Good morning, and welcome to our interim financial results for the six months ended August 31st, 2026. Before I describe the highlights of the half, I just wanted to say to my leadership team, you are simply world-class. I am extremely fortunate to have the team that I have supporting me. I have facilitated a significant amount of change in my tenure as CEO, and in turn, a significant amount of pressure. A repositioning of the brand, an audacious purpose to be South Africa's health authority, an internal reorganization to ensure clear lines of accountability and ways of working with X, bigly labs that enable data-led strategy execution. This, all amidst an internal culture being built by all of us, aligned with the purpose that we chase down. During this time, you have held an obsession around how strategy meets our customer.
We have built and executed on large strategic projects and carried the pressure of the changes in all that we do. I thank you for your energy, the manner in which you motivate me and one another, the absolute obsession you have with our purpose, and simply the relentless effort that you put in day after day, week after week. I say again, you are simply a world-class team and incredibly fun humans to work with. To our green-hearted army, you remain the heartbeat of our brand, the energy that is driving better health for all, and the friendly, capable faces that continue to deliver the healthcare services very much needed by South Africans.
When I walk in our stores, you remind me, you remind us, of the responsibility that we hold as leadership, and you hold me accountable, you hold us accountable to the promises we make, both internally and externally. To our partners, thank you for allowing us to build more sustainable relationships, to look beyond the short term and create real long-term alignment. Thank you for believing in our direction and partnering with us in delivering on our purpose. Thank you for your support on Better Rewards, a true proof point in how real stakeholder relationship building can be something that truly fits into the concept of doing good whilst doing well. Nothing captures that more than the additional ZAR 1.5 billion we have unlocked through a program we have designed and co-funded.
Finally, to our board, we appreciate the support and the longer-term understanding of our strategy as we facilitate these changes in what remains an incredibly challenging and competitive trading environment. We now move on to group highlights. The biggest highlight has obviously been the landing of Better Rewards as a program. It has delivered revenue growth, increased our market shares, and as we mentioned, not compromising total income margin. Through the program, we have returned a significant amount of value to South African consumers in what is a very value-conscious environment, that number being north of ZAR 1.5 billion. Most recently, we won Best Relaunch Loyalty Program. In terms of property, and again, aligned with our strategic ambitions over the medium and longer term, we opened 14 new stores. We have currently five Store of the Future trading environments.
Importantly, Store of the Future as a format becomes a format that we unlock across all new space. We won Best Retail Store Design at the South African Council of Shopping Centres Awards. Total income growth of 9% was ahead of group revenue growth at 8%. Retail total income growth of 11.1% ahead of retail revenue growth of 8.2% demonstrates our ability to control and manage total income margin through effective promotions and the way that Better Rewards was structured, supporting what is a sustainable reward and health funding initiative through Better Rewards. Retail total margin income as a result of that improved from 30.8% to 31.7%. X, bigly labs nears the envisioned steady state with incremental cost slowing.
Julia will discuss it, but if you look at this half compared to the prior half, we had a smaller investment in X, bigly labs, with a significant investment in the second half, which was closer to the steady state, which means a very different earnings distribution in the prior year. We do anticipate a more linear distribution of earnings, and therefore, a stronger second half. Our net working capital position improved from 24.4 days to 18.8 days. We had a slight increase in stock days as a function of buying in ahead of the gazetted SEP price increase. If we think about wholesale market share expansion, once again, we've performed incredibly well, and Chris will touch on it through the presentation. Revenue from TLC franchises stores grew by 9.3%, which drove external wholesale revenue growth of 7%. Revenue from independent customers increased by 5%.
We now service close on 90% of the entirety of the independent market. Ultimately, we see TLC as an important part of our combined brand network as we think about an invested healthcare ecosystem. Health-funded product sales and earnings are above expectations. We're starting to see very, very good traction in medical insurance and gap products, as anticipated. Proof point that the ecosystem play really, really works, and strong policy growth and continued improvement in behavioural metrics of health and life-funded products. As we think about behavioural metrics, anything that's within the insurance landscape that talks to non-taken-ups or lapses are being influenced by our ability to design benefit products, and our ability to control the ecosystem. Then finally, in the digital space, we launched the first release of our new app to 22,000 users.
Since the establishment of X, bigly labs, which housed our digital ambitions, ZAR 240 million has been invested in replatforming to ensure omnichannel relevance, and to ensure omnichannel relevance as we think about the importance of creating consistency of service delivery in the digital space between our physical footprint and our digital estate. I'm now going to hand over to Julia to take us through the financial results.
Thank you, Rui. Good morning, everyone. In the current period, we have continued to invest in our ecosystem for the future growth of delivering integrated healthcare and can see the impact of the launch of our Better Rewards program in the prior period. The main aspects from a statement of comprehensive income perspective are revenue growth of 8% and total income growth of 9%. Expenditure grew by 13.1% off a lower X, bigly labs base in the prior period, resulting in operating profit declining by 10.5%. Four other points to note in the statement of comprehensive income is finance costs, profit from associates and joint ventures, tax, and non-controlling interest. Net finance costs increased by 11.2% from the prior comparable period. Excluding finance costs from IFRS 16, net financing costs increased by 13.3%.
This increase is due to the additional bank loan taken out in the current period, as well as the use of the overdraft facility. The increase in the profit from associates and joint ventures is due to the performance of Kaelo and Geniob that has been offset partially by the loss in Dis-Chem Life. The effective tax rate has remained fairly consistent from the rate at 28th of February 2026. Non-controlling interests increased due to the strong performance of minority interest stores and oncology. In the statement of financial position, there is an increase in property, plant, and equipment due to the 14 new retail stores opened in the six-month period, 31 new stores from August 2025, and investment in computer hardware required for the rollout of the new pharmacy system, which will take place in the 2028 financial period.
Intangible assets increased due to the additional software build, including the enhancements on the app and broader omnichannel offerings, as well as goodwill from the additional 50% acquisition of Health Window. The inventory holding has increased due to the additional new stores, as well as the buy-in for the SEP price increase. Inventory days has remained fairly consistent from February 2026, with an increase of only half a day. Trade and other receivables have increased with the growth in the wholesale debtors book on the back of external sales growth of 7%. Bank loans have increased with the additional ZAR 500 million bank loan taken out, as well as the additional RCF facility. Trade and other payables have increased due to the increase in inventory, as well as the extension of certain payment terms. Revenue has been broken down between the wholesale and retail segments.
Retail revenue has grown by 8.2% to ZAR 19.6 billion, with like-for-like revenue growing by 3.4%. This growth was influenced by the opening of 31 new retail pharmacy stores since the prior comparative period, strong growth in both pharmacy and health categories, as well as the launch of Better Rewards, resulting in market share gains. Better Rewards has given back ZAR 1.5 billion in discounts to customers since its launch in October 2025. External wholesale revenue growth has been well supported by the growing TLC franchise model at 9.3% and the continuing support of independents at 5%. The TLC franchises have grown from 258 at August 2025 to 294. Total income for the group has increased by 9%, with the total income margin improving from 31.1% to 31.4%. Retail total income grew by 11.1%, with total income margin increasing from 30.8% to 31.7%.
The margin has been protected by sustainable Better Rewards funding mechanisms, increased trade terms, and more effective promotional sales. Wholesale margin declined from 8% to 7.3% due to the low SEP increase in the current period. Moving on to retail operating expenditure. Retail expenditure has increased by 13.8% from the prior period. Excluding the additional costs relating to X, bigly labs in the current period, retail expenditure increased by 11.9%. There has been a 15.3% increase in depreciation, mainly as a result of IFRS 16 depreciation, additions to computer software and hardware, as well as fixtures and fittings for new stores and renovations. Occupancy costs have increased by 13.5%, predominantly due to the increase in electricity charges. Employee costs are still the largest expense within the retail segment and increased by 12.8%, and when excluding the investment in X, bigly labs, by 10.5%.
Like-for-like retail employment costs continues to be well managed at 4.9%. Other operating costs increased by 15.2%. This increase is mainly due to an increase in IT-related costs, advertising expenses, and investment in strategic platforms. Wholesale expenditure growth during the current period is 8.9%. Depreciation has increased by 81.6% due to the reassessment of the residual values of buildings in the prior period, resulting in a reduced depreciation expense. Employment cost growth is predominantly due to the additional staff in the Longmeadow warehouse, as well as the annual increases and additional night shift in the Cape Town warehouse. Operating profit for the group declined by 10.5% from the prior period due to the timing of the investment in X, bigly labs in the prior period compared to the current period.
In the prior financial period, the investment in X, bigly labs mainly occurred in the second half of the year, resulting in the first half of the year contributing 64% of the full-year's profit after tax, compared to only 36% in the second half. In the current period, the investment is spread evenly across the year, thereby delivering a more linear distribution of earnings across the first and second half of the year. EPS and headline earnings per share for the period is ZAR 0.641 and ZAR 0.643 per share, which is a decrease of 13.3% and 12.8% respectively from the prior period. We now move to the working capital in the statement of financial position. Debtors days is being well managed and has increased by one day, predominantly due to the increase in the wholesale debtors book.
Inventory days have increased from February 2026 by half a day due to the buy-in for the SEP increase, as well as the inventory held for the additional 14 stores. Overall net working capital days improved by four days when compared to August 2025 due to the improvement in creditors days. The waterfall graph depicts our cash movement in the current period, with an increase of ZAR 828 million since February 2026. Cash inflows have come from normal trading and working capital movements. Cash payments have been made for taxation, finance costs, dividends declared, as well as for lease payments, CapEx, and loan repayments. Included in investing activities is also the ZAR 125 million relating to the purchase of the remaining 50% interest in Health Window, the pharmacy adherence company.
Expansion CapEx is mainly driven through the opening of our new stores, costing ZAR 120 million, and investment in information technology enhancements across both retail and wholesale. In the second half of the year, we expect to spend an additional ZAR 137 million on new stores and ZAR 124 million for digital initiatives. I hand over to Rui to take you through the retail trading performance.
Thank you, Julia. We will now discuss our retail trading performance for the first half. In terms of core category market shares, our category market shares have grown across all our core categories. Importantly, we have continued to show industry-leading dispensary revenue growth of 10.4% against the total market growth, excluding Dis-Chem, in value of 5.1%, driving further dispensary market share gains. It is reflected that we do not show a market share in dispensary, and that is a function of there not being a single credible source of market share metrics in South Africa. 12 months ago, we had ambitions around starting our own data business, and as such, we have not shared our dispensed out data with IQVIA. As a function of that has been forecasted and under-read in the market, which has overinflated market shares of any participants on IQVIA.
As I said, we do know that we have industry-leading dispensary revenue growth ahead of the market, excluding ourselves, and we have further increased our market share in dispensary. Those market shares have been driven by growth from a revenue perspective, from GLP-1s, as well as the pharmacy boost that has been attached to our Better Rewards program. We have also continued to gain market shares across all of our retail categories, supported by the introduction of Better Rewards programs. As we have positioned ourselves as a healthcare destination, I think importantly, our biggest market share growths have come in healthcare and medical and dispensary. Our largest market share gains have been in elastic retail categories, which talks to the values-conscious nature of a consumer and the effectiveness of the scalability and stackability of the Better Rewards program.
If we move to core category performance, again, strongest revenue increases across dispensary and healthcare, as we continue to position ourselves as a healthcare destination. So, dispensary growing at 10.4% and now closing in on 40% contribution of total revenue growth. Healthcare and medical growing at 9.5%, and almost a quarter of revenue contribution. As I mentioned previously, dispensary revenue growth influenced by GLP-1 price points and Better Rewards pharmacy boost. We saw value and volume gains in personal care, beauty, and baby care, driven by an increase in frequency of existing shoppers, reactivated shoppers, and new shoppers since the launch of the Better Rewards program, and I will touch on that in later slides. More importantly, our retail total income margin has been protected. We have secured brand and partner participation for FY 2028, as funding agreements are in place.
L et's look at Better Rewards one year later. If you recall, Better Rewards started on October 21st in the prior year. Over the reported 52 weeks up until the 27th of September, as read by NielsenIQ, we have, as Dis-Chem, seen front shop volume growth of 5.5% against the total market volume of 0.1%. This obviously reads all the large retailers in South Africa across all of the core categories that we participate in. If we look at this through a consumer lens, ZAR 1.5 billion has been passed back to consumers in the form of instant discounts. Of course, this is on top of general promotional activity, which would have largened that number, but 1.5 represents the impact that the program relaunch has had on the wallets of South African consumers. 14.8% is the average level of Better Rewards discount that every single consumer's experiencing.
That 14.8% talks to the high level of penetration of the boosts that currently exist in the program, being the Capitec boost and the pharmacy boost, as well as the higher level of discounts experienced by our cover customers. If we look at the value for stakeholders, including the Dis-Chem brand, I think importantly, as we think about the evolution of the basket and the data-led selection of the basket, we have an ever-strengthening front shop offering for consumers. Currently, 200 brands are Better Rewards partners, up from 140 at launch. To date, 45% of all front shop revenue is covered by Better Rewards brands. In terms of the customer base, we have continued to grow the active Better Rewards customer base, the concept of active being very important. Active means that the Better Rewards customer was in our environment shopping our brands and shopping our products.
That has increased by 27% to 8.2 million members. We got 980,000 new members, predominantly as a result of the strong association and partnership with Capitec, and we reactivated 760,000 members who we had previously lost and not been active in our space. Again, talking to the value creation in the Better Rewards program. In terms of contribution, 86.1% of sales are now from Better Rewards members, giving us data insights into shopping patterns of members. We've had a 3.7% increase in customer baskets, which has been unexpected and interesting considering the deflation we've created against the base as a function of the heavily invested discount. So essentially, what you see there is volume driving a bigger basket size. More importantly, in a loyal shopping base of north of 5 million people, we've seen an additional two trips over the 12-month period.
T wo additional baskets with slightly higher basket growth, which ultimately is driving our volume growth of 5.5% ahead of the market growth of 0.1% over the reported period. In terms of our partners and stakeholders from a Better Rewards perspective, Better Rewards suppliers or Better Rewards partners have seen 21% higher volume growth than non-Better Rewards brands. So, really talking to how we've integrated the program in the way that we think about the design of our stores, in the way that we've marketed, in the way that we've integrated into promotional activities. As a result, we've managed to protect and grow our total income retail margin, which currently sits at 31.7%. The sustainability of the program is being baked in as a function of secured and sustainable funding with brands and partners.
I think ultimately and culminating one year, we won Best Relaunch Loyalty Program at the Eighth Annual South African Loyalty Awards in September 2026, which is really testament to the work that has gone into reimagining this program and delivering and executing on it as well as we have. If we move on to Store of the Future, another incredibly strategic initiative for ourselves, and we look at that within the context of our growing store footprint, we have added 14 new stores in the first half of 2027, taking total retail pharmacy stores to 328 stores. We anticipate another 16 stores being delivered before the end of the financial year, five of which have already been delivered since the half-year number. We have also taken the Store of the Future formats as a function of those incremental store deliveries to five.
Five stores now trade Store of the Future formats, and all new stores will receive the Store of the Future format. I think the design principle that went into the Store of the Future has always driven expectations around economic uplift. If you think about the initial engagement and the initial project around Store of the Future, it was really to design a space around the purpose of our brand, the discipline of categorization in store, always through a return metric. What we have started to see, initial trading densities exceeding 25% of the comparable early-stage trading densities of the original format stores. Of course, it is still very early stages, but very encouraging as we do believe that that increase of 25% is a combination of faster maturation and the ability to generate higher trading densities out of that format. The Store of the Future format was reimagined.
If we just concentrate on the elements that are delivering that higher format or that higher trading density, firstly, all traffic runs through our Health Hub. So, the telemetry that we are getting on people engaging with ourselves all the way from queue management to ticket abandonment has been very interesting and is shaping up how we think about healthcare delivery in the iterations of store of the formats that we deliver over the future.
We continue to see repeatable pharmacy and clinic efficiencies across different store sizes. I think that is important. Telemetry on both the two stores that have traded for long enough to give us insights, Irene and Melrose, have shown that the operational processes that have been invested in Store of the Future are arriving at results that are very similar in both. I think both clinic experiences and pharmacy experiences are servicing the customer better and faster.
If you think about the cost associated with each of those services, it allows us to reduce, for example, in the pharmacy space, the cost to service script, which is our largest retail cost in our income statement. The focus on front shop categorization has also added and supported the increased initial trading densities. We have been very disciplined about how we allocate space to categories that we want to champion, participate in, play strongly, and then very disciplined around taking categories that do not suit the ambition and purpose of the group out of the space. Better Rewards has been completely integrated into the store design. It has been integrated through a health funding mechanism as opposed to just being an ancillary reward program. I think what we are starting to see is excellent customer insights into experiential retailing, which is improving customer sentiment of the two stores.
And like with Better Rewards, I think the recognition that we achieved at the South African Council of Shopping Centres Awards, where we won the Best Retail Store Design, is proof point and momentum building in the way that we think about Store of the Future and how we move that forward, considering our space ambitions. If we just track the numbers from a property expansion strategy perspective, I think we have doubled the annual store opening rate since FY 2024. That has really been driven by a structured property methodology, moving away from being reactive in terms of opportunity to proactive. Very excited about the investment that we are making in the real estate vertical, which I will touch on a little bit later with the operational reorganization.
Then importantly, now that we have telemetry on the economics of Store of the Future, what we are doing, which is led by X, bigly labs, is we are being very focused about prioritizing, independently of the normal revamp cycle, what stores we want to revamp, which ultimately are driven by earnings and revenue uplift, with many of these revamps initially certainly being pulled forward ahead of the traditional revamp cycle. If you look at FY 2028, we have a strong commitment of already 20 stores and 17 under negotiation. If you look at the pipeline, which continues to grow, 87 stores being negotiated, assessed beyond FY 2028. As I mentioned previously, we opened 14 stores and intended to deliver 16 stores in the second half of the year, of which some have already been opened.
In terms of X, bigly labs as an update, I think Julia touches on the cost implications of X, bigly labs and the upfront investment that we have made in the unit. I think as a reminder, X, bigly labs was intended to change the way that we retail. It has forced us as an organization to be data-led in the way that we think about our strategic ambitions, in the way that we make decisions. It really became not only an innovation hub, but an incubation for some of the areas of the business that had been underinvested in the past. That is certainly the way that we surfaced or created the tribes that are described on the left-hand side. Some of the investment that we have made is now effectively being collapsed into the ways of working with the traditional execution engine.
From an integrated digital perspective, we have obviously established our digital foundations. I talk a little bit about the fact that we have launched the first release of our new app to a controlled sample of 22,000 customers. The second release is expected in the last quarter of FY 2027 to a broader audience. I think the important thing there is, as we think about digital, it is not just app-based. It is really the entirety of the digital estate, and we are starting to see the consistency of the digital experience in-app be very similar to the digital experience in our physical spaces. Our integrated health enablement tribe, effectively we are using technological muscle to signify and significantly enhance our health journeys. That is very important for lead generation as we deliver on medical insurance leads, gap leads, life leads.
I think once someone is invested in the product, the stickiness is so much better than just a traditional customer. We are using data that is coming out of the integrated health enablement tribe to drive those journeys and create what is an efficient use of data to generate leads, and ultimately a different way to commercialize our database. The customer life cycle value, that is ultimately where Better Rewards sits. Anything Better Rewards, from evolution to program enhancements to partnerships, even the evolution of the Better Rewards basket to remain very relevant to the South African consumer from a data-led perspective is sitting there and continues to be focused on and evolved. Then the concept of, now that we have got the promotional base invested in, the concept of personalized journeys, the concept of personalized deals coming out of customer life cycle value.
Commercial decision intelligence, obviously a data-driven trading unit that supports our categories. They have played a huge role in driving categorization in-store, which I spoke about previously, in terms of increasing the trading densities. Everything from promo analytics to assortment optimization is coming out of that and integrating with our normal category teams. Wholesale innovation, Chris talks about and expands on what we are doing in the TLC space in terms of creating a value proposition. Then enterprise acceleration, which is really looking at how do we improve or drive cost consciousness in our stores, the biggest project there being the reduction in the cost to service script. Again, very much influenced and empowered and amplified by what we are doing in Store of the Future.
These will continue, but ultimately, X, bigly labs, as we think about it, really focuses on three areas: intelligent customer experience, strategic growth platforms, and ultimately, productive modern organization. Everything from AI integration into how we work through a customer lens is being driven by the unit that is X, bigly labs. If we move to slide 24, this describes where we are in the restructuring process. The restructuring process was embarked to ensure that we were designed and organized in a way to move fast and move effectively. I think we inherited a structure that was appropriate for retailing at a specific time, but needed to be adapted, specifically in terms of ways of working with X, bigly labs to enable clear lines of accountability and decision-making, and faster and more effective execution, specifically when you think about the data-led innovation that is coming out of X, bigly labs.
The restructuring process is 60% complete, and we anticipate that the completion of it will be by December 2026. What we are seeing is we are seeing the right resources being placed in the right roles, reporting to the right leadership, with the ability of decentralized decision-making happening. For myself, my direct reports have moved from 24 to 14, which unlocks our ability to work more effectively as a leadership team.
Ultimately, as much as there were many hours put into this restructuring process, I am very excited about the organizational structure that is supportive of both the incorporation of X, bigly labs, but also directly supportive of the ambitions that we have as a group to chase down, and just effectively allowing us to move a lot faster and a lot more effectively. I am now going to hand over to Chris to take us through our wholesale trading performance.
Thanks, Rui. Good morning, everyone. Thanks for the opportunity to present. Firstly, I would like to thank God for His grace and His hand of blessing upon our business. Without Him, none of this would be possible. I want to thank and congratulate my whole team on their dedication and continued focus on driving sales, exceeding customer expectations on service, and controlling costs. This morning, I will take you through some of the details surrounding the top-line revenue numbers achieved by CJ Distribution during the first six months of the 2027 financial year. I will be focusing on the main business models driving the revenue growth that we are seeing. As mentioned by Julia earlier, wholesale revenue has increased by 9.6% to ZAR 18.3 billion for the first six months.
Our operating profit has decreased from 1.7% to 1.1% due to a lower SEP increase and the impact of the rising fuel price. External revenue achieved a growth of 7%. The number will be further elaborated on in the following wholesale revenue slide. If we turn to slide 26, the table illustrates wholesale customer growth by channel, with corresponding revenue growth. If we turn our focus to the left-hand side of the table, we can see that Dis-Chem Pharmacies, their store growth has gone from 302 to 328 stores. Revenue growth from ZAR 13.5 billion to ZAR 14.9 billion, which equates to a 10.3% growth in revenue from Dis-Chem Pharmacies. Support from Dis-Chem stores declined slightly from 88.8% down to 88.0%. If we look at the middle, The Local Choice, The Local Choice store growth from 258 to 294 stores, which equates to a 14% growth in franchisee numbers.
Revenue from The Local Choice franchisees grew from ZAR 1.45 billion to ZAR 1.59 billion, which equates to a 9.3% growth in revenue. Support from The Local Choice franchisees declined slightly from 82% to 80%. On the right-hand side, independent stores. Independent store growth from 1,350 to 1,396 stores, which equates to a 3.4% growth in independent customers. Revenue growth from independent customers grew from ZAR 1.75 billion to ZAR 1.84 billion, which equates to a 5% growth in revenue from independent customers. Support from independent customers grew from 28.0% to 28.4%. The Dis-Chem support is stable at just around 88%. We are also happy to see the support from The Local Choice customers stabilizing at around 80%. Support numbers this high are comparable to the Dis-Chem support numbers, despite the fact that The Local Choice stores are independently owned stores.
It was pleasing to see the The Local Choice revenue growth at 9.3%, which once again proves the value of the model. Our independent customer count grew by 3.4%, and our revenue growth in this customer group was at 5%. If we turn to slide 27, The Local Choice retail performance. As can be seen, the group's retail revenue has increased to ZAR 2.84 billion for the first six months of the 2027 financial year.
This is a 13.5% growth in the group's retail revenue. The Local Choice customer revenue growth is partly driven by front shop support and ranging that we as a supply chain offers them. We currently have 300 The Local Choice franchise stores. If we turn to slide 28, we focus on X, bigly labs' involvement. The wholesale tribe within X, bigly labs supports us in driving a new set of capabilities, with specific focus on The Local Choice Pharmacy franchise group.
Outcomes we are working on together includes increasing the loyalty base of customers and improving their reward value, improved profitability of the franchisees, and consistent growth of a strong TLC network that is anchored in community health. We intend doing this collectively with X, bigly labs by building a customer engine using analytics to create visible value and reward loyal customer behavior, equipping the owners with operating playbooks and bespoke problem solutioning, catalyzing the network growth with data-led site identification, owner selection, and funding through a dedicated growth team. This supports the franchisees in executing their entrepreneurial spirit by being able to open and own more stores. If we now turn to slide 29, this is what X, bigly will be focusing on for the next six months.
Firstly, building TLC’s internal capability, setting the foundation for pharmacies, providing strategic advice, turning what works into shared playbooks, and giving new pharmacies a structured path to success. Lastly, delivering the strategic initiatives, for example, a simple loyalty proposition that rewards everyday health. The expected value and impact of this will be capacity to grow the network at pace, utilizing group scale where it adds the most value, owners and frontline staff gains time and spends more of their time on customers and care, new stores reaching their full potential sooner, more reasons for customers to choose TLC, and deeper, longer-term relationships built through care. Thank you very much for your time, and I will now be handing back to Rui.
Thank you, Chris. If we go through our group outlook, a lot of this has been covered through the presentation. I think importantly, we have seen strong post-period trade with group revenue up 7.9% for the seven weeks ending October 19th. Retail revenue was up 7.2%, but I think importantly, the market was very, very soft in September. As per NielsenIQ, September showed our strongest market share gains across the preceding seven months, with our volume growth up at 4.9% against the total market growth that had declined 2.6%. Again, emphasizing what we believe is an appropriately structured Better Rewards program that is really creating value for our consumers. Importantly, with the stabilization of Better Rewards, further investment in promotional activity will only be driven by predictive and adaptive offers executed through X, bigly labs, as I described, the customer lifecycle value tribe.
Beyond that, I think importantly, these are the strategic focus areas for us. The continued identification and acceleration of new store openings, done again through a very data-led lens. 30 retail store pharmacies planned for FY 2027. We spoke about the execution to date with a very, very strong pipeline. X, bigly labs using data-led commercial decisioning capability, prioritizing full Store of the Future revamps based on revenue and earnings uplift opportunity, with many of these revamps being pulled forward ahead of the traditional revamp cycle and allowing us to engage with landlords in how we surface these and bring these to life. We are very excited about the launch of our new app with best-in-class cataloging, pricing, performance, and order management to really realize our omnichannel retailing ambitions. More importantly, extending that into healthcare with pharmacy and clinic digitization.
As I described previously, we want the experience of a customer, a patient, or a policyholder to be the same in the digital world as it is in the physical world. We want them to allow us to enter the digital or physical world at their discretion and not be compromised on the healthcare delivery or the retail delivery of what we intend to do. We will focus on the conclusion of the organizational restructure, which will ultimately empower fast and effective ways of working. I think with an appropriately shaped organizational structure, with a very clear purpose, with a reward engine that has now been settled, we appreciate the need to restore our operating margin, which is currently at 4.4%. We are in a good position to do that. We focus on cost discipline. It is one of the guiding principles of the group.
Importantly, we ensure that, or we will ensure that retail cost growth is below retail total income growth. It is an incredibly important focus area for management and will remain as such. Then ultimately, to rebuild the return on equity over the medium term. In the last 12 months, and specifically in the last six months, we have embarked on a lot of change. We have delivered a lot of strategic initiatives that are now touching the consumers and ultimately landing in the market. We do appreciate as a management team that we have to be robust in our execution, and we look forward to that. It is very encouraging. There is an incredible energy in the group at the moment.
As much as the consumer is very value-constrained and the environment becomes highly competitive, we do believe that we are well-placed, specifically around our healthcare ambitions, together with some of our strategic initiatives to continue to make inroads into market share gains and deliver strong earnings. Ultimately, as I said, restore operating margins and rebuild our return on equity. I would like to thank you for listening to the presentation. We will take any questions that you may have.
Good morning, everyone. Thank you for taking the time to dial in and for your interest in Dis-Chem's interim results. We have received several questions, which I have grouped into key topics. We will work through these questions through the themes in turn, with management team responding to the question under each topic. With that, let us get started. "Retail revenue growth has slowed steadily from 8.8% in the first 11 weeks to approximately 7.8% in the last 15 weeks, 7.2% post-period. How are you thinking about revenue growth through the second half?"
I think there is a combination of factors. One, the market has slowed. A good indication of that would have been our relative volume growth against the market, so 5.4% against 0.1% in the reported period, and then the market being down 2.5% or 2.6% across September. There is definitely a slowness in the market. The other element that is playing out there is the extension of price deflation. So, price deflation contributes more, the more penetration of Better Rewards products. Obviously, we now anniversary that, and price inflation allows or comes back into the number. So, I guess it is really dependent on how soft the market is if we think about the evolution of the retail revenue number for the second half.
We do know that we are going to get some sort of relief from a price inflation perspective on 45% of the front shop, which are the Better Rewards brands, and we will also get a little bit of relief because of the SEP price increase that is coming through dispensary.
"Can you explain why retail employment costs, ex-X, bigly, grew by 10.5%, and how should we think about the second half and then over the medium term?"
Ultimately, the relationship between total income growth and retail employment cost growth is what creates operating leverage or positive operating leverage in our environment, and something we are very focused on as management. The 10.5% would have been a function of the new stores opening and the timing of the opening of the new stores, as well as some training-related expenses with Store of the Future rollouts, and then a small centralization of head office cost that we continue to invest in as we change the ways of working between the execution engine that is Dis-Chem and X, bigly labs.
"How do you get the operating margin back from 4.4% to 5.3% level? What is the timeline, and which levers matter the most?"
I think the initial step change will be in the second part of the year. As we tried to describe, the earnings distribution obviously places pressure on the operating margin in the first six months. We anticipate a recovery, a natural recovery, just because of the earnings, the cost base in the second half of the year versus how we are trading in the second half of the year. Then beyond that, it is just the management of that relationship between total income growth and cost growth. There are many initiatives that have been front-loaded that are being driven through X, bigly labs, all the way from Better Rewards and Better Rewards Evolution to Store of the Future. There is a specific EBIT uplift that we anticipate over the medium term that comes from X, bigly labs.
That way of working, or that change in way of working, is ultimately how we improve the margin to get back to the 5.3% and beyond.
"While you are driving great top line and market share gains, your costs are growing faster, leading to HEPS declines. Please explain how you will bring costs growth down in the future while still being able to drive healthy top line to get positive jaws."
I suppose the short-term answer to that is the earnings distribution piece that I mentioned. The longer-term answer is that the ways of working, so the change in the ways of working that require to be made to stay relevant to operate and compete in South African retail, have been completely invested in. If you think about kind of a margin J-curve, or an operating margin J-curve, we would be at the bottom of that. We've established X, bigly labs. We've changed the ways of working. Data-led decisioning is effectively integrated into the organization. The second half of the year will obviously show relief and will improve margins. Then beyond, it will be the relationship that we manage between cost growth and total income growth.
"What sort of deflation did you experience in the first half and post-period trade?"
We saw deflation of around 6%, which is effectively the invested discounts on Better Rewards against the natural price inflation of those products on 45% of the basket. Then we saw genuine price inflation on the non-Better Rewards brand. It's a combination of those two that created what was muted price inflation in front shop, and the majority of front shop turnover growth was volume.
We're going over to the Better Rewards questions. "Better Rewards made up a larger share of retail revenue in the first half than in the previous half, but retail income margin expansion slowed. Could you say some more on what held the margin back?"
I would expect that that question come from the 31.7% against the 32% in the 11 weeks. Obviously, the 31.7% is the highest reported retail margin that we've got, and it shows the evolution of that total retail income margin. If the question is in relation to the 32% versus the 31.7%, that's just a function of timing. We reported an 11-week number compared to a six-monthly number, so it's just a function of timing. But certainly, total income retail margins have improved steadily over the last 12 months.
"Now that Clicks has launched a very similar rewards program design, immediate discounts, stackability, etc, do you still have better relative pricing or customer value? Do you expect that, given this pricing reaction from Clicks, that your volume growth market share gains may slow?"
It will be interesting to see how it plays out. There are some design principles that haven't been replicated in the way that they've surfaced their program. From our perspective, the only thing that we can do is we can track overlapping brands, so brands that are on both programs, and whether there has been volume implications on our end, which there haven't. Their program is still new. I think the market is still understanding the program, and ours is evolving. So it will be interesting to see how it plays out. But certainly from our perspective, the investment that we've made in Better Rewards as a promotional mechanism, as a health funding solution, is now settled, and we've rebased the top line growth.
"You say that 45% of front shop sales is with Better Rewards partners, and volumes with these partners are up 21%. Does this imply that there was a significant volume drop from non-partner product lines?"
It doesn't imply a significant volume drop. Non-partner lines would have been relatively flat from a volume perspective.
Okay. "I understand Better Rewards and the work X, bigly labs is doing to improve data and promotion efficiency, and it's leading to market share gains at the moment. How will this lead to a sustainable competitive advantage for Dis-Chem in the long run? Why can't Clicks just follow?"
I think anyone can follow. I think the benefit is in, I suppose, the effort required to change of ways of working. To move an organization of our size, or of any size equivalent to ours, into a different way to operate that's data-led, the integration of the type of resources that sit within X, bigly into kind of the traditional resources that execute on the retail side is a complex thing. It just doesn't happen overnight. It's just not about cost investment. It needs to be supported by culture change. It needs to be supported by ways of working, and that takes time. Of course, anyone can copy it. What I will say is it's very much not easy to do.
"Regarding the Store of the Future rollout, how many conversions are you planning for this year and the following year, and how much will this cost?"
From a cost per square meter, we are pretty confident that we can deliver it at the same run rate that we were delivering it previously. Of course, Melrose and Irene were more expensive per square meter, but we had never value engineered that process as yet, which we are in the process of doing, and we have done. Irene, for example, was a lot lower cost per square meter than Melrose Arch already. In terms of the property expansion strategy, there are no revamps prior to the end of the year. We have opened three of the intended 14 for the second half that are Store of the Future. We have 11 left that will all be Store of the Future formats. We have 20 committed sites in negotiation with 17, which again, will be new space, all Store of the Future.
Then we have a revamp cycle that we are being effectively prioritized. The number of revamps will be dependent on the ability for us to do that, but what we are doing is we are significantly investing in revamp opportunities ahead of the revamp cycle. If there is enough revenue and EBIT uplift associated with the Store of the Future revamp, we will pull that revamp opportunity forward, holding the discipline of return against capital deployed. The intention would be to try and do 30, but of course, that is very much at the mercy of each of those instances and the context associated with the revamp and the discussions that we are currently having with landlords.
"Is the Store of the Future rollout partly a reflection of how difficult it is to get the store economics right in the original stores? What are the biggest challenges to getting the like-for-like economics right in the existing stores?"
No, it is not. I think it is, as what we have described it is a space that does justice to our purpose, and it effectively highlights and differentiates healthcare services as the differentiator point of the brand. What we are seeing in Store of the Future formats is we are seeing, very early on, but we are seeing significantly higher trading densities when compared to older format stores of the same maturity. One of the things that is driving that is the discipline categorization in store, so ensuring that we are allocating the appropriate amount of space to specific categories, and we do not have any, for lack of a better term, lazy or slow-turning stock in markets that do not justify that. Will that improve the economics? Yes.
The other element is that the pharmacy and the clinics are designed in a way to allow us to reduce the cost to service script, for example, which again, changes the return economics of the stores. The old format stores still continue to trade well, but the ability to step change and improve the economics of the store requires a new space and a new format.
On to the X, bigly labs questions. "When will your innovation spend on X, bigly labs and the digital replatforming stop weighing on margins, and what operating margins should we expect once it's in steady state?"
As I described, I think the second half is going to show an uptick in margins, just as a function of the base not having X, bigly labs in this first half, or not a significant amount of X, bigly labs. We've discussed the environment of more linear kind of earnings distribution over the two halves. From my perspective, X, bigly labs is not ancillary to how the group works. It's integrated into how the group works, and it'll carry the same kind of cost discipline going forward in terms of cost deployed and return expected. There'll be a step change in margins that will come across with the second half trade, and then from there on, we believe that margins will improve over the medium term far beyond 5.3%, as we've discussed in the past.
"How much of the X, bigly spend is capitalized versus included in the P&L? When do you expect incremental upside from the spending to be visible in earnings?"
Again, as I said, in the second half. I think when you think about capitalized versus expenses, the majority of that is resource-driven, so it would be expensed. Obviously, some of the builds, like for example, in the digital infrastructure that we've pointed out, the ZAR 240 million that we've invested will be capitalized, but the majority of that is expensed.
Couple of wholesale questions. "Do you think the slowdown in wholesale sales growth is structural given the competitive dynamics in the sector?"
I do. I think SEP price has impacted any retail pharmaceutical wholesaler. It obviously weighs on margins, on total income margins, so that's one of the impact. And typically, if you think about who wholesale is servicing, they're servicing an independent pharmacy community. That same community is servicing the same value-conscious customer, and more reliant on drug pricing and more reliant on pharmacy as a category in their stores. So it is very tough. It's a very tough trading environment in independent wholesale, and it's almost highlighted the success and the importance of TLC again.
"Please explain why distribution had such a weak period with total income flat despite good traction with independents and TLC. How much was SEP increases versus other factors?"
Predominantly SEP price increases. Very difficult to manage some of the costs, like fuel, for example. Courier, for example, gets influenced by working capital management from independent pharmacy, so smaller orders, more frequency as they try and manage their own working capital. Predominantly a relationship between managing courier costs and the impact of SEP on total income margins, which again, there will be some reprieve into the second half of the year with the SEP price increase that has been gazetted over the entirety of the industry. Whether that plays out entirely is unlikely, but we certainly will get some reprieve. The funders are obviously pushing back on that kind of approach, but some of the manufacturers will take and bid that increase down.
"Inventory rose by 13% on the SEP buy-in, and the wholesale total income margin fell to 7.3% on the lower SEP. What do you expect from the 2.88 SEP from the 1st of October, and how much of that stock gain lands in the second half?"
A ll the stock gain will land in the second half, just as a function of how we turn the stock. As I said previously, I think those buy-ins were tactical based on the manufacturers that we anticipate and expect to take the price increase. As such, the stock gain will all land in the second half and improve total income margins for the second half in wholesale.
"Wholesale support from Dis-Chem stores and TLC franchisees both fell. Why, and what does this say about how the network buys?"
I suppose it depends on how you define fell. They moved incrementally down. That support is still incredibly strong. So north of 80% for TLC, and from a Dis-Chem perspective, close on 90%. I think the most important feature of that performance in wholesale was the improved kind of contribution to support from traditional independents that aren't TLC branded, with almost 5% gain there. That just shows the relevance of CJ Distribution for an independent that's not necessarily branded TLC, and how much more of that basket that we're taking.
"In the Section 189 process, outcome intended or expected to reduce headcount, or is it merely restructuring of roles?"
It's not intended, or it wasn't designed to reduce headcount. It was really just to restructure, and to make us more appropriately structured for the ways of working with X, bigly labs, and to drive accountability into verticals that traditionally had been structured in a very clumsy way, just because of what was needed at the time that the brand was being built. But certainly now, with the tightest span of control to myself, with more clear lines of accountability, the reorganization was only designed to facilitate that process, so not to reduce cost.
"How is the performance in Baby City, and what are the like-for-like sales growth?"
Performance in Baby City has been strong. We have obviously rationalized the network, which has helped. Like-for-likes have been bolstered by Better Rewards. As you saw, baby as a category has seen the strongest market share gains. They are very elastic SKUs, predominantly wipes and paper sit within the baby space. When you have a differentiated program like Better Rewards driving price point down on that type of elastic SKU, it drives revenue growth, and as such, total income growth. Like-for-likes have been strong, and the Baby City portfolio has performed well.
"Do you expect the planned 30 stores in FY 2027 to impact retail trading densities? Also, could you comment on trading density trends you are seeing?"
T hey will impact trading density, as new stores always do. I guess the impact is really a function of when you open them, how late into the year you open them, and how you do the calculation. The impact on trading density from our perspective, again, price deflation created by Better Rewards does not help, but we have seen strong volume gains. Now we start to see price inflation come back in. I think the most pointed piece of trading density has really been the trading densities that we are seeing in Store of the Future formats. That is certainly very exciting for me, the incremental upside, because it is not only faster maturation, it is also the ability to drive trading densities out of that format north of what we were traditionally seeing from an older format.
"How are you preparing internally for the potential entry of Medirite on Sixty60?"
Medirite has always been a threat. I think if you think about one of the benefits of X, bigly labs and the whole investment that we've made in digital, one of the things we cannot afford to lose, one of the things that we are obsessed with is script ownership. Obviously, Medirite and Sixty60 allows them to amplify their licenses to take scripts beyond the traditional reach that a pharmacy would have. We've been preparing for that for a long time. It was always expected, anticipated, and the ways of working driven by X, bigly labs, our digital ambitions, the ZAR 240 million we've invested, the new kind of best-in-class app, ultimately de-risk that environment for us.
"Are you seeing any impact of Amazon on the business, specifically the Baby City business?"
No, we are not yet.
That is all the questions we have. Thank you very much for dialing in, and have a lovely day.