· 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.