Dis-Chem defers annual dividend, unveils plans for Baby City

Dis-Chem, the South African pharmaceutical and healthcare retailer, has recently deferred its annual dividend as part of its strategy to preserve cash amidst the uncertainties posed by the Covid-19 pandemic. The company also unveiled plans to acquire Baby City, a leading baby care and products retailer, for a sum of R430 million. In a recent interview with CNBC Africa, Dis-Chem's CFO, Rui Morais, discussed the company's financial results, the reasons behind the dividend deferral, and the strategic vision for Baby City once it formally becomes a part of the Dis-Chem brand. Morais acknowledged that while the latest financial results were not the best that the company had reported since its listing, there were several factors contributing to the performance. One significant factor was the rationalization of stock across the group over the past two years, which led to high inflated stock levels. Despite challenges, the company saw a positive outcome in the form of increased cash generation from operations, which rose by 115% to over 700 million. There were also residual impacts from previous strikes reflected in the numbers, but Morais viewed the results as a normalized base for future growth. The discussion then shifted to the impact of Covid-19 on Dis-Chem's operations. Morais clarified that reports of the company seeking leniency in rental payments were misconstrued. While some stores were unable to trade due to non-essential goods restrictions, Dis-Chem maintained proactive engagement with landlords and paid a significant portion of the rent in April. When trading resumed fully for essential goods in May, the company paid the full rental amount. Morais emphasized that the company adhered to industry guidelines and principles in managing rental obligations. Regarding the acquisition of Baby City, Morais revealed that the decision to defer the dividend was partially linked to funding considerations for the acquisition. Dis-Chem had been evaluating the asset for over two years, identifying synergies between Baby City's positioning in the baby products industry and Dis-Chem's presence in the pharmacy sector. Both brands focus on offering value to consumers through everyday low prices and aspire to be destination stores in their respective markets. Morais highlighted the growth potential in the baby products sector, driven by a large number of annual births and the demand for comprehensive baby product offerings. Morais outlined strategic opportunities for leveraging synergies between Dis-Chem and Baby City, including introducing service elements from Dis-Chem's existing offerings into Baby City stores to enhance foot traffic. The integration of loyalty programs and streamlining distribution processes were also identified as key focus areas. Morais expressed optimism about the acquisition, citing long-standing interest in Baby City and the natural alignment between the brand ethos of the two companies. As speculation arose about the timing of the acquisition coinciding with an anticipated rise in baby product demand post-lockdown, Morais clarified that the decision was not solely influenced by short-term market conditions. The company had been pursuing the acquisition for an extended period, emphasizing a strategic fit between Dis-Chem and Baby City. While market dynamics may evolve post-lockdown, the acquisition was viewed as a long-term investment in a resilient industry. In conclusion, Dis-Chem's financial results and strategic moves reflect a balancing act between short-term challenges and long-term growth objectives. The decision to defer the dividend and pursue the acquisition of Baby City underscores the company's focus on securing its financial position and expanding its market presence in key sectors.