SA may be dealing with a nasty economic headache and depressed consumers, but that hasn’t stopped people from flooding through the turnstiles at SA’s two JSE-listed pharmacy groups, Dis-Chem and Clicks.
For investors, Dis-Chem’s listing nearly a year ago has been a windfall, with the stock up 53%. Clicks has been no slouch either, up 32% over the past year. Which is likely to leave investors’ wallets the healthiest?
"It is not an easy call to make," says Daniel Isaacs, an analyst at 36One Asset Management.
Both pharmaceutical groups are led by experienced management teams and pin their hopes on the drug store operating model.
This model is arguably the most resilient in the world for retail — combining a front-store profit engine (chocolates, deodorants and food, for example) with a back-of-store pharmacy dispensing medicine.
Though Clicks and Dis-Chem share the model, their store format strategies differ.
Clicks has gone for smaller, convenience shops. The average size of its 662 stores (which include 50 large-format stores outlets) is 650m². By contrast, Dis-Chem stores are rambling, large-format, shopping mall-based shops, sized 1,000m²-1,800m². Of its 121 stores, the largest comes in at 3,000m².
The two heavyweights are also in something of a race for space. In Clicks’s year to August, 31 stores were opened, while another 80 have been added under an outsourcing agreement struck with Netcare in late 2016. Clicks has further set its sights on opening 20-30 stores/year over the next seven to 10 years. "Our target is 900 stores," says David Kneale, who has been CEO since 2006.
That’s an awful lot of medication. Isn’t that overkill? "Getting to 900 stores poses no problems for Clicks," says Kneale. "There are 1,100 convenience shopping centres of between 5,000m² and 25,000m² in SA, and we are in fewer than 300 of them."
Dis-Chem is also thinking big. For its year to February next year, it will open 21 stores. By 2023, it wants 200 stores — which means that 15 new stores a year will be added.
Ivan Saltzman, Dis-Chem’s co-founder, told analysts at a recent presentation that "space growth and the maturing of existing stores are the main structural drivers of [sales and profit] growth".
Certainly, sales are growing at a fast clip. In the six months to August, Dis-Chem rewarded shareholders with a 15% rise in retail sales to R8.8bn and a 38.1% rise in headline earnings. This followed a 30.8% earnings rise in the previous financial year.
But Dis-Chem has another growth trick up its sleeve, which will bring it into a more open clash with Clicks. Saltzman said Dis-Chem has noticed a shift to smaller convenience malls, so it recently opened its first small-format (670m²) store. He wants to add another four similar-sized stores in the next financial year.
Dis-Chem also now has an alliance with franchise pharmacy group The Local Choice (TLC). It will roll out a number of TLC pharmacies owned by Dis-Chem and sized between 300m² and 600m². "It gives us a channel to grow beyond 200 stores," said Saltzman.
Kneale sees no danger of the market becoming overtraded.
"There is room for two major drug store players," he says. "That’s the way it is in other countries and SA is no different."
With its unerring consistency, Clicks delivered a sterling performance in its year to August, lifting sales 13.5% to R18.9bn and like-for-like store sales volume 3.1%. The annual dividend was hiked 18.4%.
"It was a superb result in this environment," says Isaacs.
Though Clicks and Dis-Chem have put in exceptional performances, they aren’t exactly cheap shares. Dis-Chem is trading on a steamy 41 p:e and Clicks is on an almost as heady 34.6.
Nonetheless, Isaacs believes Dis-Chem’s rating could be justified by its high growth potential. He expects it to grow headline earnings at 25%-30%/year over the next few years.
Even Sasfin Securities’ Alec Abraham, who isn’t as optimistic, believes Dis-Chem’s earnings will grow by more than 20% over the next three years.
Clicks’s growth outlook is far more muted. Isaacs expects its headline earnings to grow at 10%-15%/year over the next few years, while Abraham reckons it will average growth of 13%/year.
Is this enough to justify their steep price?
Not everyone thinks so. Warren Jervis of Old Mutual Investment Group is staying well clear of the two pharmaceutical groups.
"Their ratings are crazy," says Jervis. "Like other retailers, they are serving consumers who are under pressure, and eventually the weak retail sales growth trend will catch up with them. Any earnings hiccup would be a disaster for their share prices."
It is hard to argue with Jervis. After their blistering share-price runs, Clicks and Dis-Chem appear to be best watched from a
distance.
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