Dis-Chem acquiring a R502m distribution centre to launch store growth

Dis-Chem pharmacy store. Picture: Karen Sandison/African News Agency(ANA)

Dis-Chem pharmacy store. Picture: Karen Sandison/African News Agency(ANA)

Published May 22, 2023


Dis-Chem Pharmacies’ imminent acquisition of a 63 000 square metre distribution centre would add warehouse capacity for the group to double its store count and grow market share in the independent market, the group said Friday.

The group said in their annual results that it was in the final stages of entering into an agreement to acquire the distribution centre in Gauteng.

The share price on Friday fell by a sharp 7.9% to R22.00 on Friday afternoon. It later closed down 2.05% at R23.40 on the JSE>

The new distribution centre investment comes at a time when retail sales generally are flagging, with Statistics South Africa last week reporting that retail sales fell 1.6% in March year-on-year, 0.3% in February and 1.6% in January. Some economists have warned SA might slip into a recession this year.

“The rapid growth of the group has necessitated the need for additional warehouse capacity to service increased demand from both our own retail stores and the independent market. The warehouse will be debt funded.”

A new loan facility with Standard Bank of R455m would fund the acquisition of warehouse properties.

The group admits there are headwinds in its new financial year, as it expects the South African consumer will continue to face financial hardship, while load shedding related cost increases were also likely to negatively impact group earnings.

This was in spite of early investment in generator capacity that resulted in minimal disruption to the ability to trade in the past year, but the diesel expense increased by 65% to R91m over the period.

“The integration into the healthcare value chain is expected to reinforce the resilient nature of the current and future earnings profile,” the group’s directors said in the results.

Ivan Saltzman announced last week he was stepping down as CEO at the end of June, and that chief financial officer Rui Morais would succeed him. Saltzman (73), co-founded Dis-Chem with his wife Lynette in 1978 - she stepped down as an executive director last year. Ivan Saltzman would remain a board director and continue to serve as an executive management team member.

The group said Friday the succession implementation would ensure a “smooth leadership transition and executive management’s commitment to deliver on the group’s strategic ambitions over the long-term.”

Headline earnings per share increased by a sturdy 17.4% to 116.5 cents in the year to February 28, 2023, while revenue increased 7.4% to R32.7 billion.

The final dividend was 8.7% lower at 18.45 cents, but the total 2023 dividend was up 17.3% to 46.57 cents.

The group said the result was pleasing considering the abnormal shopping patterns after Covid-19 and the weak economy.

During the period, Dis-Chem said it had continued to increase its dispensary market share.

Thirteen retail pharmacy stores were opened to February 28, 8 were closed (all former Medicare stores) and 8 retail baby stores were opened. Twelve Baby Boom stores were acquired, resulting in 258 retail pharmacy stores and 54 retail baby stores at the end of February 2023.

Retail revenue grew 6.5% to R28.9bn with comparable store revenue at 3.3%. Retail revenue growth was impacted by Covid-19 vaccine and testing in the prior period compared to the current period and if this was excluded from both periods, retail revenue grew by 8.4%.

Wholesale revenue grew 10.4% to R24.2bn. Wholesale revenue to own retail stores, still the biggest contributor, grew by 9.6%, while external revenue to independent pharmacies and The Local Choice (TLC) franchises grew by 7.7% and 23.9% respectively.

The TLC growth was due to an increase in TLC franchise stores from 147 to 171, with increasing support of the supply chain from existing TLC franchisees. Independent pharmacy growth was attributed to new customers and more support from the current base.

Total income grew 15.7% to R10.2bn, exceeding the targeted 30% total income margin eighteen months sooner than initially anticipated.

On April 1, 2022, 100% of the shares of CT Distribution Proprietary, KZN Warehouse Proprietary and Eleadora Proprietary were acquired. It was a related party transaction due to the companies acquired being owned by directors, previous directors and prescribed officers of Dis-Chem, who are also shareholders of Dis-Chem.

The acquisitions resulted in the release of the lease liability and right-of-use asset on the statement of financial position resulting in a R72m gain in the income statement.

When this gain was excluded, wholesale total income grew 18.3% with the wholesale margin at 8%.

This increase was attributable to a higher contribution of more profitable pharmacy volume following the Medicare acquisition, and a focus on increasing fees earned on increasing wholesale scale.

Retail expenses grew by 15.8% as the group invested in new stores and acquisitions. Employee costs increased 14.5%, IT costs including the new point-of-sale system increased by 32%, and there was additional advertising spend due to retail trade normalisation.

Wholesale expenses grew by 12.2%, mainly driven by a 10% increase in employee costs due to inflationary pressure, a 56% increase in diesel costs, unrealised and realised forex losses totalling R43m as a result of exchange rate weakness, as well as higher IT costs with the stock management system being migrated to a SAP hosted cloud solution.