Dis-Chem

· Dis-Chem released results which exceeded market expectations in a   difficult operating environment, with Covid-19 being a major impediment.   Non-essential merchandise sales were hit by the pandemic whilst foot traffic,   particularly in large malls, was muted.

· Sales in convenience centers were relatively resilient, generally   operating from a smaller store format relative to the big box retail   operations, away from the major cities. However retail sales grew by only 6%,   with comparative sales up by 1.50%. There has subsequently been a marginal   uptick of 7.1% in sales and group revenue up by 8.2% for the nine weeks to   31st October 2020. Another major turnaround in sales numbers from the malls   was also another positive, from the large scale decline of 38% in revenue at   the height of the pandemic.

· The Wholesale business operations showed a robust set of results,   with revenue increasing by 14.9% due mainly to sales to independent   pharmacies being up by 25%. This resulted in a breakthrough to a positive   operating profit of R41 million driven by volume growth, a major reversal   from that of first half of 2020 where the loss was R77 million.

· Group margins increased by 40 basis points, in an extremely   competitive trading environment, and better inventory management with the new   SAP point of sales systems should lead to additional improvements in due   course.

· The second half earnings impact of Covid-19 is likely to decline in   the second half of the 2021 results, with the interim results taking the   brunt of the R45.4 million once-off costs. This should lead to retail and   wholesale margins improving in due course and some claw-back in lost market   share as trading conditions normalize.

· The solid results by Clicks recently were partially due to the   large-scale footprint of small store formats, predominately away from major   metropolitan cities. Dis-Chem is in the throes of acquiring a community based   pharmacy group of fifty retail outlets, which should help it compete with   Clicks’ geographic advantage.

· In addition, Dis-Chem has continued to invest in its growth strategy   and is in the advanced stages of concluding the acquisition of a strategic   interest in a healthcare insurance business. This will encompass the   administration and risk management of primary healthcare insurance, as well   as gap cover.

· This appears to be a strategy to achieve a business model of   vertical integration into a health value chain, having grown the telemedicine   operations at retail outlets, Covid testing, as well other medical offerings.

· The growth via acquisitions, including Baby City, which is still   awaiting competition commission approval, comprised R183 million of   expansionary expenditure and R46 million of replacement capex. So due to   Dis-Chem being in an expansionary phase in terms of growth via strategic   acquisitions, it has decided to not pay dividends but instead to use cash to   fund acquisitions.

· The group turnaround thus far is gaining momentum, having reported a   positive increase in HEPS of 16.2% from 31c to 36c per share. The   opportunities in the healthcare and beauty industry and its strategic   investment policies should reward patient investors in the medium to long   term.

Dis-Chem