The Group approached the end of our financial year in February 2020 amid growing concerns about the rapid spread of the coronavirus and its potential impact. Since then, the world has been turned upside down by this pandemic and its devastating economic, health and social consequences.
Ivan Leon Saltzman
The past financial year can be characterised by the continued weak macroeconomic environment in South Africa that has severely constrained consumer spending, and which has been evident in the declining basket size and spend. I am very pleased, however, that our focus on Return on Invested Capital (ROIC), cost control, operational adaptability and strategic agility has provided some benefit in this extremely tough trading environment. These factors have all, ultimately, resulted in Dis-Chem reporting positive results with improved market share across all our core categories.
The Group continues to report revenue growth ahead of market growth. Overall revenue was 12% higher at R24 billion, which was on the back of a 10% increase in revenue growth in the previous financial year. Retail revenue rose 11% to R21.8 billion with like-for-like retail sales growing 4.0%, which is commendable considering selling price inflation of 2.2%. Retail gross margins improved, with dispensary margins under pressure in a competitive market. The external revenue growth of 14% in the wholesale environment is mainly due to the successful acquisition and integration of Quenets — the Western Cape wholesaler acquired in the latter half of the previous financial year – and an increase in TLC franchise stores from 91 to 104. TLC’s revenue grew by 29.8%, which reemphasises the feasibility and success of this business model. We have also made a strategic decision to embark on a corporate TLC model, which allows us to purchase smaller stores that would not normally be suitable for a Dis-Chem store format. Independent customers grew by 4.3%, as independent pharmacies continue to consolidate.
Cost efficiencies remained a core focus throughout the period, with expense growth influenced by a number of once-off expenses, including higher bonus pay-outs as a result of a change in our bonus policy as well as residual strike-related costs. Retail expenses grew by 13% to R4.7 billion as we invested in new stores while contending with increased store rental and electricity costs. Within wholesale, expenditure grew by 5.2%, to R1.4 billion, excluding one-off items. Wholesale’s costs were well contained, largely as a result of the earlier investments in technology, as well as other productivity and performance enhancements.
The ROIC focus in particular has been on enhancing margins, specifically in terms of the in-store retail environment, improving trade terms with suppliers, and better stock days following the rationalisation of stock and mproved buying efficiencies, while also taking advantage of an extension in creditors days. This resulted in the necessary inventory reductions and rationalisation across the wholesale space. Pleasingly, this was achieved without compromising revenue, or any impact on our customers’ access to our products and services, and ultimately was one of the leading levers that led to our enhanced ROIC.
The effect of the ROIC focus is also evident in the net working capital days that reduced to 33, as well as the year’s vastly improved free cash generation, which increased by a significant 115%, or R671 million, year on year. At year-end, the Group’s cash and cash equivalents had turned around by a remarkable R782 million, from an outflow of R481 million last year to a positive inflow of R300 million. This is after taking into consideration the improved working capital movement, dividend payments, growth capex, acquisition costs, finance costs, taxation and other payments.
Overall expansion and maintenance capex reduced by 8% to R363 million. We opened 18
new stores over the last year and acquired threenew pharmacies resulting in a total of 170 stores
as at 29 February 2020.
While we improved market share across allcore categories, our earnings in the current period were impacted by one-off items such as the adoption of the new accounting standard IFRS 16, and the low growth in purchases from suppliers, which resulted in the total income margin declining.
The majority of the inventory rationalisation occurred in the first half of the year and this period’s earnings decreased by 37.4% compared to the corresponding period. However, as purchases increased in the second half of the year, this was convincingly reversed, with earnings increasing by 16.7%.
The Group’s total earnings, excluding one-off items, decreased by 5.9% over the corresponding period, while earnings attributable to shareholders and headline earnings both declined by 16.8%. Earnings per share and headline earnings per share were both 69.6 cents, a decrease of 16.7%.
Through our pharmacy focus, reward-driven campaigns and availability of choice for our customers we continued to drive strong footfall into our stores, while also growing our Dis-Chem loyalty membership base to over 5.5 million, which is up from 4.7 million in the previous year – that is nearly one million additional people welcomed to the Dis-Chem family since last year. The increase was primarily driven by the exponential membership growth in our FOR YOUTH Programme and as well as our Baby programme, which has seen numbers doubling.