Dis-Chem versus Clicks

Dis-Chem and Clicks operate in a similar retail segment, and both perform fairly well, but the market has a different view of the two companies.

Dis-Chem’s share price declined by 28% over the last year, significantly worse than Clicks’ 12% decline over the same period.

It raises the question of why investors prefer Clicks over Dis-Chem and what the two companies are doing differently.

An issue that stands out is Dis-Chem’s negative press over the last year. It was embroiled in an anti-white scandal, which cost it many of its loyal customers.

In June, Ivan Saltzman, who co-founded Dis-Chem with his wife Lynette in 1978, stepped down as CEO and was replaced by CFO Rui Morais.

However, this does not fully explain why the market is taking a dim view of Dis-Chem, which caused its share price decline.

Daily Investor delved into the financials of the two retail giants to see what stands out and where each company performed well.

Dis-Chem has increased its stake in the combined market share between itself and Clicks from 37% to 45% over the last decade.

Dis-Chem’s revenue growth outpaced Clicks. It achieved an average revenue growth rate of 14% since 2013, much higher than Clicks’ 9%.

However, in its latest annual results, Dis-Chem reported its worst revenue growth since listing, having grown only 7% compared to its 14% average growth rate.

Clicks also has the highest absolute revenue value, reporting R39.5 billion in revenue in its latest annual results compared to Dis-Chem’s R32.7 billion.

Although Dis-Chem outperformed Clicks in terms of revenue growth, Clicks has been superior to Dis-Chem in profitability.

Since 2013, Dis-Chem’s profitability has been dwindling. It fell from a 4.0% net profit margin to 3.1% over the last ten years.

Clicks, in comparison, has seen an improvement in its profitability over the same period. It increased its net profit margin from 4.3% to 6.7%.

In its latest annual results, Dis-Chem reported a higher gross profit margin than Clicks but a lower operating profit margin, indicating less efficient operating cost management.

Clicks has also been able to grow its net profits faster than Dis-Chem at an average of 15% since 2013 compared to 11% from Dis-Chem.

Valuation

The raw valuation values, like price-to-sales, price-to-book value, and price-to-earnings ratios, show that Dis-Chem is undervalued compared to Clicks.

However, that only tells part of the story. There are good reasons why the market prefers Clicks over Dis-Chem and is willing to pay a premium for it.

One reason is the higher average growth rate in Clicks’ earnings, which typically results in a higher valuation.

Others include trust in the management team, the company’s market position, and its growth strategy.

The table below compares Clicks and Dis-Chem’s valuations using the most popular measures.