Clicks Group Limited (CLS) Earnings Call Transcript & Summary

Good afternoon and welcome to the webcast of our interim results for the 6 months ended February 2020. I'm Vikesh Ramsunder, the Chief Executive of the Clicks Group. And I'm joined here today by Michael Fleming, our Chief Financial Officer. Together, we will take you through today's presentation. Is there truly difficult times? When Michael and I presented the group's annual results 6 months ago, we could never have imagined the devastating impact that the COVID-19 virus would have on our world today. Our sincere condolences go out to those that have lost their loved ones during this pandemic. Our thoughts are also with everyone in our country suffering hardship at this time. This is the outline of the presentation. I will start with the review of the past 6 months. Michael will follow with an overview of our financial performance. I will then take you through the trading performance and close with the outlook for the group. You can submit questions via the webcast during and after the presentation. Sue Hemp from Investor Relations, will read them out for Michael and I to answer. I'll now begin with a review of the period. The group has once again delivered a strong health and beauty performance over the past 6 months. This period, of course, excludes the impact of COVID-19 on our business, and I will talk about this later in my presentation. Our performance was achieved in the context of low economic growth, constrained consumer spending and significant trading disruption due to electricity load shedding. The first half has also most certainly seen a shift in trading patterns with Black Friday becoming more prominent on the retail calendar. It also means that purchases are brought forward into November, which results in lower spend on Christmas. Despite these headwinds, the business once again generated strong volume growth driven by our great everyday prices, a differentiated product offer and our highly accessible store network. This focus on our organic growth strategy has ensured that we gained market share across all our core categories. I will provide more detail on market shares later in the presentation. UPD saw excellent sales grow. This time around, the growth was not driven by bulk distribution contracts, but rather by attracting new wholesale customers who are looking for superior customer service in this very challenging market. UPD also continued to grow its market shares. Another highlight was the effective capital management and strong cash generation over the period, and more detail will be provided on this shortly. The combination of the solid performance in health and beauty, strong growth in UPD and focused capital management has resulted in diluted headline earnings per share increasing by 14.4%. I will now hand over to Michael to take you through the financial performance of the group.

Thank you, Vikesh. Group turnover increased by 9.9% for the first 6 months. We saw pleasing sales growth of 9.6% in our health and beauty business and UPD grew turnover 12.3% and also gained market share. Group operating margin was maintained at 7.4%. Diluted headline earnings per share rose to ZAR 3.38 per share, up 14.4%, as Vikesh indicated. The return on equity of the group remains attractive at 34.8%. We ended the half year with cash of ZAR 2.3 billion on the balance sheet. This ensures that the group will be well positioned to withstand the headwinds faced in the second half that Vikesh will elaborate on later. In these unprecedented times, impacted by the COVID-19 pandemic and increasing economic upheaval globally as well as here in South Africa, the Board has decided to preserve cash and consider an annual dividend at year-end, once there is greater certainty. We were generally pleased with the turnover growth achieved by the group in the first half in what has been an extremely tough trading environment. Retail grew same-store sales 5%, despite Musica sales declining almost 18%. Selling price inflation represented only 2.7% of retail sales growth, and our strong promotional activity drove real volume growth, particularly in health and beauty. New stores and pharmacies added a further 3.6% to the top line, which boosted total retail sales growth to 8.6% for the half year. The distribution business experienced low selling price inflation of 2.4% and saw particularly pleasing volume growth in the wholesale business, which ensured turnover rose 12.3%, as I mentioned previously. This slide reflects our total income earned for the half year. The retail total income margin was 30 basis points lower. This was mainly driven by higher operating costs included in our retail Centurion Distribution center as we completed the commissioning of the singles picking project from which we expect to derive future efficiencies. UPD's total income margin was 20 basis points higher at 8.1%. As I mentioned earlier, this benefited from the addition of new wholesale contracts. The group's total income grew 8.2% to ZAR 4.6 billion. The group has adopted IFRS 16, the new lease accounting standard on a full retrospective basis from the 1st of September 2019. This means we have also restated our comparative figures to provide meaningful information. The full detail of the IFRS 16 adoption is contained in our SENS announcement released this morning. Included on this slide are 3 relevant cost lines related to IFRS 16, which are depreciation on the right-of-use asset capitalized on the group's balance sheet, which increased by 10.9%. Occupancy costs, not capitalized in terms of IFRS 16, which were up 3.4% and finance costs at the bottom of the slide, which are associated with the lease liability now included on the balance sheet. We continue to focus on efficiency and retail operating expenditure and have reduced cost as a percentage of turnover by 30 basis points to 24.9%. Over the past 12 months, we've opened 41 Click stores, 44 pharmacies, of which, 17 stores and 27 pharmacies were opened in the last 6 months. We also extended space in 10 existing stores during the first half. Retail pricing related depreciation employment and other operating costs in total were up 7.3%, largely due to the addition of space and employees to support these stores and pharmacies. On a comparable basis, retail cost growth was contained to 3.8%. In the distribution business, UPD has leased an additional warehouse in Johannesburg this year, given it has reached full capacity in that region. This brings an element of inefficiency into the business until further distribution contracts are won. Although UPD costs were up by 14.5%, this was driven by the addition of new wholesale contracts I mentioned before, which will be of ongoing benefit to the business for the rest of this year and thereafter. You can see both the retail and distribution business operating margins are healthy, as is the group margin despite the faster growth in the distribution business. Retail now has surpassed the ZAR 1 billion operating profit mark in the first 6 months. And UPD, in particular, grew operating profit by 13.5%. Overall, the group operating profit increased by 9.4% to just over ZAR 1.2 billion for the 6 months. Looking at inventory, stock levels were up significantly on the prior year. There are essentially 3 reasons for this. Firstly, in retail, we are carrying a few more days fund shop stock. The strategically insured stock source from China was shipped earlier this year due to the COVID-19 virus challenges experienced in that country. Secondly, UPD has gained sizable additional wholesale business, which requires a higher volume of stock to be held. As only 2 months additional turnover has been included in the results, the stock days are thus artificially increased and will normalize over time. Thirdly, UPD also strategically bought in stock due to possible supply chain shortages in Asia and also ahead of the single exit price increase. This will certainly be beneficial to the margin in the second half as the stock is selling through quite quickly. Lastly, despite the increased stock days, the overall group net working capital improved by 2 days compared to last year. Cash flow has continued to be well managed. Profit before tax of almost ZAR 1.2 billion for the 6 months was up 12.9% on last year. Net working capital utilized amounted to ZAR 391 million, which was ZAR 98 million lower than the prior year. Cash and inflow from operations of ZAR 1.2 billion at the bottom of the slide was up 2.9%, mainly due to higher cash tax payments made compared to the prior year. We have invested ZAR 309 million in CapEx during the past 6 months, mainly on new stores, 33 store refurbishments and IT. We continue to offer our shareholders attractive cash returns. During the period, we returned ZAR 822 million to shareholders in dividends, which was up 20.5% on last year. Given the adoption of IFRS 16, the repayment of lease liabilities amounting to ZAR 374 million is now reflected separately under financing activities on the cash flow statement. This leads group with a healthy ZAR 2.3 billion in cash on the balance sheet at the period end. As I have just outlined, the group continues to be highly cash generative. Subsequent to the half year, the group repurchased 2.86 million shares for ZAR 653 million as part of our capital management strategy aimed at enhancing returns to shareholders. Repurchases were made under a closed period mandate approved by the JSE. In order to preserve cash, no further share repurchases have been made subsequent to South Africa entering the lockdown period. Over the short term, we will remain prudent and watchful as we now have effective cash flow management is paramount to sustainability of the business through the unknown outcomes of the COVID-19 endemic. However, we believe the long-term prospects for organic growth remain highly attractive. We, therefore, plan to invest ZAR 389 million in CapEx for the balance of this financial year. ZAR 159 million will go towards committed new stores, pharmacy drop-ins and certain store refurbishments. Continuation of the planning and design of the multiyear retail merchandising system replacement project is ongoing as is the UPD multiyear IT systems replacement projects. Both of these latter strategic projects continue to run in parallel to normal business and therefore, do not impact day-to-day operations. Last year, in my CFO report published as part of our integrated annual report, I drew your attention to the fact that our medium-term financial targets needed to be restated for the adoption of IFRS 16 as this standard has a material impact on both the income statement and balance sheet ratios. For completeness, I therefore reiterate these restated targets having now adopted IFRS 16, although it has no impact on the way we run the business economically. Firstly, and importantly, there is no material impact on headline earnings nor our return on equity targets. The return on assets range have been lowered to 11% to 15% as we have had to capitalize ZAR 2.1 billion as a right-of-use asset, which is depreciated over the term of the leases. There is also a lease liability, both long and short-term of ZAR 2.4 billion that is technically added to borrowings. Although in reality, we have not raised any borrowings. Retail operating and group margin ranges have both been increased by 100 basis points, as the associated lease finance charge is now shown below the operating profit line. There is no change to the distribution margin as we own all of our distribution warehouses by one. Importantly, the group has continuing headroom growth, which Vikesh will take you through in the rest of the presentation. And I will now hand back to him.

Thanks, Michael. I will now take you through trading performance, starting with health and beauty. This is a breakdown of health and beauty sales by category. Total turnover grew 9.6% with existing stores growing by 5.8%. Moderate inflation of only 2.3% was achieved, whilst we remained price competitive. I will give you more detail shortly on how we are managing value in this environment. Good volume growth of 3.5% was achieved in existing stores. Pharmacy grew 8.3%, which exceeds their rate of market growth at 5.2%. Value in pharmacy continues to be suppressed by genericization, and the period also saw a lower demand for acute medication. This trend usually changes during the winter cold and flu season. Front shop health growth of 11.8% was the star performer, owed by 3 factors. Firstly, we saw an excellent performance from our Baby category, which was up over 20%; secondly, our international franchise brand, GNC, continues to outperform our expectations, growing by 17.6%; and finally, our external health care categories of diagnostics and incontinence delivered growth in excess of 12%. Beauty and personal care also had a pleasing performance despite being our slowest growing front shop category. This was mainly driven by growth in skin care, up 14%; ethnic hair care, up 19%; and luxury bath, up 21%. The pressure in this category is in color cosmetics, which recorded low single-digit growth as consumers trade down in this tough economy. Weaker sales were also experienced in fine fragrance gift sets over the Christmas period. The general merchandise category grew by almost 10%, driven by our basket building categories of domestics, up 51% and paperware, up 10%. As I mentioned at the start of the presentation, Clicks continues to gain market share in all major categories. We have grown to 24.6% in retail pharmacy, almost 32% in front shop health. Baby has shown strong market share gain and is now at 18%. Beauty reflected a similar trend of market share gains with skincare getting close to 40% market share. Improved availability in general merchandise, has once again allowed us to gain significant share in small electrical appliances. What is encouraging to note is that in large market categories like personal care and Baby, we still have less than 20% share. These 2 categories combined have a market size in excess of ZAR 30 billion. Pharmacy share is at 25% with independent pharmacies still holding 46% of the market. These categories provide us with significant opportunity for long-term growth. I will now take you into detail on the key drivers that supported our performance. Starting with value. The constrained economic environment makes delivering value to consumers even more important, and we have done this in several ways. First, through great everyday prices. As you can see from the table on the slide, we remain price competitive with all major national retailers. This index also excludes our famous 3 for 2 promotions. Second, through market-leading promotions, promotional sales grew by 15% and now make up 40% of turnover. Third, by offering patients a generic medicine at our pharmacies. Generics now contributed 56% of sales and 68% of volume. Finally, our rewards offered through our loyalty program and lower prices through our extensive range of private label products. Private label has the added benefit of differentiating us from our competitors and now makes up 23.5% of sales. A key highlight is the 39% growth in private label medicines, which now makes up 8% of pharmacy sales. Another driver of performance was the Clicks ClubCard. During the month of March, the ClubCard was once again voted as South Africa's #1 loyalty program with over 8.4 million active members, contributing 78% of sales. 750,000 customers have already downloaded the app, and we are continually enhancing our mobile platform. The latest enhancement of the app went live last month and allows customers to self-select their own promotions. These offers are based on algorithms, run by an AI engine and the unique purchasing behavior of each customer. This initiative is in its infancy, but it's another step in our personalization journey. In December, we saw the launch of a new affinity partnership with Engen South Africa. Engen has the largest number of fuel service stations in the country, making ClubCard transacting even more convenient. I'm also pleased to announce that at the beginning of April, South Africa's largest banking rewards program, eBucks, moved its partnership to Clicks as their preferred health and beauty retailer. eBucks currently has almost 3 million active members who can earn up to 15% back on their spend in Click stores. Another way in which we enhance the brand positioning is through convenience in health care. Firstly, we have a repeat prescription program that supports patient care and convenience through a reminder service and pre prepared parcels. We regard these as our managed patients and they display, on average, a 24% higher chronic medication compliance. Secondly, customers are able to submit scripts via the app to a Clicks pharmacy of their choice. This helps speed up service and reduce waiting time. And finally, we can deliver medication to our patients' homes or places of work, offering the ultimate convenience. Building on our convenience strategy was the expansion of our store network and the performance of our online store. During the period, we expanded our network to 721 Click stores and 572 pharmacies. 74% of these stores are in the convenience format. 50% of the population now live under 5 kilometers of Click's pharmacy. We also completed 33 revamps to ensure that our estate remains modern and appealing to our customers. The online store remains our fastest-growing store. This is even more evident during the COVID-19 lockdown period. We have made significant investments in online and are well positioned to benefit from the ongoing growth in this channel. That completes health and beauty. I will now move on to UPD. UPD has once again delivered an excellent performance, despite the total private pharmaceutical market growing by an uninspiring 2%. The result was achieved by gaining new hospital and buying group contracts and the ramp-up of purchases from customers prior to the annual SEP price increase. This slide reflects the breakdown of UPD's wholesale turnover, excluding bulk distribution and preferred supply contracts. Wholesale turnover grew by 17.6% with hospitals being the fastest-growing channel at 34%. Independents and other channels also saw double-digit growth. Fixed purchases grew 9.6%, in line with its pharmacy performance and now makes up 51% of sales. The solid performance of UPD's core customer base and new wholesale contracts has resulted in wholesale market share increasing to over 27%. Total managed turnover, that's combining wholesale with the turnover managed on behalf of our bulk distribution clients, increased by 3% to ZAR 10.6 billion. Soft growth was experienced in bulk distribution, which was predominantly impacted by the delay in the issuing of state tenders that were already in the base last year. The contribution of generic medicines continues to increase with sales growing by 18.1%. Genericization, unfortunately, creates increased pressure on UPD's margin. The margin pressure, however, will be offset by a higher SEP increase of 4.53% for the year. To deal with the increased scale of the business, additional warehousing space has been rented. The space has now been licensed and is available for use in half 2. In preparation for the impact of COVID-19, UPD purchased significant amounts of inventory from suppliers. This was to ensure supply to key customers like Clicks and the larger hospital groups. As the country deals with this pandemic, UPD is well positioned in terms of its scale and logistics capabilities to support all health care facilities with their medicine requirements. That completes the review of the business. I will now conclude the presentation with comments on COVID-19 and our outlook for the balance of the year. It is important to stress that COVID-19 is a humanitarian crisis. And as the country's leading pharmacy chain, we have a critical role to play in protecting our staff and communities. We are aligned to government's objective to flatten the curve, and our response was swift in implementing the following interventions. WHO and NICD hygiene protocols were introduced immediately across our stores, pharmacies, distribution centers and offices. Sneeze screens were fitted at our toll points and pharmacy counters, with floor staff being provided with protective visors. Physical distancing was applied by limiting the number of customers in the store with clear demarcation lines for queuing. Home deliveries were encouraged through the Clicks' online store and Clicks' direct medicines. We are providing commercial support to consumers, by holding our prices on essential hygiene products and limiting purchase quantities. In terms of our social responsibility, company-funded flu vaccinations were offered to all our employees to help support immunity levels. A customer care incentive will be paid to operational staff in recognition of their courage and commitment in serving our customers during this very challenging period. The Executive Directors, Chairman and members of the Board have decided to contribute 1/3 of their salaries and fees to the Solidarity Fund over the next 3 months. Free primary health care services are being offered at our clinics daily to the most vulnerable citizens of the country. And finally, 10,000 units of flu vaccines have been donated to the Department of Health to help protect public health care workers. Ordinarily, we wouldn't provide a trading update together with our interim results. But these are most certainly not ordinary times. As the President announced the state of disaster, followed by the lockdown, we saw unprecedented sales demand in our stores, particularly, across our health care and hygiene categories. This trend, however, has reversed during the lockdown period. The outcome was that retail sales grew by 7.9% for the first 7 weeks of half 2 with health and beauty growing by 9.3%. Included in the sales growth is 24 days of the lockdown period, which was impacted by shorter trading hours, reduced footfall and the limitation of only selling essential goods. As nonessential stores, Musica, The Body Shop and Claire's are closed during the lockdown. UPD reported a turnover growth of 31.2% for the first 7 weeks, as customers prepare to manage the impact of COVID-19. Total group turnover was up 15.9% for the same period. And now the outlook for the balance of the year. Trading conditions are expected to be extremely tough as the duration and economic impact of the pandemic remains unknown. Low trading remains a real risk, particularly in the higher demand winter season. The rand is also depreciated by more than 30% from the start of the calendar year. This could impact on inflation, towards the end of our fiscal year and negatively impact an already constrained consumer. These challenges do not impact our long-term strategy, and we will open 38 new stores and 40 new pharmacies for the fiscal year. As Michael demonstrated earlier, we had strong cash flow generation and a balance sheet that can support us over this challenging period. The COVID-19 pandemic has transformed the world around us. And with this level of uncertainty, it is impossible to accurately forecast our earnings for the full year. However, our sustained performance has demonstrated that our strategy and business model are both resilient. I have no doubt that this will be further stress tested in the months to come, but conversely then create more opportunity. I therefore, remain confident in the group's ability to deliver on our medium-term targets. Thank you for listening, and we are now happy to take your questions.

I have a number of questions from Jiten Bechoo at Avior. Well done on the results. Are you looking to renegotiate rental agreements on an ad-hoc basis with landlords due to the lockdown restrictions?

We have paid all of the Clicks' landlords, the lease for the month of April. We typically pay that in advance, as you know. And we have also requested relief for the brands that haven't traded, being Musica, The Body Shop and Claire stores. And those will be negotiated landlord by landlord.

His next question is on UPD. Do you anticipate a material drop-off in sales during the rest of H2 as a result of higher stockpiles from distribution clients?

Look, it's quite clear that UPD's customers have started preparing for COVID-19. You can see in the 7-week trading update that the sales have surged in UPD quite dramatically. And I think that's to be -- that's understandable given the hospitals tell you they want to be ready for -- if the pandemic spreads. And the same would be true of independent pharmacy and pharmacies in general. So I would expect that UPD sales rate will down in half 2 compared to what you've seen relative to the first 7 weeks. Simply because demand is run ahead of the actual sickness spreading itself.

His next question. Has government price controls had a bearing on price pass-through thus far? And will there be an impact going forward? Will this dynamic impact on the next SEP materially, in your view?

So really, in the manner in which government has controlled pricing essentially was through policing. So government hasn't really restricted us on selling prices, et cetera. And we have been cognizant of the impact on consumers and actually have chosen to maintain our prices. Even though in some instances, they may have taken some margin compression, but we've decided to take that view. I don't think government has imposed prices on retailers currently. In terms of the future SEP increase, I think there's a formula that government follows, and we'll really have to wait and see how that presents itself in the future.

His next question, what was the rate of online sales growth in H1? Given the rising online trend, especially post-COVID, will you intensify IT and other online or mobile retail investments?

I mean, omnichannel and mobile shopping was always part of our strategy. In fact, if -- when you consider that when we released our results last year, our online store was our fastest-growing store. It maintains that position as our fastest-growing store even before COVID-19 hit the country. All that's happened is you've seen now further exponential growth in online, which makes sense because people are at home at the moment, they would expect to get deliveries rather than going out into brick-and-mortar stores. Certainly, I would say to you that our investment in online has been material. But it's a very small part of our business, and we expect this to grow on a continual basis.

He has another question on UPD. What are the dynamics around the state tender which was delayed? Will this come through and support distribution sales growth in H2?

That's really just dependent on the tender process. The state was moving into a different type of drug combination drug, which they then re-tendered. That tender was expected to come through in first half, it didn't. It was expected to come through in March, and I didn't. I think the government at the moment has potentially some other priorities.

Then his last question for now. Are there already additional locations coming available from the failure of other retailers? The new stores forecast for 2020 at 38 is a little higher than the typical 25 you target. What dynamics led to the increase in your rollout?

So let's just go back to the original plan, and we want to open up to 900 stores in South Africa. We are very clear on where we want to open those stores. All that's happened over the past few years is that with a tough economy, more of these locations have become available to us sooner than we would have expected. I mean, a good example of this was last week. We managed to sign a lease on a shopping center that we couldn't get into for 10 years. We want you to get into that shopping center, we couldn't get in and space has now become available, and we've taken that space. So therefore, in my outlook, I fully understand that the future will be difficult, particularly over the next few months, but it may create more opportunity. So we still remain quiet optimistic. Our long-term strategy around store rollout certainly hasn't changed.

And clearly, the convenience strategy supports that. So these are existing centers, where we can put down convenience stores and particularly through the COVID-19 crisis. I mean that's where demand is being seen as closer to people's homes or if they allow to get close to their place of work. But generally it's convenience, neighborhood centers and really presents a good opportunity for us, I think.

Yes.

A question from [ AndreBeckert91 ]. Can you give more color on the 7-week update? How has the operating margin been affected by the change in consumer spend over the period? What was the sales growth in health and pharma pre lockdown for the first 3 weeks of the update?

Andre, without going into too much of detail. I would say that the business was to some degree significantly impacted by the lockdown for 3 reasons. One, we had to trade shorter trading hours because the staff had to get home and taxis were limited in terms of when they could run. Consumers have heeded the call of the President and decided to stay at home. So not many customers are coming to shop at the moment, particularly in the large destination shopping centers. So I think our convenience strategy has truly proven valuable for us now because we can see the performance of our convenience stores has certainly significantly outstripped the destination malls. And the last point is really we were limited to selling just essential products. And the view that we took on essential was we wouldn't sell effectively color cosmetics, beauty, fine fragrance products. So that, to some degree, would suppress a bit of the margin and affect the turnover. But consumers have behaved as the President has requested.

A question from [indiscernible] at Sanlam Private Wealth. Do you believe that the lockdowns impact on the spread of other seasonal viruses may have a material negative impact on winter pharmacy and front shop health sales?

It's too early to tell, to be honest. We have no idea if the lockdown is going to be lifted. The President may advise that later this evening. And obviously, at the moment, you typically see cold and flu -- normal seasonal flu starting in May and moving forward. And I think it's just too early to determine that.

Question from [indiscernible] of [indiscernible]. How has the shift in festive season buying to Black Friday impacted profitability of this period, given full price sales now being done in highly promotional period?

So all you're really seeing is a shift of spend. We're quite protective of margin. So we certainly work with our suppliers to support the promotions. What customers are expecting, though, is deeper promotions within Black Friday. So we're very cautious about how much we invest or how many products we actually put it into Black Friday, but we can see the trend changing. The reason why I do mention the presentation is that shift is because you are seeing an impact on gift sets as an example. So I have no doubt that gifting would come under pressure over time. But certainly, customers will then buy singular products. So I think in terms of categories, as you would have noticed, we've made that up in the total performance.

A few questions from [ Nick Kreher ] at Signal Asset Management. Firstly, what percentage of retail sales are classified as nonessential?

It's circa 20%. So 80% of our products are defensive. And at the moment, we're saying about between 10% to 20% is nonessential.

Second question, is it fair to assume that margin will come under pressure as nonessential sales have a higher margin? Can you please give us some guidance on the expected margin?

It's very difficult to predict what that impact would be. I think once we're all trading up and running, again, we do believe there will be pressure on discretionary categories and discretionary categories typically have higher-margin. We're going to have to see how we can offset that with volume moving forward. But I think once again, we'll really only know once we start to trade to some degree normally, again, I mean -- and who knows what normal is moving forward.

I also think that -- I mean, you can see that consumers are going to be under enormous pressure given the implications of the lockdown. And products that are -- that represent greater value potentially like our private label ranges will be hopefully supportive and in greater demand. So again, one might be able to use that as an opportunity. Clearly, we're going to be very cost conscious. So anything that we can contain we will. And then there'll also be some additional costs as well because now you need to provide sanitization, you've got to have the ability to screen. We've had to put screens in our stores, et cetera. You've got to deep clean stores more frequently. Just to make sure that hygiene is monitored. So we're going to be looking to offset costs wherever we can. And at the same time, be quite careful in our product promotions in terms of where we want to promote and what products consumers are needing.

His third question is, store walks indicate that some items are out of stock. How material are these sales? And do you expect this issue to persist?

I think the short answer to that is yes. Certainly, there would be an impact on the supply chain. We are fortunate that we planned for the COVID-19 virus before it hit South Africa. We actually planned for it when it hit China. So you see the increase in inventory that we brought products in earlier. But with companies on lockdown at the moment, once they start the production up again, I think it will take time for full supply to hit the market. So I have no doubt there will be disruption to supply chains over the next few months.

Question from Nellie Brand-Jonker at Netwerk24. How many shops have you had to close due to staff getting ill? How many staff have tested positive?

So we've only had 3 staff members that have tested positive thus far, and those were back-end staff. We had an incident yesterday where we had to close a store, and that was a store in Ceres. And the moment the staff member tested positive, we implemented all the protocols and the store was closed. So we've only had to close 1 store thus far. So that brings a total of 4 staff members out of 15,000 in there.

Some financial questions. One from Brian Thomas at Laurium Capital. Are you able to elaborate a bit more on the rationale for doing the buyback, presumably after the end of February against not paying an interim dividend? Now the second related question is around the average pass at which the buyback was conducted.

Yes. So you would have noticed last year, we had a ZAR 2.6 billion worth of cash on the balance sheet. We've always said that we -- on a medium-term basis that our dividend payout ratio has been 60% to 65%. You have seen that reiterated on my slide. And we haven't changed our view on that in terms of the medium term. Clearly, we had said that where opportunity presented itself, we would supplement dividends with share buybacks. I mean, that's been part of our strategy for the last decade, and we've done it from time to time. Every year at the AGM, our shareholders have given us a mandate to continue with share buybacks. And so we implemented a close-period mandate. Obviously, COVID-19 hadn't yet arrived in South Africa at that point in time. And you would see, based on the value we paid, ZAR 653 million, which includes transaction costs. And I've given you the number of shares that would have been around ZAR 228 a share that we would have paid, which we thought represented good value. But again, a closed period mandate means you put the mandate in ahead of the time the JSE approves it and it runs through the closed period. We haven't bought any shares back since the lockdown was implemented in South Africa. And clearly, we won't be buying back shares in the shorter term because the emphasis now on cash preservation. And again, as Vikesh said, dividends are very important to shareholders. We just think it's prudent to see how South Africa moves through the lockdown into a softer lockdown, if I can put it that way. How it will evolve in South Africa? It's really -- we're in the very, very early stages, and it's just prudent to defer decision on a dividend for the year to the end of the year. But I have no doubt that in the medium term, the company is definitely very cash generative, and we'll be able to resume paying those.

Deon Botha from Fairtree also asked about the scope of the buyback mandate, which you've answered. But he's also asked how it was financed.

In cash.

Then a question from Nick van Rensburg at Milkwood Capital. Can you explain how you believe buying back stock at over 30x earnings makes financial or any other sense?

Look, I think, one obviously takes a forward view of what the organic growth prospects are. From our perspective, we think long-term shareholders value the additional supplement, the strategy of buying back shares. Yes, I'll leave that to each shareholder to answer in terms of whether they think it was -- will be accretive on a long-term basis or not. But I think if you go back and have a look whenever we bought shares, I don't recall us having destroyed value to date and certainly would hope that these would be actually enhancing out of the long term.

And another question from Jiten Bechoo, Avior. Please provide further color on the rationale behind no interim dividend, given cash generation and the balance sheet remaining very strong. Could you increase payout by year-end to make up once there is greater certainty post lockdown?

I think I've answered basically that question, Sue, in every aspect.

Then a question from the Lulama Qongqo at Mergence. Firstly, how is the rand depreciation affecting your ability to procure merchandise profitably? What percentage of your retail and UPD merchandise has bought in foreign currency?

The short answer on UPD is nothing is bought in foreign currency from ourselves. We buy everything in rands because everything is sold in rands. So basically, all the manufacturers, whether they manufacture in country or they manufacture offshore, sell in rand. So I can't answer that for them in terms of their active ingredients where they are sourcing from. I have no doubt there's plenty of exposure to foreign currency. But again, the manufacturers will take that compression and margin on medicines. On, for example, bunch of stock, it's quite small. It's about 6% or so of the retail cost of goods sold is directly imported in foreign currency. And clearly, we have forward cover. We generally have hedged those many months in advance. So we still have good protection on that. But given the severe devaluation, the rand, as Vikesh said, over 30%, 35% that's going to have implications for margin and how much consumers can absorb and, I guess, demand when you look forward sort of 6 months into the new year? That clearly will become issue if the currency remains where it is today.

Her second question, how many stores have you closed due to COVID -- oh sorry, we've answered that already. What has been the impact of decreased footfall in super regional malls? Are you moving stock to other, busier stores? What does this mean for your rental negotiations with landlords?

So I mean, we would have expected to see any impact on the large destination shopping centers, particularly because that's where there's entertainment and fashion. So those retailers are closed, you would expect reduced footfall in those particular areas. The big -- the large shopping centers have seen a significant footfall decline. However, that has been definitely made a portion of that in the convenience format. So I think it's -- on all honestly, it's a different impact on different formats at the moment. Can you just repeat that again, Sue, the next piece of the question.

Vikesh, perhaps, I could add to that. In terms of demand forecasting and being [indiscernible] enormously beneficial.

It's actually the inventory point, so I just forgot the second piece of the question.

It was about rentals in centers where footfall is down.

Okay. So really to close on the inventory point as well. We have centralized supply, centralized distribution and forecasting. So when you see the decline taking place into this large destination shopping centers, we would have reduced inventory supply to those stores. So inventory risk reduces there significantly as well. And in the convenience stores with the sales uplift, that inventory just naturally moves into those locations as well. And in terms of rental, as Michael said earlier, we've paid our landlords' rental. We're currently in negotiation with landlords where we've seen a decrease in turnover. And that will be an ongoing negotiation for footfall.

Question from Alec Abraham at Sasfin Wealth (sic) [ Sasfin Bank ]. What is the absolute value of online sales?

We don't provide that.

A couple of questions from [indiscernible] at [indiscernible]. What is your plan or outlook for the almost 15,000 employees now and in the future? Will you be going the contractor staff route like many other retailers? And a follow-up question, how are jobs being kept securing this economy and beyond COVID?

So at the moment, obviously, our cleric staff, where the stores are trading, our staff have been going to work. This means our beauty consultants, as an example, those who have been asked to go and leave because we couldn't sell color cosmetics, et cetera, those were treated as nonessential. However, those employees have taken leave, they'll get a salary at the end of the month, et cetera. So we're trying to balance employees' needs versus the needs of the company and all our stakeholders at the same time. I can assure you it's a very difficult balance. Our ambition is to try and limit or prevent retrenchments as best as we can. So that's why we've been quite cautious in the manner with which we're approaching this. Let's not also forget our Musica brand that didn't trade, and is not trading for the period. But Claire's, we've got Body Shop. So we're just going to take all of those employees into consideration as well. But what I can say is that all our employees we've paid for the month of March and in April almost every single employee will get a portion of their salary once again as well as those employees who did come to work over the period, we'll get a bonus paid to them at the end of the month as well.

Question from [indiscernible] Singh at [indiscernible]. Impact from COVID-19 on working capital going forward, are suppliers demanding more lenient payment terms?

Look, we're very cognizant of the fact that we've all got to get through this lockdown period. It's important that our suppliers get through it. So we continue to honor the trading terms that exists. So we paid all our suppliers, like we do, at the end of March. We will do the same at the end of April. Clearly, there's a huge increase in inventory. So I think there will be a little bit of working capital required to fund that in the months ahead. But I think that's something we can deal with. Again, we've got the cash. We've got the balance sheet strength to do that. In fact, I think that speaks to the ability of Clicks to be able to sustain itself, both from a UPD perspective on the total market as well as Clicks in the health and beauty arena. It's really something that I think we should quite capably be able to manage. It all depends how long President Ramaphosa extends the lockdown, is it regional, et cetera, et cetera. And for that, we'll have to wait till tonight to see. It's an ever-evolving set of decisions one has to make.

Question from Achumile Mashalaba at Investec. Looking at UPD, how many profitable contracts, both wholesale and bulk, do you think UPD can still get going forward? What is your market share target for UPD's fine wholesale business?

I look at the contracts that UPD has landed within fine wholesale. I think UPD could comfortably get to the 30% target that we set. Over the medium term. And I think in the short term, the bulk distribution finds, those CEOs maybe more distracted by dealing with the short-term impacts of their businesses. So I think I'm quite comfortable in the new contracts that UPD have landed in wholesale. I don't expect rampant growth in distribution contracts over the short term. But certainly, UPD continue to engage manufacturers to see if they could offer them further value to bring their contracts across.

Question from David Smith at Investec. Within your retail business, how have the different categories performed for the 7 weeks post year-end?

So the first impact on the categories has really been on the beauty category because we've treated it as none essential. And the other categories have continued to perform, I would say, in line with our expectations and some in terms of the update that I've given in the first half.

And a lot of demand for health products now.

Another question from [indiscernible]. Can you comment on the foreseeable losses from the low foot traffic in your stores in destination malls versus your convenience stores? How do you plan to mitigate this in the business?

Well, I think it's too early to tell because once if the President opens up the business -- I'm sorry, the economy, then I think people with the pent-up demand may go back to those large destination malls once again. The advantage we have is some diversification. We have large stores we have smaller -- we have stores all across South Africa within time ships and everything the most affluent areas. So I think we're well diversified to deal with that. And as a group, I'm sure we can absorb any pressure that comes on the large destinations.

That's all the questions we have.

Thank you. So there appear to be no further questions. Thank you for joining us on our webcast today, and please stay safe.

Yes. Thank you.