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We take a look at the full year result of listed pharmaceutical and personal goods retailer Dis-chem (DCP) for the year ended 28 February 2019. Dis-chem is one of the JSE's newer listings and is in direct competition with bigger rival Clicks (CLS).
They both operate in a space for which there will always be a demand, as consumers will always continue to by personal care items as well as medication regardless of economic circumstances. But there is a strong retail component in their sales which might affect earnings when the economy is struggling or slowing down. |
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23 April 2020: Breaking news on Dis-chem. Dis-chem charged with inflating prices during Covid-19
Latest news on Dis-Chem is that the group looked to pocket a little extra by inflating various prices during the Covid-19 pandemic and the nationwide lockdown. The article below discusses it in detail as obtained from EWN.
JOHANNESBURG - Dis-Chem Pharmacies Limited has on Thursday been charged for inflating prices during the COVID-19 national lockdown. The Competition Commission has found Dis-Chem guilty of excessive pricing on essential hygienic goods to the detriment of customers and consumers in contravention of the Competition Act. The essential items include several types of surgical face masks.
Commissioner Tembinkosi Bonakele said: “People who sell these essential products ought to appreciate that these are literally life saving items right now. They shouldn’t be exploitative and take advantage of cash strapped consumers during the worst time in our history. We will spare no effort in protecting the consumer.” The Competition Commission said it launched the investigation after it received complaints from the public against several retail stores owned by Dis-Chem for taking part in excessive pricing of face masks, specifically dusk and surgical masks.
"These essential items are surgical face masks blue 50PC, surgical face masks 5PC and surgical face masks folio dress blue. From at least 28 March 2020, the Commission received several complaints from the public against several retail stores owned by Dis-Chem for engaging in excessive pricing of face masks, specifically dusk and surgical masks," the commission said in a statement. According to the commission, Dis-Chem inflated their surgical face mask blue 50PC, from R43.47 (excl VAT) per unit (50 masks) in February 2020 to R156.95 (excl VAT) per unit (50 masks) in March 2020, a price increase of 261%. The surgical face masks 5PC, the average price increased from R13.27 (excl VAT) per unit (5 masks) in February 2020 to R19.03 (excl VAT) per unit (5 masks) in March 2020, a price increase of 43%.
The full article can be found here
JOHANNESBURG - Dis-Chem Pharmacies Limited has on Thursday been charged for inflating prices during the COVID-19 national lockdown. The Competition Commission has found Dis-Chem guilty of excessive pricing on essential hygienic goods to the detriment of customers and consumers in contravention of the Competition Act. The essential items include several types of surgical face masks.
Commissioner Tembinkosi Bonakele said: “People who sell these essential products ought to appreciate that these are literally life saving items right now. They shouldn’t be exploitative and take advantage of cash strapped consumers during the worst time in our history. We will spare no effort in protecting the consumer.” The Competition Commission said it launched the investigation after it received complaints from the public against several retail stores owned by Dis-Chem for taking part in excessive pricing of face masks, specifically dusk and surgical masks.
"These essential items are surgical face masks blue 50PC, surgical face masks 5PC and surgical face masks folio dress blue. From at least 28 March 2020, the Commission received several complaints from the public against several retail stores owned by Dis-Chem for engaging in excessive pricing of face masks, specifically dusk and surgical masks," the commission said in a statement. According to the commission, Dis-Chem inflated their surgical face mask blue 50PC, from R43.47 (excl VAT) per unit (50 masks) in February 2020 to R156.95 (excl VAT) per unit (50 masks) in March 2020, a price increase of 261%. The surgical face masks 5PC, the average price increased from R13.27 (excl VAT) per unit (5 masks) in February 2020 to R19.03 (excl VAT) per unit (5 masks) in March 2020, a price increase of 43%.
The full article can be found here
Below we cover Dis-Chem's financial results as written on 16 May 2019
Background on Dis-chem
The following regarding Dis-chem was obtained from the website and their latest annual report
"We are a leading pharmacy group in South Africa. Our “Pharmacy First” approach, means that our customers can always depend on there being a pharmacist to serve their pharmaceutical needs whenever they enter a Dis-Chem store."
The Group employs more than 13 500 full-time and part-time employees. In November 2016, the Group listed 27.5% of its issued share capital on the Johannesburg Stock Exchange (JSE). This was the second largest initial public offering (IPO) on the exchange.
Retail
The Group’s “Pharmacy First” approach guarantees that its customers can always depend on there being a pharmacist to assist with their pharmaceutical needs whenever they enter a Dis-Chem store. In addition to the Group’s pharmaceutical products and services offering i.e. its Dispensary category, its retail front shop has Personal Care and Beauty, Healthcare and Nutrition, Baby Care and other offerings. Other offerings include confectionary, household goods and ancillary services such as clinics, and hair and beauty salons. As at 3 June 2017, the group traded from 115 stores, including 3 in Namibia, and more than 200 clinics. It has a wide range and assortment of front shop products with over 60 000 SKUs creating a competitive advantage for the group.
E-Commerce
The group launched its online platform in 2013 and even though online shopping is still a very small part of Dis-Chem’s operations, it is growing rapidly. The Click and Collect service has proven to be a success and is being provided in all stores.
Wholesale
Dis-Chem entered the wholesale market in 2013 when it acquired a controlling stake in CJ Distribution to service its own stores as well as third parties.Over time, Dis-Chem intends to expand its wholesale business into the distribution business whereby it would service both the wholesalers and retailers.
"We are a leading pharmacy group in South Africa. Our “Pharmacy First” approach, means that our customers can always depend on there being a pharmacist to serve their pharmaceutical needs whenever they enter a Dis-Chem store."
The Group employs more than 13 500 full-time and part-time employees. In November 2016, the Group listed 27.5% of its issued share capital on the Johannesburg Stock Exchange (JSE). This was the second largest initial public offering (IPO) on the exchange.
Retail
The Group’s “Pharmacy First” approach guarantees that its customers can always depend on there being a pharmacist to assist with their pharmaceutical needs whenever they enter a Dis-Chem store. In addition to the Group’s pharmaceutical products and services offering i.e. its Dispensary category, its retail front shop has Personal Care and Beauty, Healthcare and Nutrition, Baby Care and other offerings. Other offerings include confectionary, household goods and ancillary services such as clinics, and hair and beauty salons. As at 3 June 2017, the group traded from 115 stores, including 3 in Namibia, and more than 200 clinics. It has a wide range and assortment of front shop products with over 60 000 SKUs creating a competitive advantage for the group.
E-Commerce
The group launched its online platform in 2013 and even though online shopping is still a very small part of Dis-Chem’s operations, it is growing rapidly. The Click and Collect service has proven to be a success and is being provided in all stores.
Wholesale
Dis-Chem entered the wholesale market in 2013 when it acquired a controlling stake in CJ Distribution to service its own stores as well as third parties.Over time, Dis-Chem intends to expand its wholesale business into the distribution business whereby it would service both the wholesalers and retailers.
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Financial Results overview
Now for some of the financial numbers we are interested in:
- Revenue: R21.420 billion up 10% from R19.479billion
- Profit before tax: R1.05billion up 9.4% from R964million in prior period
- Earnings per share: 85.4c up 5.52% from 79.6c per share in the prior period
- Cash and equivalents: R177million down from R279 million in prior period
- Cash generated per share: 39c per share
- Cash on hand per share: 20c per share (or 0.76% of current share price)
- Net asset value per share (NAV): R2.44
- Price/NAV: 10.9 times its book value
- PE ratio: 31
- Dividend yield: 1%
- Tobins Q: 2.6 (where ratios of higher than one states the firms total worth is worth more than the replacement value of all its assets). Essentially Dis-chem is trading at 2.6 times the total value of all of its assets.
Management commentary on the results
Commentary on the financial results by Dis-chem:
Overview
Despite a tough economic environment and prolonged industrial action, which affected close to a third of the financial year, the Dis-Chem Group reports positive results with improved market shares across all of its core categories and continues to produce attractive returns to shareholders.
Earnings attributable to shareholders and headline earnings both grew by 7.4% over the corresponding period in the prior year ("corresponding period"). Earnings per share and headline earnings per share are both 85.4 cents per share, an increase of 7.4%.
Chief executive, Ivan Saltzman: "It is pleasing to continue to see market share gains across all of our core categories. With constrained consumers continually searching for value offerings we believe that these market share gains are driven by our everyday low price strategy coupled with aggressive promotional activity, our trusted in-store service and the availability of choice for our consumers, while we continue to focus on private label and exclusive brands.
Our store roll-out plan of adding more than 20 stores annually continues to remain on track. We are increasingly pleased with the performance of our new stores, across all formats, as we enter new markets and grow our share in existing markets. Considering the consolidation theme playing out in the retail pharmacy industry, space growth using the appropriate store format remains and will continue to remain a fundamental driver of Group growth.
We acknowledge the importance of driving volume growth and managing costs in our mature space, ensuring that we maintain and improve our retail operating margins. We continue to focus on driving dispensary volumes, the core of our business. Recently this has been evidenced by our investment in an adherence management technology business focused on driving chronic volumes - chronic volumes currently represent 50% of our dispensary business. Coupled with this, leveraging our loyalty partnerships and finding ways to better commercialise our extensive loyalty data will assist in growing volumes and share in all of our spaces.
Unfortunately, the industrial action which began mid-November last year heavily impacted the Group's performance in the current financial period. The demands by the union were unreasonable considering the economic climate and the nature of the industry in which we operate. We are pleased that the industrial action has been concluded and our focus is now on continuing to develop a productive employer/employee relationship, improving wholesale productivity levels and cost efficiency, as well as optimising the levels of stock holding in the Group which the industrial action necessitated."
Retail
Retail revenue grew by 9.7% to R19.6 billion with comparable store revenue at 3.4% and selling price inflation of only 1.16%. Comparable store revenue and selling price inflation were negatively impacted by the 1.26% SEP increase effective 1 March 2018, as well as competitive pricing across the personal care and baby categories. Total dispensary revenue growth was 9.4% lagging the average front shop revenue growth of 11.2%. We expect some relief in the coming financial year from the most recently gazetted SEP increase of 3.78%. In the current period, the Group opened 20 new stores, including flagship stores in Sandton, Eastgate and Gateway as well as our first store in Botswana, resulting in 149 stores at February 2019. New stores added in the period under review contributed R647 million to revenue. The 21 new stores that were opened in the prior period contributed R1.4 billion to current period revenue. The brand's position in a deteriorating consumer spending environment, the maturing of our store base and the addition of new stores, supported by the Micorpopz! Campaign, partially offset the industrial action challenges that we saw in the last four months of the financial year.
Wholesale
Wholesale revenue grew by 11.2% to R14.5 billion. Revenue to our own retail stores, still the biggest contributor to wholesale sales grew by 11% as we achieved 80% internal supply. Wholesale sales to external customers - The Local Choice ("TLC'') and independent pharmacies - grew by 12.9% primarily as a result of the Quenets acquisition on 1 November 2018. The increase in external customer growth was despite our primary external customer facility, Delmas, being significantly impacted by the industrial action resulting in lower than anticipated sales over the strike period. Delmas reported external sales growth of negative 0.58% over the period of the industrial action compared to the 5.1% wholesale external growth reported in the first half of the financial year.
Overview
Despite a tough economic environment and prolonged industrial action, which affected close to a third of the financial year, the Dis-Chem Group reports positive results with improved market shares across all of its core categories and continues to produce attractive returns to shareholders.
Earnings attributable to shareholders and headline earnings both grew by 7.4% over the corresponding period in the prior year ("corresponding period"). Earnings per share and headline earnings per share are both 85.4 cents per share, an increase of 7.4%.
Chief executive, Ivan Saltzman: "It is pleasing to continue to see market share gains across all of our core categories. With constrained consumers continually searching for value offerings we believe that these market share gains are driven by our everyday low price strategy coupled with aggressive promotional activity, our trusted in-store service and the availability of choice for our consumers, while we continue to focus on private label and exclusive brands.
Our store roll-out plan of adding more than 20 stores annually continues to remain on track. We are increasingly pleased with the performance of our new stores, across all formats, as we enter new markets and grow our share in existing markets. Considering the consolidation theme playing out in the retail pharmacy industry, space growth using the appropriate store format remains and will continue to remain a fundamental driver of Group growth.
We acknowledge the importance of driving volume growth and managing costs in our mature space, ensuring that we maintain and improve our retail operating margins. We continue to focus on driving dispensary volumes, the core of our business. Recently this has been evidenced by our investment in an adherence management technology business focused on driving chronic volumes - chronic volumes currently represent 50% of our dispensary business. Coupled with this, leveraging our loyalty partnerships and finding ways to better commercialise our extensive loyalty data will assist in growing volumes and share in all of our spaces.
Unfortunately, the industrial action which began mid-November last year heavily impacted the Group's performance in the current financial period. The demands by the union were unreasonable considering the economic climate and the nature of the industry in which we operate. We are pleased that the industrial action has been concluded and our focus is now on continuing to develop a productive employer/employee relationship, improving wholesale productivity levels and cost efficiency, as well as optimising the levels of stock holding in the Group which the industrial action necessitated."
Retail
Retail revenue grew by 9.7% to R19.6 billion with comparable store revenue at 3.4% and selling price inflation of only 1.16%. Comparable store revenue and selling price inflation were negatively impacted by the 1.26% SEP increase effective 1 March 2018, as well as competitive pricing across the personal care and baby categories. Total dispensary revenue growth was 9.4% lagging the average front shop revenue growth of 11.2%. We expect some relief in the coming financial year from the most recently gazetted SEP increase of 3.78%. In the current period, the Group opened 20 new stores, including flagship stores in Sandton, Eastgate and Gateway as well as our first store in Botswana, resulting in 149 stores at February 2019. New stores added in the period under review contributed R647 million to revenue. The 21 new stores that were opened in the prior period contributed R1.4 billion to current period revenue. The brand's position in a deteriorating consumer spending environment, the maturing of our store base and the addition of new stores, supported by the Micorpopz! Campaign, partially offset the industrial action challenges that we saw in the last four months of the financial year.
Wholesale
Wholesale revenue grew by 11.2% to R14.5 billion. Revenue to our own retail stores, still the biggest contributor to wholesale sales grew by 11% as we achieved 80% internal supply. Wholesale sales to external customers - The Local Choice ("TLC'') and independent pharmacies - grew by 12.9% primarily as a result of the Quenets acquisition on 1 November 2018. The increase in external customer growth was despite our primary external customer facility, Delmas, being significantly impacted by the industrial action resulting in lower than anticipated sales over the strike period. Delmas reported external sales growth of negative 0.58% over the period of the industrial action compared to the 5.1% wholesale external growth reported in the first half of the financial year.
Industrial action as Dis-chem
Industrial Action Summary
Background
The Group was the target of a national strike by a group of employees belonging to the National Union of Public Service and Allied Workers (NUPSAW) that started on the 16th of November 2018 and concluded on the 10th of April 2019. Two thousand three hundred (2 300) employees, the majority from our wholesale operations, were part of the protected strike. At the start of the industrial action, less than 13% of our employees were registered as NUPSAW members.
Demands
The union's demands included a minimum wage of R12 500 across the board, an annual increase of 12.5% (guaranteed for the next three years) for all employees and a guaranteed annual bonus. In addition, post discussions with The Commission for Conciliation, Mediation and Arbitration (CCMA), an additional demand was made to take back all employees that had transgressed picketing rules, had damaged company property and/or attacked fellow employees and damaged their possessions.
Conclusion
The industrial action came to an end on the 10th of April 2019 with NUPSAW withdrawing all demands and employees returning to work. The following provisions were agreed to as part of the conclusion of the industrial action:
- Employees that had not returned to work within three working days of the conclusion of the strike were deemed to have permanently abandoned their employment;
- NUPSAW agreed that they will only be entitled to engage in collective bargaining once the threshold of 50% plus 1 member in the workplace has been met; this was included in the original organisational rights agreement signed by Dis-Chem and NUPSAW in January 2018.
- Any future disputes between Dis-Chem and NUPSAW as to NUPSAW's membership within the workplace will require verification. The verification will be conducted on an open and transparent basis through the CCMA;
- Dis-Chem agreed to pay pro rata bonuses to all eligible employees who were not paid their bonus for the year ending 2018. From 2019 onwards, the bonus policy will no longer apply a forfeiture of the bonus payment in relation to those employees who have valid final written warnings on file; and
- Dis-Chem retained and reserved all of its rights in law to take disciplinary action for misconduct committed during the strike, as well as Dis-Chem's rights in relation to the cost orders granted in Dis-Chem's favour by the Labour Court.
Financial Consequence
The industrial action that affected the Group for close to a third of the financial year, had both a direct and indirect impact on the financial performance of the Group. R50.4 million of additional direct costs were incurred, the primary contributing costs include:
- Increased investment in security at all our distribution centres, our head office and certain targeted stores to ensure our consumers, our employees and our assets were protected;
- Employment and training of temporary staff in our distribution centres to fill the void in the wholesale segment left by striking employees;
- Relocating head office staff to other premises to ensure their safety;
- Inability to invoice logistic fees as certain suppliers had to deliver inventory straight to stores and not through our distribution centres; and
- Related legal costs incurred. Indirect costs were estimated between R22.3 million and R26 million.
In December, which was the most impacted trading month, retail revenue growth was only 6.2% with comparable store revenue of negative 2.5%, which was well below our expectations. Although contingency plans were in place to ensure minimal disruption at our retail stores, we experienced lost opportunity sales primarily due to stock supply challenges.
This was further supported by the fact that we reported our lowest market share gains of the financial year in the month of December. In addition, our primary external customer facility in Delmas was significantly impacted over the period of the industrial action reporting growth of negative 0.58% compared to wholesale external growth of 5.1% reported in the first half of the financial year.
Background
The Group was the target of a national strike by a group of employees belonging to the National Union of Public Service and Allied Workers (NUPSAW) that started on the 16th of November 2018 and concluded on the 10th of April 2019. Two thousand three hundred (2 300) employees, the majority from our wholesale operations, were part of the protected strike. At the start of the industrial action, less than 13% of our employees were registered as NUPSAW members.
Demands
The union's demands included a minimum wage of R12 500 across the board, an annual increase of 12.5% (guaranteed for the next three years) for all employees and a guaranteed annual bonus. In addition, post discussions with The Commission for Conciliation, Mediation and Arbitration (CCMA), an additional demand was made to take back all employees that had transgressed picketing rules, had damaged company property and/or attacked fellow employees and damaged their possessions.
Conclusion
The industrial action came to an end on the 10th of April 2019 with NUPSAW withdrawing all demands and employees returning to work. The following provisions were agreed to as part of the conclusion of the industrial action:
- Employees that had not returned to work within three working days of the conclusion of the strike were deemed to have permanently abandoned their employment;
- NUPSAW agreed that they will only be entitled to engage in collective bargaining once the threshold of 50% plus 1 member in the workplace has been met; this was included in the original organisational rights agreement signed by Dis-Chem and NUPSAW in January 2018.
- Any future disputes between Dis-Chem and NUPSAW as to NUPSAW's membership within the workplace will require verification. The verification will be conducted on an open and transparent basis through the CCMA;
- Dis-Chem agreed to pay pro rata bonuses to all eligible employees who were not paid their bonus for the year ending 2018. From 2019 onwards, the bonus policy will no longer apply a forfeiture of the bonus payment in relation to those employees who have valid final written warnings on file; and
- Dis-Chem retained and reserved all of its rights in law to take disciplinary action for misconduct committed during the strike, as well as Dis-Chem's rights in relation to the cost orders granted in Dis-Chem's favour by the Labour Court.
Financial Consequence
The industrial action that affected the Group for close to a third of the financial year, had both a direct and indirect impact on the financial performance of the Group. R50.4 million of additional direct costs were incurred, the primary contributing costs include:
- Increased investment in security at all our distribution centres, our head office and certain targeted stores to ensure our consumers, our employees and our assets were protected;
- Employment and training of temporary staff in our distribution centres to fill the void in the wholesale segment left by striking employees;
- Relocating head office staff to other premises to ensure their safety;
- Inability to invoice logistic fees as certain suppliers had to deliver inventory straight to stores and not through our distribution centres; and
- Related legal costs incurred. Indirect costs were estimated between R22.3 million and R26 million.
In December, which was the most impacted trading month, retail revenue growth was only 6.2% with comparable store revenue of negative 2.5%, which was well below our expectations. Although contingency plans were in place to ensure minimal disruption at our retail stores, we experienced lost opportunity sales primarily due to stock supply challenges.
This was further supported by the fact that we reported our lowest market share gains of the financial year in the month of December. In addition, our primary external customer facility in Delmas was significantly impacted over the period of the industrial action reporting growth of negative 0.58% compared to wholesale external growth of 5.1% reported in the first half of the financial year.
Outlook
For the 10 weeks to 10 May 2019, Group revenue grew by 12% from the prior comparable period. The Group expects that the consumer will continue to remain constrained as a result of the current macroeconomic environment. As was the case previously, the resilient markets in which the Group operates together with the brand positioning will offer a certain amount of protection against the weak environment and the Group is well positioned to benefit from additional consumer disposable income. The Group remains focused on adding retail stores. Five stores have been added since the financial year end and an additional 17 store openings are planned through to February 2020.
For the 10 weeks to 10 May 2019, Group revenue grew by 12% from the prior comparable period. The Group expects that the consumer will continue to remain constrained as a result of the current macroeconomic environment. As was the case previously, the resilient markets in which the Group operates together with the brand positioning will offer a certain amount of protection against the weak environment and the Group is well positioned to benefit from additional consumer disposable income. The Group remains focused on adding retail stores. Five stores have been added since the financial year end and an additional 17 store openings are planned through to February 2020.
Dis-chem share price performance
The image below (taken from Sharenet) shows the share price performance of Dis-chem over the last 3 years, as well as the returns offered by the group's shares over various time periods. The summary below shows the returns made on Dis-chem shares over various time periods.
- 1 week: -1.92%
- 1 month: 3.38%
- Year to date (YTD): -5%
- 1 year: 13.35%
Dis-chem (DCP) stock valuation
We do believe that either Dis-chem or Clicks is a must have in any long term portfolio. Clicks is the more diversified group, with them owning The BodyShop and Musica, while Dis-chem is the smaller more pharmacy focused entity. Investors will have to decide which one of the two they like more, but we dont recommend holding both in a long term portfolio due to the large overlap in the businesses.
Looking at their financial results, their cash generation, cash on balance sheet, their net asset value, the impact of the industrial action on the group etc, we value them at R23.00 currently. They at current prices we feel that DCP could show short to medium term losses if investors were to buy at their current price.
Looking at their financial results, their cash generation, cash on balance sheet, their net asset value, the impact of the industrial action on the group etc, we value them at R23.00 currently. They at current prices we feel that DCP could show short to medium term losses if investors were to buy at their current price.