Clicks versus Dis-Chem

Clicks and Dis-Chem released financial results last week, which showed that Clicks continued its superior performance over its main rival.

Clicks was founded in 1968 and is the country’s leading health, beauty and wellness retailer and the largest retail pharmacy chain.

It boasts an expanding network of over 930 stores and 715 pharmacies supported by a growing digital presence.

It was listed on the Johannesburg Stock Exchange (JSE) in 1996 and has formed part of the FTSE/JSE Top 40 Index for numerous years.

Husband and wife team Ivan and Lynette Saltzman founded Dis-Chem in 1978, and it grew to become South Africa’s second-largest pharmacy chain.

The Dis-Chem stores were also always bigger than their competitors, further adding to their appeal.

The business continued to diversify and expand, adding its private-label offerings in 1997 and opening its first franchise in Namibia in 2014.

Today, Dis-Chem has a market cap of R31 billion, with 327 stores across South Africa and a growing retail footprint.

Since Dis-Chem was listed on the JSE in November 2016, the retailer embarked on an aggressive expansion strategy.

Dis-Chem started to target the market share of its main competitor, Clicks, as part of this expansion.

In 2016, Dis-Chem held 40.3% of the combined Clicks and Dis-Chem market share, with Clicks holding the remaining 59.7%.

Over ten years, Dis-Chem closed the market share gap, holding 46.6% of the combined market, with Clicks holding 53.4%.

Dis-Chem achieved its growth through a series of acquisitions, including TLC Pharmacy, CJ Distribution, Quenets, and Baby City.

As part of its growth strategy, the company also acquired Kaelo, Healthforce, Medicare, and Columbia Falls Properties.

Through these acquisitions, Dis-Chem significantly expanded its operations. It also invested significant resources into distribution centres.

Clicks versus Dis-Chem results

Clicks reported strong results for its 2024 financial year, and now the retailer plans to open up to 50 new stores and 50 new pharmacies in 2025.

Group turnover increased by 9.2% to R45.4 billion. Retail turnover, which includes Clicks, GNC, The Body Shop and Sorbet corporate stores, increased by 11.7%.

Comparable store turnover grew by 8.4%, with inflation of 6.3% and volume growth of 2.1%.

The company’s profit for the year grew by 11.8% to R2.84 billion, while headline earnings grew by 11.9% to R2.8 billion.

Dis-Chem’s interim results for the six months through August 2024 revealed decent results for the retailer.

Its total income grew by 10.4% to R6.01 billion, up from R5.44 billion the year before. Retail revenue grew by 7.1% to R16.7 billion.

During the six months to 31 August 2024, Dis-Chem opened a net 6 retail pharmacy stores, resulting in 274 retail pharmacy stores and 53 retail baby stores as of 31 August 2024.

Clicks has been the dominant player in the retail pharmacy space, consistently generating greater revenue than Dis-Chem.

From 2016 to 2021, Clicks increased its market share lead and revenue lead from around R7.8 billion to just below R9 billion.

However, since 2021, Dis-Chem has made strides in reducing Clicks’ lead, bringing the annual revenue differential down to R7.4 billion.

Dis-Chem achieved this by implementing a more aggressive acquisition strategy than Clicks.

By acquiring many other businesses, companies can expand their operations and more quickly generate additional revenue.

Since 2021, Dis-Chem has made many acquisitions. The most notable is the acquisition of Baby City and Medicare and a 25% stake in Kaelo.

Dis-Chem also acquired many small independent pharmacies and invested a lot in opening more Medicare and Baby stores.

On top of this, Dis-Chem also invested a lot in acquiring distribution centres and property management companies.

In 2022, Dis-Chem acquired 3 distribution centres for a combined amount of R216.9 million. In 2023, it acquired a 63,000 m2 distribution centre for R502 million.

Dis-Chem is also purchasing a property company for R479 million in which Ivan, Lynette and Sual Saltzman have financial interests.

Dis-Chem also announced that it was investing R156 million in acquiring OneSpark an AI life insurance company in which Ivan and Saul Saltzman had financial interests. At the time, OneSpark was generating a loss before tax of R25 million.

Companies can quickly expand their operations by implementing an acquisition expansion plan. However, debt is always something to be wary of.

Many of these acquisitions required significant debt financing, which is reflected in Dis-Chem’s financials.

Its interest-bearing debt has increased significantly over the past few years to well over R2 billion, excluding lease liabilities.

Conversely, Clicks’ results indicated that the group had no interest-bearing debt apart from its lease liabilities.

Clicks follows an approach of organic expansion, not using debt to acquire new companies but only cash generated within the group.

This caused Clicks to grow its revenue less aggressively over the past 3 years compared to Dis-Chem. However, it has done so by being much more profitable.

Although Clicks has more than twice Dis-Chem’s market cap, it pays only around half of what Dis-Chem does to service its debt.

The debt that Clicks pays is primarily on lease liabilities and not debt financing.

This results in Clicks having a significantly greater net profit margin than Dis-Chem. It is more efficient in its cost management and turns revenue into profit.

This causes Clicks’ revenue to be priced much higher than Dis-Chem’s, at a price-to-sales ratio of around 2 times compared to Dis-Chem’s 0.9 times.

Despite Dis-Chem’s stronger revenue growth over the past few years, it has not been able to convert its growth into profit growth.

Since Dis-Chem listed, it has maintained an average net profit growth of 11%, while Clicks averaged 13%.

This also results in Clicks’ earnings being valued more than Dis-Chem’s, as seen in Clicks’ P/E ratio of 34 compared to Dis-Chem’s 32.