Clicks Group's core market under pressure

Consumers, he adds, are pressured by rising costs on multiple fronts, including utility services, petrol, food and school fees. "Consumers are now very cost-conscious and we have responded by increasing our special offers," says Kneale. "It has resulted in good volume growth and increased market shares in the health and beauty sectors."

In its key Clicks store unit, the group grew sales in the six months to February by 9.5% (to R5,38bn) compared with the same period last year. All but 0.1% of the increase came from higher volumes. But price discounting to drive volume growth came at a cost: the unit's pretax profit rose by a lower 5.7% to R363m, 79% of the group total of R461m.

There was also a clear sign of a slowing in sales growth momentum. This was reflected in growth in like-for-like store sales, which in volume terms slowed from 11.7% in the first half of the previous period to 5.4% currently. Driving the additional sales growth in the latest six months were 30 new Clicks stores and 29 new dispensaries, which took their respective totals to 412 and 295.

Kneale holds out no hope of a quick revival in consumer spending growth. "Consumers will be under financial pressure throughout 2012," he says. "There will also be no V-shaped recovery."

The group's second-largest unit, United Pharmaceutical Distributors (UPD), is also unlikely to provide much joy. Though the department of health has increased regulated medicine prices by 2% in 2012, Kneale says the rise will be diluted by increased sales of lower-priced generic medicines. UPD lifted its pretax profit by 3.3% in the six months to February to R74,6m.

A better showing was seen from Musica, which after a 40% slump in pretax profit the year before clawed its way back to a 12% rise in the latest interim period to R15,4m. "With closure of unprofitable stores, Musica is now a smaller and leaner operation," says Kneale. Also performing well was the group's up-market beauty product chain, The Body Shop, which upped its pretax profit by 18% to R15,4m.

Promising as these performances may be, they have little bearing on the group's overall prospects. These are decidedly muted. The company itself expects fullyear headline EPS (HEPS) growth of 6%11%. First-half HEPS were up 7.5% and to achieve an 11% annual rise will require a 13.5% rise in the second half. That could be a tall order. The market's reaction to Clicks' interim results was a 3.6% fall in its price on the day of their release, indicating that it also has its doubts.

Clicks is not a bargain on an 18 historical p:e, which is well above its 10-year average p:e of 14. Underpinning its high rating are optimistic forecasts by analysts. According to I-Net Bridge the consensus view is for HEPS to rise by almost 11% in 2012 and by an average of 18.4%/year in the following two years. As things now stand, this forecast appears overly optimistic.

As a long-term investment, Clicks retains the strong appeal that has attracted foreign investors to increase their total stake in the retailer from under 10% in 2008 to almost 60%. Not least of Clicks' attractions are growth in its core middle-income consumer market, robust cash flow and a high 60.7% return on equity. But there appears little reason to plunge into Clicks at current price levels.

Source: Financial Mail