“We are confident of achieving our medium-term ROE target of 30% in the 2008 financial year.”

chief executive's report

A year of strong growth

It is pleasing to report to shareholders on a year which was characterised by strong organic growth, considerably improved working capital management and cash generation, and resultant value enhancement for our shareholders.

Turnover for the year grew by 12.0%, with retail turnover up 13.1%. As inflation for the period was only 2.5% and store numbers remained static, this indicates real volume growth.
The group generated cash of over R1.3 billion from operations, an increase of R1 billion over the previous year, and deployed R558 million in repurchasing shares.
Shareholder value has been enhanced with a 45.2% increase in total distributions for the year to 48.2 cents per share.

Drivers of performance

At the time of the appointment of the new executive team in 2006 we identified four short-term priorities to address the barriers to success. These were setting clear targets, outlining clear accountabilities, making the business simpler and getting the basics right.

These short-term priorities have been the drivers of our improved trading, operational and financial performance in the past year. Over time these priorities need to be entrenched within the values by which we manage our business.

By getting the basics right we reduced inventory levels over the past year by 2.8%, despite the 12.0% growth in turnover, while inventory measured by days in stock improved from 66 to 57 days.

Discom, the ethnic beauty and hair care retailer, was sold to the Edcon Group and this has brought increased focus and simplicity to the group.

We recognise that our core expertise is in meeting the needs of middle and upper income customers in health, beauty, home and entertainment retailing. Discom serves a different customer profile to Clicks, Musica and The Body Shop and its customer base will be better served by a company which has a stronger focus on Discom’s target market.

The sale will enable the group to extract further operational efficiencies and create additional capacity in our distribution centres where we were facing the likelihood of further investment to manage increasing volumes.

Our retail brands are all now focused on middle and upper income customers.

Performance management systems have been introduced to drive accountability and measure delivery against clearly defined targets.

The management talent in the group has also been enhanced through several mainly external senior appointments in Clicks, UPD, Musica and our central Group Services departments, including the appointment of Ralph Lorenz as managing director of Musica.

Progress towards our goals

In last year’s annual report we outlined our three medium-term goals which would enable the group to deliver on its strategy. The group has made significant progress towards achieving these goals:

Delighting our customers: Our focus has been on better service, better products and better availability. We have spent time listening to our customers and undertaken more intensive customer research. Our product offering has been greatly enhanced with private label merchandise and we have improved product availability to our target level of 93% in Clicks and over 95% in our dispensaries. The in-store experience for customers is being continually upgraded in all three retail businesses and we have also introduced the Blueprint store renewal programme in Clicks. While notable successes have been achieved in each area, we have some way to go in our quest to deliver to world-class standards.
Motivated and competent people: Our people focus over the past year has been on the training and development of store staff, buyers and healthcare staff, particularly pharmacists and pharmacists’ assistants. Our employee wellness programme introduced during the year already has the highest utilisation rate in the retail sector. The group has also invested in improving labour relations and Clicks secured a two-year wage settlement with its representative trade union.
Improving return on equity (ROE): The group’s ROE improved from 14.2% in 2005 to 16.7% last year and reached 24.7% in 2007. We are confident of achieving our medium-term ROE target of 30% in the 2008 financial year, ahead of our original expectations.

More challenging environment

The trading environment is expected to become increasingly challenging in 2008, driven primarily by consumer sentiment as the effects of several interest rate increases take their toll on disposable income levels. While Clicks is a more defensive retailer than its credit-based peers and our products are mainly needs-based, we are by no means immune to a downturn in consumer spending and lower foot traffic through shopping malls.

Inflation is likely to remain at modest levels in 2008, mainly due to competitive pressure and pricing regulation within the group’s healthcare businesses.

Strategy and prospects

Operating in a tougher climate makes delivery on our strategy even more critical. Management believes the group’s strategy is working effectively and is confident the strategy will provide a sustainable competitive advantage. The group has clearly defined strategic priorities and plans to deliver the strategy, as outlined in the Chairman’s statement. These include implementing the Clicks Blueprint programme, the continued rollout of dispensaries, growing the private label offering, diversifying UPD’s revenue base and expanding the entertainment offering and store coverage of Musica. We are planning to grow total trading space by around 5% by opening 38 to 40 new stores across the retail businesses in the next year.

Against this background, along with the continued uncertainty over healthcare regulations relating to dispensing fees, benchmark pricing and logistics fees, the group will maintain an intense focus on operational execution to deliver improved performance. Getting the basics right is critical.

The group remains confident of delivering improvements in operating margin and continued cash generation in the year ahead and expects earnings to grow at a more normalised level off the higher base set in 2007.

Appreciation

2007 has been a year in which New Clicks has made great strides in its turnaround to sustainable performance. This was truly a team effort where people across all the businesses have made a valuable contribution.

I would like to thank our chairman, David Nurek, and my board colleagues for their continued guidance and counsel, and the group executive team for its leadership and support.

Our people in the stores across the country and at head office are starting to realise the fruits of their labours and becoming part of a winning team. Thank you for your commitment as we strive to make New Clicks the country’s specialist retailer of choice.

David Kneale
Chief executive officer