditions to remain extremely constrained owing to the increasing pressures on consumer disposable income in the current low growth, high inflationary environment. This will be compounded by the trading disruption from ongoing electricity load shedding.

Clicks has proven its ability to adapt to changing market dynamics and its growth drivers of value, convenience, customer loyalty and product differentiation position the business to respond to the needs of customers, particularly in the current weak economic environment. Our strength and significant market shares in our core retail markets support our growth aspirations.

Our confidence in the growth prospects of Clicks is reflected in the increase in our long-term store target from the current 900 to 1 200 stores, with 40 to 50 stores and 40 to 50 pharmacies planned to open each year.

We expect UPD’s fine wholesale business to regain market share through increased elective surgeries in hospitals, the acquisition of new clients and the continued growth in the Clicks pharmacy business. The bulk distribution business in UPD is strong and expanding.

These growth opportunities, together with the group’s strong cash generation and healthy balance sheet, should ensure that we continue to deliver on our medium-term financial and operating targets.

Appreciation

Thank you to our chairman, David Nurek, and the non-executive directors for their support during the leadership transition and I extend my gratitude for the confidence they have shown in me to lead the group.

My colleague Michael Fleming has been a pillar of strength and I thank him together with the executive teams in Clicks and UPD for their commitment and contribution.

The performance of the past year was due to the resilience, capability and passionate commitment of our people, and I thank them for their role in ensuring that we remain South Africa’s leading health and beauty retail group.

Bertina Engelbrecht
Chief executive officer