That clicking is the sound of a company getting it right
The Clicks share price may be flat for 2018, but it rose over 1,000% in the past decade. Is there more to come?
Years ago Business Day used to make a “company of the year” award, and staff were often asked which companies should be considered. I had just interviewed the then CEO of Clicks, Trevor Honeysett, and I was impressed with the singularity of the vision of the group, so I suggested the company should be considered. My colleagues thought I was joking. Clicks was at the time a tiny retailer in a niche market with modest prospects.
Well, it’s nice to have been right for once. Clicks in now a JSE Top 40 stock and apart from a few minor missteps the company has not put a foot wrong over the past decade.
Even in those days, Clicks was using UK store Boots as a model, so it wasn’t too much of a surprise when it hired a senior Boots executive, David Kneale, to take over in 2004. Kneale is standing down at the end of the year, and seems slightly shocked that his initial intention to spend a few years in SA has lasted almost a decade and a half.
One presumes a reason he stayed so long is that everything went so well. Earnings per share and dividends per share have increased every year like clockwork. Profit breached R2bn this past year, a 12.6% increase on a 9.1% increase in turnover. To achieve this in a retail market under enormous pressure and an economy in shambles is truly remarkable.
Kneale, who is handing over to long-time insider and COO Vikesh Ramsunder, told Moneyweb that “retailing is a straightforward business. It’s about doing lots of small things well at the same time, which is what the Clicks machine has become good at.”
Those “small things” include good products priced competitively, a huge number of promotions, leveraging the Clicks ClubCard and growing the private label products. You can see how these things work well together and why Kneale is so adamant about simultaneous execution.
Good-value products promoted well through a personalised vehicle – it’s a winning and self-perpetuating formula. It sounds simple, but try doing it. Not so easy.
The store card, as Clicks reps will tell you endlessly, was initiated in SA by the company. By being the first out the gates, it’s now a huge moat in the store’s competition with Dis-Chem and independent pharmacists.
The rivalry with Dis-Chem is fierce, but it doesn’t seem to have held back either company, which have mostly matched each other on the market. There are slight differences in the business model, with Dis-Chem stores slightly larger and with larger ranges. Clicks also have some personal health brands like The Body Shop which affects the comparison. Clicks’ corporate governance is notably better, but both are performing well.
What is driving that growth? First, a gradually ageing population; and second, they both take market share away from the independents. Another thing helping is, ironically, rising healthcare costs. Both stores now offer basic healthcare services, which the health insurance companies strongly support because it helps catch illness before it becomes too serious and reduces the cost of basic care.
With this wind at their back, it has been unnecessary for either company to go on risky adventures into new markets. Kneale is adamant that serious growth is still on the cards locally. In a Business Day interview, Kneale said the company plans to have 900 stores in SA within the next seven to 10 years, from 663 today.
The calculation is not based on supposition; it is based on a formula. Kneale said Clicks had mapped the SA retail footprint and only about 50% of SA households live within 5km of a Clicks store. Many foreign companies maintain a 75% ratio, and that was Clicks’ target.
“I’m going out on a high, but there’s still a long runway of growth ahead for the brand,” Kneale said. Yet for shareholders the choice is a little tricky. The past runway has been so long that the share is now quite expensive, trading at about 27 times annual earnings. Dis-Chem, with its slightly higher profitability, is trading a touch higher. This is almost twice as high as the general retailers.
The result has been a nervy and vacillating share price over the past year or so. Still, Clicks shares are flat this year, which is very good because flat is the new up. But it’s still a remarkable change from the more-or-less clean upward sweep over the 10 years prior to 2018. The share rose over 1,000% in the past decade.
But even at this high valuation Clicks still offers defensive qualities and a great dividend. Think of it as getting a flu jab: somewhat painful but probably a good idea in the long run.