Health and beauty retailer New Clicks Holdings is confident that its model for including pharmacy dispensaries and related health services across its Clicks chain of stores will prove profitable, even if the current regulations fixing dispensing fees and establishing single exit prices for medicines prove to be permanent, according to group leader Trevor Honneysett.
Honneysett was speaking to I-Net Bridge following the release of the group’s annual results, where it reported a 12,7% rise in its fully diluted headline earnings per share from continuing operations for the year to August 31 2004, to 68,3 cents from 60,6 cents a year earlier.
The company declared a final dividend of 22,5 cents, up from 15,1 cents in 2003.
New Clicks owns such brands as health and beauty chains Clicks and Discom, The Body Shop, music chains Musica and CD Wherehouse, pharmaceutical distributor UPD and pharmacy chains Link, LinkMax and Purchase Milton and Associates (PM&A).
The group is in the process of rolling out pharmacy dispensary services in its Clicks stores and converting its PM&A pharmacies to Clicks-branded pharmacies.
During the second half of the year, the group was able to convert 21 of its PM&A pharmacies to the Clicks brand, Honneysett said. Three of these included the transfer of dispensaries, previously in shopping-mall-based PM&A stores, to large-format Clicks stores in the same mall.
Results from these three stores for the three months of June, July and August showed they had been able to improve their bottom lines by an average of 90%, Honneysett revealed. This was due to a combination of several factors, including an average 20% improvement in sales at the Clicks stores, due to the leverage effect of including the dispensaries; a significant fall in costs resulting from the move from a small, high-overhead operation to the lower costs incurred by a large-scale operation such as Clicks; and a reduction in rental costs.
These factors more than made up for the large drop in gross profits at the pharmacies due to the legislation, Honneysett said.
“These results reaffirm that Clicks is the best-placed to be able to bolt on dispensaries in this legislative environment,” he said.
“Although margins across the entire industry have been hit by the lower dispensing fees and single exit pricing, our model reduces costs and boosts sales volumes, more than making up for the fall in margins and making it a profitable operation. It is very exciting for us.”
He added that the group has now received government approval for the transfer of all of the existing PM&A pharmacy licenses to New Clicks (about 80 in total). Another 20 license applications are pending approval from the Department of Health. Plans are to submit more applications for licenses in the near future.
The South African government’s introduction in August of a dispensing fee for pharmacies, set at 26% for medicines costing less than R100 and R26 for medicines costing more than R100, effectively lowered the pharmacy industry’s gross profit margins from an average of 29% to 16%, or sometimes less (if a pharmacy has a much higher proportion of sales of more than R100).
This resulted in a 44% fall in the industry’s average gross profit margin.
In some cases, pharmacies are finding it difficult to survive, given their higher costs and inability to boost sales volumes to compensate for this fall in margins.
New Clicks has joined with the Pharmaceutical Society of South Africa and other independent pharmacists to contest the regulations in court.
They lost the first round of the battle, with the Cape High Court ruling in a split decision in August in favour of the government to uphold the current regulations.
However, they opted to appeal the decision, and on September 20 the High Court reserved judgement on that appeal, with no date yet set for a hearing of the appeal case.
As a result of this ongoing uncertainty surrounding the regulations, New Clicks was obliged to write off R258,2-million in goodwill associated with its acquisition of PM&A. This, plus other impairments on property, plant and equipment of R13,5-million, led to the group’s net profit before tax falling to R61,7-million from R268,4-million a year earlier, a decline of 77%.
Still looking ahead, Honneysett was upbeat about the prospects for the new year, as Clicks rolls out more pharmacy dispensaries in its Clicks stores and converts further PM&A pharmacies to the Clicks brand. For the first seven weeks of the new year, sales at Clicks had grown 11% versus the previous year.
The outlook for its other retail brands is encouraging, Honneysett added, with improved performances expected from Discom, the entertainment division and The Body Shop. — I-Net Bridge