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chairman’s statement


A consistent theme in my reports to shareholders over the past three years has been that New Clicks is a business in transition. The transition has continued in the 2006 financial year. Overall, the group has continued to make steady progress in its turnaround towards sustainable performance. Headline earnings increased by 25.5% to R251.6 million, with diluted headline earnings per share growing by 23.7% to 71 cents per share.


David Nurek
Independent non-executive
chairman

“Thanks largely to the efforts of the new management team, New Clicks enters the 2007 financial year in a much improved financial and operational state.”

The decisive action taken by the new management team in Clicks over the past 12 months has seen the business turn the corner and produce improved turnover growth and profitability. In the other businesses, Discom posted a strong growth in operating profit, Musica delivered good sales growth but disappointed at the profit level, The Body Shop made a strong comeback in the second half and UPD once again produced outstanding results.

A major part of the transition in Clicks has been its evolution into a health and beauty-focused drugstore. Clicks has grown into the largest retail pharmacy network in the country in little over two years, with more in-store dispensaries than all other retail corporates combined. We now have empirical evidence that our business model is working, evidenced by the strong front shop performance from stores where we have introduced dispensaries.

The legislative uncertainty around medicine pricing has now been resolved. We believe the new four-tiered pricing structure introduced by the Department of Health meets the accessibility and affordability objectives of the National Drug Policy.

Clicks has developed a positive and constructive relationship with the health authorities this year and we look forward to our continued engagement.

Discom is beginning to realise its potential as a health, beauty and lifestyle retailer for the lower to middle-income groups. The positioning and offering of this business are now clear, and we need to adopt a low-cost operating model which will enable us to strengthen the value proposition to our price-conscious target market.

Musica’s transition from a pure music business into a broader entertainment retailer continues to gain momentum. Non-music merchandise such as DVD, gaming and lifestyle products now account for over one-third of total sales.

Increased focus has now been brought to the Musica brand with the introduction of the Musica Megastore concept and the conversion of our four CD Wherehouse stores to this new format.

The Body Shop recovered after a slow start to the year, boosted by improved operational management and the introduction of the loyalty programme from The Body Shop International.

UPD has successfully adapted to a high volume, lower margin business model in the single exit pricing environment by attracting increased sales, including two large private hospital supply contracts in the past year. Sales to Clicks have also increased strongly and now account for 15% of UPD’s turnover, reflecting the benefit of operating an end-to-end distribution supply chain within the group.

The transition to the new enterprise-wide systems platform at the start of the financial year has been challenging as the business adapted to the new processes. The systems implementation is covered in detail in other reports but we are encouraged by the initial benefits that have started flowing from these systems and look forward to realising the full benefits over the next two to three years.

A detailed analysis of the financial performance is contained in the Chief Financial Officer’s Report.

Board and management

Chief executive officer, Trevor Honneysett, elected to take early retirement in January this year and stepped down after 18 years at the helm. Trevor dedicated his entire career to the group and we wish him continued good health in retirement.

David Kneale, an accomplished international retailer who joined the group at the beginning of 2006 from Boots Group, was promoted to chief executive officer. David and his group executive team have brought increased focus, clarity and, most importantly, a renewed sense of energy to the business.

During the year the board of directors was restructured and strengthened to enhance the board’s expertise in professional pharmacy and retailing, as well as recognising the role of the senior executives in leading the group.

Professor Peter Eagles and Martin Rosen were appointed as non-executive directors, while David Kneale, Keith Warburton (chief financial officer) and Michael Harvey (managing director of Clicks) were appointed as executive directors. Professor Eagles is one of the country’s leading academic pharmacists and is the president of the South African Pharmacy Council and chairperson of the Medicines Control Council. Martin is an experienced retailer and marketer and served the Pick ’n Pay group with distinction for 33 years. The new non-executive directors are engaging well with management and adding value to the debate at board level.

Non-executive directors Dr Allen Zimbler and Peter Swartz resigned during the year. Subsequent to the year-end, Roy Smither was appointed as an independent non-executive director.

The board now consists of seven non-executive directors and three executive directors, with eight of the directors having been appointed in the last three years.

We believe the group has a well-balanced board with a range of complementary skills, together with an appropriate balance between executive and non-executive directors. Regrettably, our longest-serving director, Eliot Osrin, has decided not to make himself available for re-election at the forthcoming annual general meeting. Eliot has been involved with Clicks since 1968 when the “group” consisted of two stores. Over the years, the business has benefited enormously from his guidance, insights and uncanny intuition. We will certainly miss him and wish him well in his retirement.

Corporate governance

The group’s governance structures and processes are regularly reviewed to take account of changes within the group and best practices in the corporate governance arena.

During the year we formed a board Transformation committee which has been mandated to accelerate the pace of internal transformation and develop an all-encompassing empowerment strategy.

Outlook

Thanks largely to the efforts of the new management team, New Clicks enters the 2007 financial year in a much improved financial and operational state, although we acknowledge that the task of restoring the group to its former heights has only just begun. Operational challenges have been identified and are being addressed, employee reward systems are now more closely aligned with performance and the creation of shareholder value, and there is greater certainty around pharmacy pricing regulations.

Consumers are coming under increasing pressure following the 150 basis points increase in interest rates between June and October this year, and economists are predicting that this upward trend is likely to continue. However, the retail brands in our stable are not particularly interest rate sensitive and our product offering is mostly non-cyclical. While the rate of growth may slow down in the year ahead, we do not anticipate that this issue will have a major impact on any of our businesses.

Thanks

Our customers are the very lifeblood of our business and we thank them for supporting us in increasing numbers. Thank you to our shareholders – and welcome to those who invested in New Clicks for the first time this year – as well as suppliers, industry regulators, media, business associates and advisers.

In closing, thank you to my board colleagues, chief executive officer David Kneale and the senior management team for the leadership of the group over the past year. After a few challenging years, the staff of New Clicks are starting to reap the benefits of their hard work and commitment, and I thank you all for a job well done.



David Nurek
Independent non-executive chairman