THE CLICKS GROUP

OVERVIEW
Trading conditions became increasingly challenging during the year and the group also encountered the high base set in 2010, which included the FIFA 2010 World CupTM. Selling price inflation continued to decline and averaged only 1.6% for the year, compared to 5.4% in the previous year, which impacted turnover growth by almost four percentage points. In this environment, the Clicks chain reported strong growth in turnover and operating profit as the brand showed real sales volume growth and continued to gain market share. The group continues to be highly cash generative and remains committed to returning excess capital to shareholders, repurchasing shares totalling R552 million during the year. Return on shareholders’ equity (ROE) increased from 50.8% to 62.2% for the year, boosted by share buy-backs of approximately R300 million in the last six weeks of the financial year. Management has increased the medium-term target for ROE to 55% – 65%.

FINANCIAL PERFORMANCE
Retail turnover growth of 10.9% was driven by the strong performance of the Clicks chain which reported sales growth of 13.0%. Selling price inflation for the retail businesses was 0.6% for the year compared to 5.4% in 2010. Total income, comprising gross profit and total income, increased by 10.9%. Operating expenses increased by 9.9%. Expense growth was well contained in the second half of the year, with retail costs growing by 7.7%. Headline earnings increased by 13.9% to R655 million. Diluted headline earnings rose by 18.1% to 249.7 cents, benefiting fromnthe group’s share buy-back programme. Diluted HEPS has grown at a compound rate of 28.6% over the past five years. A final distribution of 88.0 cents per share has been declared, bringing the total distribution for the year to 125.0 cents, an
increase of 17.7%. Cash inflow from operations increased by R244 million over 2010 to R677 million, with R226 million used for capital expenditure and R848 million returned to shareholders through share buy-backs and distributions.

TRADING PERFORMANCE
Clicks posted real sales growth of 12.0% and continued to grow its share of the increasingly competitive healthcare market. Clicks opened its 400th store in August 2011 as 31 new outlets were added during the period, the highest number in a single year. The national pharmacy footprint was extended to 283 with the opening of a further 32 dispensaries. The Clicks operating margin improved from 6.9% to 7.7% owing to good buying and supply
chain management, while Clicks maintained its aggressive pricing strategy. Operating profit increased by 25.8%.

PROSPECTS
Consumer spending is expected to remain muted in the current uncertain economic climate. Inflation is anticipated to remain low and no SEP increase is expected for 2012. The group will face increasing cost pressures in employment, property, transport and utilities. The focus for the year ahead will therefore be on driving volume and containing costs. The group remains well positioned in the medium term through the market leadership and growth potential of its brands. Capital expenditure of R257 million has been committed for 2012
and trading space is planned to increase by 4% to 5%. As a result of the group’s continued strong cash generation, the board has resolved to reduce the distribution cover from 2.0 to
1.8 times from the 2012 financial year, which will further enhance returns to shareholders.

SHAREHODLER DISTRIBUTION
The board of directors has approved a final distribution of 88.0 cents per ordinary share (2010: 75.7 cents per share) subject to the approval being granted by shareholders at the general meeting to be held on 17 January 2012. The source of the ordinary distribution will be a capital reduction out of share premium.

Challenging economic climate
The 2011 financial year started on a positive note in an environment of buoyant consumer sentiment in the wake of South Africa’s successful hosting of the FIFA 2010 World Cup. This mood of optimism was supported by an expectation of a continued economic recovery both locally and internationally. Low and stable interest rates, with a further 100 basis point reduction in rates in the first half of the year, and higher real wage increases across most sectors proved positive for consumer spending and sustained the economic momentum through the festive season trading period. However, economic and trading conditions became increasingly challenging as the financial year progressed as these positive factors
were negated by consumers coming under pressure from higher fuel, electricity, utilities and food costs. Confidence was further eroded by the renewed global uncertainty arising out of the USA and the Euro zone. The impact of the tougher trading conditions are reflected in the
slowdown in economic growth in the country, with gross domestic product slowing to 1.3% in the second quarter of 2011 following two consecutive quarters of growth measuring 4.5%.
Consumer confidence has also declined during the course of 2011 and fell sharply in the third quarter of the year to the lowest level recorded since mid-2009. This reflects a growing concern among South Africans about the state of the economy and sentiment is being negatively impacted by global economic instability. Domestically, rising household costs, high debt levels and a lack of job creation are weighing down confidence levels. There is a close correlation between consumer spending and consumer confidence; and the declining levels of confidence indicate a deteriorating retail environment in the months ahead.

Sustained financial performance
In this tightening economic environment it is pleasing that the group delivered a strong financial performance and continues to generate sustained returns for shareholders. Headline earnings increased by 13.9% to R655 million through robust trading in Clicks and efficient margin management. Diluted headline earnings per share (HEPS) again benefited from the earnings-enhancing effect of the share buyback programme and increased by 18.1% to 249.7 cents per share. Diluted HEPS has grown at an annual compound rate of 28.6% over the past five years. A final distribution of 88.0 cents per share was declared, bringing the total distribution for the year to 125.0 cents, an increase of 17.7%. Distributions have shown a five-year annual compound growth of 30.4%. The group continues to be highly cash generative and remains committed to returning excess capital to shareholders. During the year R848 million was returned to shareholders through distributions and share buy-backs. Over the past five years the group has generated over R4 billion in cash, utilised R1 billion for capital expenditure and returned R3.4 billion to shareholders in distributions
and share buy-backs. The return on shareholders’ equity (ROE) was boosted by the share
buy-backs and increased strongly from 50.8% to 62.2% for the year, more than trebling since 2006. Owing to the continued strong cash generation, the board has shown its confidence in the group’s prospects and resolved to reduce the distribution cover from 2.0 to 1.8 times HEPS from the 2012 financial year, which will further enhance returns to our shareholders.
The group’s trading and financial performance is covered in the Chief Executive’s Report and in the Chief Financial Officer’s Report.

Changing governance landscape
South Africa’s corporate governance landscape has undergone fundamental change in the past year following the introduction of King lll and the enactment of the Companies Act (No. 71 of 2008, as amended). Governance processes and practices in the group have been aligned and enhanced as part of the implementation of this ground-breaking governance code and far-reaching new legislation. A detailed review of governance developments over the past year is contained in the Corporate Governance Report on pages 44 to 50. The board committee structure has been streamlined to enable committees to function more efficiently. Following the amalgamation of the audit and risk committees last year, the remuneration and nominations committees have been combined. In line with the requirements of the Companies Act the board has established a social and ethics committee. The transformation committee has been incorporated into the social and ethics committee and
the combined committee has oversight for ethics management, stakeholder engagement, empowerment and transformation. The independence of all non-executive directors was reviewed during the year. After an intensive evaluation the nominations committee concluded that all six non-executive directors, including myself as chairman, are appropriately classified as being independent in terms of both the King lll definition and the JSE Listings Requirements. This review of director independence is undertaken annually. King lll has also introduced the concept of integrated reporting to enable stakeholders to assess a company’s ability to create and sustain value in the short, medium and long term. The group
supports the concept of integrated reporting in the interests of enhancing disclosure to allow investors to make more informed investment decisions. Integrated reporting presents another first for South Africa, which is already highly regarded internationally for reporting, regulation and governance standards. The group qualified for inclusion in the JSE Socially Responsible Investment (SRI) Index for the second consecutive year, based on an independent evaluation of environmental, social, governance and sustainability practices.
The SRI Index has become the benchmark for sustainabilty among listed companies and applies both global SRI standards and issues specific to South Africa, such as transformation and black economic empowerment. The group showed a pleasing overall improvement in its rating in the index, achieving over 90% of the governance and related sustainability indicators.

Board of directors
The group’s chief financial officer, Keith Warburton, resigned to take a well-deserved sabbatical from corporate life. We echo the tribute paid to Keith in last year’s annual report and on behalf of the group wish him every success for the future. Michael Fleming succeeded Keith as chief financial officer and was appointed to the board as group financial director in March 2011. Michael has strong credentials as a financial director in a listed environment and we are already benefiting from his wealth of experience.

Outlook
Consumer spending is expected to remain muted in the current uncertain economic climate. Selling price inflation is anticipated to remain low and no medicine single exit price increase is expected to be granted by the Department of Health for 2012. The group will also face increasing cost pressures in employment, property, transport and utilities. The focus for the year ahead will therefore be on driving sales volumes and containing costs. The group remains well positioned in the medium term through the continued expansion of the Clicks store and pharmacy footprint and the opportunity to capitalise on UPD’s national presence to secure additional distribution agency contracts.

Acknowledgements
Challenging times call for strong and decisive leadership and I thank David Kneale and his executive team of Michael Fleming, Michael Harvey and Bertina Engelbrecht for their contribution over the past year. Thank you also to my fellow non-executive directors for sharing their wisdom and expertise. Once again I thank our more than 8 300 employees at our stores, distribution centres and at head office for their commitment to ensuring our group remains the market leader. I also welcome our staff who became shareholders for the first time this year through the employee share ownership programme. Thank you to all our external stakeholders, including our customers, shareholders and investment analysts, suppliers, industry regulators and business partners for your continued support.

David Nurek
Independent non-executive chairman

Clicks posted real sales growth of 12.0% and continued to grow its share of the increasingly competitive healthcare market. Clicks opened its 400th store in August 2011 as 31 new outlets were added during the period, the highest number in a single year. The national pharmacy footprint was extended to 283 with the opening of a further 32 dispensaries. The Clicks operating margin improved from 6.9% to 7.7% owing to good buying and supply chain management, while Clicks maintained its aggressive pricing strategy. Operating profit increased by 25.8%.

Musica’s performance slowed in the second half and turnover for the year was 5.9% lower as the decline in the CD and DVD markets accelerated. Musica maintained market shares and showed good growth in gaming, technology and accessories. The Body Shop’s operating profit increased by 3.5% despite the brand experiencing price deflation of 6.6%.

UPD increased wholesale turnover by 4.2%, impacted by lower inflation, further decline in independent pharmacies and the changing product mix with faster growth in sales of lower value generic medicines. Operating profit was 19.4% lower than the prior year owing to the lack of a trading gain on SEP. Despite the challenging conditions UPD increased its share of the private pharmaceutical wholesale market from 22.7% to 23.1%.