Integrated Annual Report 2016 - Clicks Group

Clicks Group Integrated Annual Report 2016Group strategy andbusiness modelCLICKS GROUP’S strategy is to create sustainable long-term shareholdervalue through a retail-led health, beauty and wellness offeringCLICKS’ strategy is to be the customer’sfirst choice health and beauty retailerPRODUCT SOURCING(Value)Consistently good value-for-moneyproducts delivered throughcompetitive prices andeffective promotionsPRODUCT DEVELOPMENT(Differentiation)Differentiated offering throughwide ranges of private labeland exclusive brands,including franchise brandsINTEGRATED AND CENTRALISED SUPPLY CHAINUPD provides an integrated healthcare supply chain channelfor Clicks, with national coverage and up to twice daily deliveryCentralised supply from distribution centres to all retail stores(achieved 96.4% centralised supply in 2016)Our customersINFORMATION TECHNOLOGYClicks targets middle to upper income customersCUSTOMERENGAGEMENTCustomers in LSM groups 6 –10Clicks ClubCard has 6.2 million active members(Rewards)78% of ClubCard holders are femaleLoyalty rewardedthrough ClubCardprogramme61% of ClubCard holders are aged 25 – 49CLIDirect marketing basedon purchasing behaviourValues-driven culture with equitable reward and ustomer care)Great customer servicefrom friendly andknowledgeable staff inwell-presented storesMOTIVATED AND SKILLED PEOPLERETAIL FOOTPRINTRESERVICEEfficient and flexible bespoke and proprietary systems: Planning, ordering and store ranging Loyalty management Healthcare management Omni-channel management Warehouse managementCommitted to training and development (invested R57.8 millionin 2016)Building pharmacy capacity through in-house PharmacyHealthcare Academy and bursary programmeExtensive store and pharmacy network in South Africaallowing for easy access to customersATINGBUMeasured store expansion into neighbouring countriesof Botswana, Lesotho, Namibiaand SwazilandSINESS MODEL9

Clicks Group Integrated Annual Report 2016Group strategy and business model (Continued)VALUE CREATION IN 201612Inputs and capitalsValue created in 2016The financial resourcesdeployed by thecompany.Turnover R24.2FINANCIAL10Total shareholder return 35.3%Cash generated from operations R1.8billionReturn on equity 49.2%The infrastructure usedin selling merchandise,including the retailstore network,distribution facilities,online store andinformation technologysystems.MANUFACTURED3billionThe collectiveknowledge andexpertise across thebusiness as well as theintellectual property ofthe group.INTELLECTUALOpened 32retail stores; total stores 68939 new Clicks pharmacies; total now 400Online store launched9 distribution centresR433 million capital investmentClicks gainedcategoriesmarket share in all key productPrivate label and exclusive brands 21.0% of health and beautysalesClicks independently rated as leadingbeauty retailer in SAhealth and456Inputs and capitalsValue created in 2016The competency,capability andexperience of theboard, managementand employees.Directors and executive management develop and execute thestrategy to create value for shareholdersHUMANRelationshipswith stakeholdersinfluencing thebusiness, primarilyshareholders,customers, suppliersand employees.SOCIAL ANDRELATIONSHIPThe group’soperations have a lowenvironmental impactand therefore uselimited natural capital.14 093 permanent employees who provide customers withmedicines, products and servicesR57.8 million invested in employee skills developmentShareholders: R876 million returned to shareholders individends and share buy-backsCustomers: Over 1 million new ClubCardmembers; now 6.2 million membersCustomers: R309ClubCard membersmillion cash-back paid toEmployees: R2.7billion paid to employeesSuppliers: R21.3billion paid to suppliersCommitment to reduce carbon footprint andgenerate savings through energy and water efficiency2 072 tons of recycling in supply chainNATURAL11

Clicks Group Integrated Annual Report 2016Managing material IssuesMaterial risksInherent ificantRemoteUnlikelyReasonably possibleProbablyAlmost certainProbability12TradingenvironmentTop materialrisks by inherentrisk rating3Increased retailcompetitionResidual Risk4RegulatoryimpactShortages ofcritical skills(after current mitigations)MATERIAL ISSUES have been identified which could impact positively or negatively on the group’s ability to createand sustain value. These material issues are reviewed annually by the board and management where all relevantinternal, industry and macroeconomic factors are evaluated. The needs, expectations and concerns of the stakeholdergroups that are most likely to influence the group’s ability to create sustainable value, notably shareholders, customers,suppliers and staff, are central to determining the material issues. Following the board’s review for the 2017 financialyear, the material issues are unchanged from 2016.12TRADINGENVIRONMENTCOMPETITIONRISKS relating to each material issue are basedon the major risks on the group’s register.The accompanying graphic indicates the levelsof risk before (inherent risk) and after (residualrisk) mitigation plans have been implemented.34REGULATIONPEOPLEOPPORTUNITIES are presented for eachmaterial issue to indicate how the group isusing its competitive advantage to manage theimpacts of the material issues on value creation.CatastrophicImpactMajorModerateCentral to determining the material issues arethe needs, expectations and concerns of thestakeholder groups most likely to influence the group’sability to create sustainable value. These are ourshareholders, customers, suppliers, financial institutionsand onably possibleProbablyAlmost certainProbability1213

Clicks Group Integrated Annual Report 2016Managing material Issues (Continued)1TRADING ENVIRONMENTSouth Africa’s retail trading environment, which has been severely constrained in recent years,is coming under increasing pressure owing to the deteriorating economic conditions in the countryand greater demands on consumer disposable income. Social unrest, political uncertainty andthe weakening labour market are limiting economic growth and this is being compounded by thevolatile and depreciating currency. Consumer confidence is at lower levels than recorded duringthe global financial crisis of 2008/2009 and consumers are facing higher health insurance costs,rising food, utility and general living costs, as well as increasing debt servicing costs owing to risinginterest rates.Risks 2Further deterioration in theeconomic environment willdepress consumer spendingwhich is already undersevere pressure. Expansion by corporatepharmacy and retail chainsimpacting on market sharegrowth in Clicks.Increasing pricecompetitiveness of retailerscould negatively affect salesand profitability in Clicks.Opportunities Clicks has an extensive store network and plansto open 25 new stores each year, expanding to800 stores in the longer term. Continued expansion of the pharmacy networkwith the long-term plan to open pharmacies in allClicks stores in South Africa. 14Focus on differentiators, including extensiveand convenient store and pharmacy footprint;private label and exclusive ranges; ClicksClubCard loyalty; and consistently high levels ofcustomer care.As a health and beauty retailer Clicks faces competition on several fronts, including corporateand independent pharmacy, national food retailers, general merchandise chains, and specialisthealth and wellness stores. The level of competition is being intensified by the sustained expansionof national food chains and corporate pharmacy, and new entrants into the local market. In thecurrent constrained consumer spending environment retailers are increasingly price competitiveand adopting aggressive promotional strategies to attract cash-strapped consumers and protectsales volumes. In this climate Clicks Group is one of the few listed retailers to have increased salesvolumes while maintaining its operating margin. Clicks will continue to pursue a strategy toimprove price competitiveness, grow salesvolumes and entrench Clicks as a value retailer.COMPETITIONContinued recruitment of new members to theClicks ClubCard.Ongoing improvements in pricing, product offerand customer service.Healthcare markets are highly regulated across the world and approximately 50% of the group’sturnover is in regulated pharmaceutical products. The group supports regulation that advances thegovernment’s healthcare agenda of making medicines more affordable and more accessible to allSouth Africans. However, the current regulatory regime imposes obstacles which inhibit accessto affordable healthcare and also limits customer choice. Management actively engages with theDepartment of Health on an ongoing basis on current and proposed regulation and legislationwhich impacts the business and its customers.RiskSOpportunitiesLack of growth in privatehealthcare market.RiskS3REGULATION 4Legislative and regulatorychanges introduced by theDepartment of Health (DoH),SA Pharmacy Council (SAPC)and Medicines ControlCouncil (MCC) could impacton Clicks and UPD turnoverand margins.Impacts include the abilityto obtain pharmacy licencesand to launch private labeland exclusive scheduled andcomplementary medicines.Opportunities Ensure Clicks and UPD are operating efficiently tomaintain margins and profitability. Continue management engagement withthe DoH, SAPC and MCC on legislation andregulation. Formal written and oral submissions to DoH,SAPC and MCC in response to draft legislationor regulations. As the market leaders in retail pharmacy andpharmaceutical wholesaling, position Clicks andUPD to benefit from market consolidation arisingfrom changes in legislation and regulation.PEOPLEAttracting and retaining talent is critical to the group’s sustained performance in an industry wherescarce retail and healthcare skills are in high demand locally and internationally. This is addressedthrough the group’s ongoing investment in its people through competitive remuneration packagesand incentive schemes, career path planning, creating a stimulating working environment,transformation and empowerment, with R244 million invested in training and skills developmentover the past five years. A broad-based employee share ownership plan (ESOP) has enabled staffto share in the long-term growth and success of the business, and at the same time retain criticalskills in the group. As the largest employer of pharmacy staff in the private sector in South Africathe group is actively building capacity to address the critical shortage of pharmacists which is achallenge the world over.Risk Inability to recruit, attractand retain talent for corebusiness needs, includingmerchandise and planning,store management andpharmacy.Opportunities Salaries and incentives externally benchmarked toensure the group remains competitive. Broad-based ESOP improves retention andcreates longer-term wealth. Bursary and internship programmes to attractpharmacy graduates. Retail graduate programme launched. Accredited training programmes for storemanagement, key store roles, and merchandiseand planning being developed. Senior leadership development programmestrengthens pool of management talent.15

Clicks Group Integrated Annual Report 2016Investment caseClicks Group offers attractiveorganic growth prospectsfor investors wanting noncyclical equity exposure tothe South African retail andhealthcare sectors.12341632.7%total shareholderreturnthree-year CAGRFavourable market dynamics Healthcare markets are defensive and growing in South AfricaIncreasing proportion of population entering the private healthcare marketImproving living standards, increasing urbanisation and longer life expectancy iscontributing to a growing market for health and beauty productsResilient business modelOver 80% of group turnover is in defensive merchandise categories As a value retailer Clicks is price competitive with national retailers As a cash retailer Clicks is less interest rate sensitive than credit retailersMarket leadershipClicks and UPD occupy market-leading positions Clicks is the largest retail pharmacy chain in South Africa UPD is the country’s only national full-range pharmaceutical wholesalerExpanding retail footprintOver 500 conveniently located Clicks stores Targeting to open 25 stores each year 25 Clicks stores opened in 2016 Goal to expand Clicks store base in South Africa to 800 in the long term5678910Expanding pharmacy baseObjective to operate a pharmacy in every Clicks store in South Africa Pharmacies currently in 82% of stores Targeting to open 30 – 35 pharmacies each year 39 pharmacies opened in 2016 Retail pharmacy market share goal of 30% in the long term Primary care clinics in 195 Clicks storesDifferentiated product offerPrivate label and exclusive brands offer differentiated ranges at higher margins Target to grow private label to 25% of total Clicks sales; currently 21% Exclusive health and beauty franchise brands differentiate Clicks offerGrowing customer loyaltyClubCard is one of the largest retail loyalty programmes in South Africa 6.2 million active ClubCard members generate 77% of sales Target to reach 7.5 million members over the next three yearsEfficient supply chainUPD provides an efficient healthcare supply chain channel for Clicks UPD offers wholesale and distribution services to pharmaceutical manufacturers Centralised supply from company-owned distribution centres to all retail stores (96% ofproduct through centralised distribution)Effective cash and capital management Highly cash-generative business– R5.4 billion cash generated by operations over past three yearsReturns enhanced through active capital management– Industry-leading return on equity averaging 53.3% over past three years– R2.3 billion returned to shareholders in dividends and share buy-backs in past three yearsWell invested store base and supply chain– R1.1 billion capital expenditure in past three yearsGlobally competitive operating marginsRetail and UPD operating margins rank in upper quartile of global drugstores and pharmaceuticalwholesalers17

Clicks Group Integrated Annual Report 2016Chairman’s ReportThe group has onceagain shown itsresilience in the faceof growing economicheadwinds andproduced anotherstrong performance.Resilient financial performanceOFFSHORE SHAREHOLDINGSouth Africa is in the midst of one of the most challengingtimes in recent decades, with political uncertainty andinstability, civil and social unrest, a deteriorating labourmarket and unprecedented currency volatility beinga feature of the past year.68.6%58.4%59.3%Our business modelis resilient, with over80% of revenue indefensive merchandisecategories.47.1%These factors are all compounding South Africa’salready weak growth prospects, while the threat ofa sovereign rating downgrade looms ominously overthe country.Retail spending has come under increasing pressure inthis environment, with financially stressed consumersalso encountering increasing interest rates, higherfood, utility and education costs, and rising healthinsurance costs. Consumer and business confidence isunderstandably low.However, the group has once again shown its resilience inthe face of growing economic headwinds and producedanother strong performance, particularly from the Clickschain which has entrenched its leading position in thecompetitive health and beauty retail sector.The group’s performance for the year translated into anincrease of 14.2% in diluted headline earnings per shareto 438.5 cents. Shareholders will receive a total dividendof 272.0 cents per share, 15.7% higher than last year.Dividends have grown at an annual compound rate of23.4% over the past ten years while the payout ratio hasincreased from 45% to 59% over the same time.In the past three years the group has generated a totalshareholder return of 134%, driven by our strategy ofpursuing organic growth in the South African market.7.6%2008201020122014201620 years of JSE listingCompelling investment caseIn March this year the group celebrated its 20th yearof listing on the JSE. New Clicks Holdings, as ourcompany was known, listed at a price of R3.70 with amarket capitalisation of R915 million. In 2016 the shareprice reached an all-time high of R130.50, with themarket capitalisation exceeding R30 billion.The strong organic growth prospects for the coreClicks chain creates a compelling investment casefor investors seeking equity exposure to the retail andhealthcare sectors in South Africa.Since its debut on the stock market in 1996 the grouphas generated shareholder value of R33 billion.While the scale of the group has shown phenomenalgrowth over the past 20 years the business has alsochanged fundamentally. At the time of listing the groupwas not yet active in the retail pharmacy or wholesalepharmaceutical markets.Today Clicks is the country’s leading retail pharmacychain and UPD is South Africa’s foremost pharmaceuticalwholesaler and distributor.15.7%The healthcare markets in which we trade are defensiveand growing, with an increasing proportion of theSouth African population entering private healthcare.Improving living standards, increasing urbanisation andlonger life expectancy are all contributing to the growthin the health and beauty products market.Our business model is resilient, with over 80% ofrevenue in defensive merchandise categories. Clicksand UPD have market-leading positions and theiroperating margins rank in the upper quartile of globaldrugstores and pharmaceutical wholesalers.The JSE is one of the most admired exchanges globallyand is to be commended for its high corporate andregulatory standards. This has certainly contributed tothe Clicks Group attracting extensive foreign investment,with 69% of our shares currently held by offshore fundmanagers.increase intotal dividend14.2%growth indiluted HEPS1819

Clicks Group Integrated Annual Report 2016CHAIRMAN’s REPORT (Continued)As a board we recognisethat good governancecan create sustainablevalue and enhancelong-term equityperformance.Clicks currently has over 500 stores and managementhas revised the longer-term store goal, confident thatthe chain can grow to 800 stores in South Africaover the next ten years. Clicks remains committed toits objective of incorporating a pharmacy into everyClicks store and growing its retail pharmacy marketshare to 30% in the long term.The investment case is supported by sustainedfinancial and operational performance, a proven capitalmanagement strategy which enhances returns toshareholders and the group’s ability to generate strongfree cash flows.Board and governanceAs a board we recognise that good governance cancreate sustainable value and enhance long-term equityperformance. It is pleasing to report that the groupqualified for inclusion in the recently introduced FTSE/JSE Responsible Investment Index. As part of theeval

GNC is the largest global specialty health and wellness retailer, and has been operated under an exclusive franchise agreement for southern Africa since 2014. 5 stores In 261 Clicks stores Claire’s is one of the world’s . I Clicks Group .