The Clicks share price is about 20% lower than at its peak in late October 2022.
Since then, headline earnings per share has largely gone sideways, but the weakness in the share price probably has more to do with its being perceived to be overpriced than anything else.
Even after its recent decline, the share is still trading on a historic price:earnings ratio of 24.7x, which is expensive in anyone’s terms. It remains the most expensive retail stock by far, with no apparent justification for such a rarefied rating.
What has kept the Clicks share price relatively elevated for years has been its ability to produce consistent, if somewhat unexciting, earnings and dividends.
That thesis is still largely intact, so there remains the possibility that the share price will recover over time, but it will probably require a more conducive economy and equity market for that to happen.
Coinciding with this fall in the share price has been noticeable weakness in retail sales figures from Stats SA relating to pharmaceuticals and medical supplies, cosmetics and toiletries. This category of retail spending has always been seen to be resilient and defensive and yet low single-digit year-on-year drops in sales have been apparent every month for the past few months.
As the leading pharmaceutical retailer and distributor, Clicks (and UPD, its distribution arm) has been reflecting this. It’s perhaps not surprising that as the effect of the Covid-19 pandemic continues to recede both retail and whole pharmaceutical demand has fallen.
For the six months to end-February 2023, group turnover rose 6.8%, though if the effect of vaccines is removed, turnover rose only 2.3%. This was achieved on an increase of 7.5% in floor space. Headline earnings per share rose 1.1% to 472.2c and a dividend of 185c a share was declared, an increase of 2.8%.
Retail sales grew 11.9%, excluding vaccinations, with like-for-like sales rising by 8% on volume growth of a fairly low 1.7%. The store estate now stands at 861 stores, with a net new 18 stores added during the first half. A total of 691 of these stores now have pharmacies, with 18 new pharmacies being address in the interim.
Like other retailers, Clicks was affected by load-shedding and incurred R9m in diesel costs to run generators required to keep its stores operating. While an unwelcome cost, it pales into insignificance beside the hundreds of millions of rand incurred by Pick n Pay and Shoprite on diesel.
Clicks doesn’t have refrigerators that use up a lot of electricity, hence their diesel requirements are much lower than those of the large supermarket chains.
Clicks has always been something of an outlier on the SA retail scene. Not a drugstore chain until about 20 years ago with the deregulation of the pharmacy retailing industry and not a supermarket chain either, it has managed to retain an incredibly loyal following.
If, as seems likely, the retail landscape remains bleak because of continued high-intensity load-shedding, Clicks may well present an interesting acquisition and/or merger opportunity for another large retail group. This often happens when organic growth is elusive because the ambient economy is too weak to support it.
Clicks generates huge amounts of free cash and has never really deviated from a tried and tested model that operates in both the retail and pharmaceutical distribution sectors. The main problem in acquiring Clicks may be the price; its present market capitalisation of just more than R62bn puts it in third place among JSE-listed retailers in terms of market cap, behind Shoprite on R120bn and Woolworths Holdings on R64bn.
It also has the highest rating of any listed JSE retailer at 24.7 times. The competition authorities are not likely to allow a merger with arch-rival Dis-Chem as the concentration of power in the pharmaceutical industry would be too great.
• Gilmour is an investment analyst.
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