DISCHEM Off to a healthy start

Author: Stafford Thomas

The pharmacy franchise has done very well in its first year of listing and is on an aggressive store roll-out.

Dis-Chem lived up to demanding market expectations in its maiden year as a listed company, delivering a 30.8% rise in adjusted headline EPS (HEPS). But to justify its heady 36 p:e, the health and beauty retailer will have to keep on producing more of the same.

Strongly in Dis-Chem’s favour is its highly resilient drugstore model, in which the front-store profit engine is supported by a back-of-store customer-drawing pharmacy. It is the same model followed by Dis-Chem’s larger arch-rival, Clicks, which is now trading on a 27.6 p:e.

At the retail sales level Dis-Chem lags behind Clicks by a big margin.In its year to February, Dis-Chem reported retail sales of R15.6bn, a retail operating profit of R1.1bn and an operating margin of 7%. In its six months to February, Clicks’ retail sales stood at R9.24bn (annualised R18.5bn), retail operating profit at R700m (R1.4bn annualised) and operating margin at 7.6%. Clicks generates roughly the same level of retail sales and operating profit in its first and second six months.

Where Dis-Chem has an edge is in retail sales growth. In its latest financial year it grew retail sales 15.3%, like-for-like sales 9.1% and volume 8.8%. In its latest six months, Clicks lifted retail sales in its core Clicks store division 13.1%, like-for-like sales 8.4% and volume 7.9%.

It sets the scene for an interesting race between the two sector heavyweights, which already each control about 21% of the pharmacy retail sector. Central to the race will be both groups’ aggressive roll-out of new stores.

Dis-Chem’s objective is to up the number of stores from 117 (15 of which were opened in the past 15 months) to 200 by 2022/2023. It indicates that about 13 to 15 new stores will be opened each year.

“A great deal is resting on Dis-Chem’s ability to open all the new stores it is targeting,” says Alec Abraham of Sasfin Securities. “The risk is that [it opens] fewer than planned.”

Dis-Chem co-founder Lynette Saltzman is confident. “We feel we can easily achieve our target,” she told the Financial Mail just prior to Dis-Chem’s listing in November.

Neither she nor CEO and co-founder Ivan Saltzman were available for comment following the release of the group’s annual results — they were travelling.

There is certainly scope for Dis-Chem to expand its footprint. While it is well represented in Gauteng with 62 stores, it has only 14 stores in greater Cape Town and eight in Durban.

Dis-Chem is gearing up for growth in these two key centres. The first Durban warehouse of its wholesale business, CJ Distribution, has just been completed. At 14,400m², it is a third of the size of CJ Distribution’s Johannesburg facility.

A major warehouse expansion is nearing completion in Cape Town, which will up capacity from 2,250m² to 15,693m².

Clicks’ store roll-out calls for the opening of about 25 stores a year in SA, with the long-term goal of reaching 800 stores, all with pharmacies. At the end of February there were 495 Clicks stores in SA.

There is a notable difference in the store expansion strategies of the two retailers. Dis-Chem has focused on big-format, mall-based destination stores with a size of 1,000m²-1,800m². Its largest store, a 3,000m² giant, is in Centurion, Pretoria.

By contrast, Clicks’ focus is primarily on smaller convenience stores, with the average size of existing stores, including its 50 large-format stores, now 652m². The strategy is applauded by research firm Urban Studies, which noted in a recent study: “Convenience shopping is the name of the game.”

Dis-Chem appears to be acknowledging this. In the past financial year it opened its first smaller-format store. Located in a “convenience-focused centre”, it has a trading area of 670m².

There will be even smaller stores in Dis-Chem’s lineup in the current financial year, when it starts to open The Local Choice (TLC) stores of between 300m² and 600m². TLC is a franchise pharmacy business in which Dis-Chem has a stake.

As matters stand, analysts expect Dis-Chem to grow its HEPS at a faster pace than Clicks. “In their current years we forecast Dis-Chem’s HEPS to rise by 18%-22% and Clicks’ by 12%-15%,” says Evan Walker of 36One Asset Management.

That would put Dis-Chem on a still very rich forward p:e of about 35 and Clicks on an also high p:e of just under 27.

Looking further ahead, Abraham is forecasting Dis-Chem’s HEPS growth to average 20.9%/year and Clicks’ 14.8%/year. It leaves Dis-Chem and Clicks neck and neck, both on three-year forward p:es of about 19.

It makes choosing between the two a matter of preference. Or, as Walker notes: “You can make a case for having both. There are few shares around delivering the type of growth they are.”

Source: Finacial Mail