Store And Digital Upgrades Will Create New Opportunities

Key Takeaways

• Expansion of the Clicks Group's store network and loyalty program is poised to boost revenue through increased market penetration and customer engagement.
  
• Tech investments and focus on private labels aim to enhance efficiency, differentiation, and margins, supporting favorable capital management outcomes.
  
• Rising operational and retail costs, coupled with growing inventory levels and market share declines, could pressure Clicks Group's revenue growth and profit margins.

Catalysts

Operates as a health, wellness, and beauty retailer in South Africa and internationally.

• The expansion of Clicks Group's store and pharmacy network, with plans to open 45-55 new stores and pharmacies and modernize existing ones, is expected to drive revenue growth through increased market penetration and accessibility.
  
• The growth in the Clicks ClubCard loyalty program, adding 1.1 million new members contributing significantly to sales, is likely to impact revenue through heightened customer engagement and repeat purchases.
  
• Investments in technology, such as the rollout of a modern LEAP pharmacy system and improvements to online and in-app services, aim to enhance operational efficiency and customer experience, potentially boosting revenue and net margins.
  
• The focus on expanding private label and exclusive brand offerings, which have shown strong growth, is expected to enhance product differentiation and improve net margins due to typically higher margins associated with these products.
  
• The buyback of shares, combined with a strong balance sheet, supports an improved return on equity and earnings per share, reflecting positive impacts on financials from capital management strategies.

Clicks Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Clicks Group's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 7.0% in 3 years time.
• Analysts expect earnings to reach ZAR 4.3 billion (and earnings per share of ZAR 17.43) by about May 2028, up from ZAR 3.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.1x on those 2028 earnings, up from 31.4x today. This future PE is greater than the current PE for the ZA Consumer Retailing industry at 21.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.56%, as per the Simply Wall St company report.

Clicks Group Future Earnings Per Share Growth

Risks

• The constrained consumer environment, due to factors such as the likely VAT increase and geopolitical risks, could negatively impact revenue growth.
  
• The cost base in retail has increased, partly due to wage and electricity costs, which may pressure net margins if not managed carefully.
  
• Inventory levels are slightly higher than the previous period, and retail working capital days have increased, which can create cash flow challenges and impact overall earnings.
  
• The increase in operational costs, such as packaging and delivery, could continue to grow faster than turnover, affecting profit margins if costs aren't controlled effectively.
  
• The market share in some categories, particularly small household electrical appliances, has declined, which might hinder revenue growth if these areas are not addressed comprehensively.

Valuation

• The analysts have a consensus price target of ZAR402.5 for Clicks Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR431.0, and the most bearish reporting a price target of just ZAR325.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR62.0 billion, earnings will come to ZAR4.3 billion, and it would be trading on a PE ratio of 35.1x, assuming you use a discount rate of 16.6%.
• Given the current share price of ZAR395.61, the analyst price target of ZAR402.5 is 1.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.