Amcal owner back in the black with recovery bolstered by COVID anti-viral sales in second half

The operator of pharmacy brands Amcal, Discount Drug Stores and Guardian has returned to profit thanks to a new retail strategy and stronger sales across its network.

Reporting a full-year net profit after tax of $1.8 million for the financial year ending 31 January 2023, Sigma Healthcare (ASX: SIG) has recovered from a $7.2 million loss the year prior which was attributed to costs incurred as part of the group’s strategic plans and its new distribution centre in Truganina, Victoria.

Net revenue in FY23 was up 6.2 per cent to $3.66 billion and earnings rose by 65.3 per cent to $49.6 million. Debt has also been crushed by Sigma, reduced by 55 per cent from $149.2 million to $67 million at the end of January.

According to Sigma CEO and managing director Vikesh Ramsunder, who commenced in the role at the beginning of the company’s latest financial year, the pharmacy operator has made ‘significant progress in the transformation of the company’.

“We now have a much stronger operational platform to improve service delivery to customers, which underpins our pursuit of growth opportunities and will incrementally deliver improved financial outcomes for shareholders,” he said.

The company remains a beneficiary of COVID-related pharmacy sales, which evolved over the financial year as the pandemic progressed thanks to greater access to vaccines and the introduction of anti-viral medication to at-risk patients.

According to Sigma, wholesale pharmacy sales revenue was up 2.2 per cent to $3 billion during the year, buoyed by sales of rapid antigen test (RAT) kits in the early months of the first half and sales of COVID anti-viral medication in the second half.

Sales were offset however by ‘operational challenges’ in the first half - teething issues that were triggered by the implementation of a new company-wide enterprise resource planning (ERP) system.

Sigma says the disruption led to increased costs and resulted in a loss in market share of over 2 per cent as the company focused on system stabilisation and improving processes and practices.

“We now have great confidence in our operational ability to delivery against key customer performance metrics,” Ramsunder said.

Beyond the implementation of the new ERP, further transformation at Sigma was underway in FY23 in the form of a new retail strategy announced in September last year.

These strategic plans involved consolidating Sigma’s franchise brand network and narrowing its portfolio to include just the Amcal and Discount Drug Store names - leaving behind PharmaSave and Chemist King in turn.

Some Guardian-branded stores still exist but the plan is making progress and the company hopes the merger of brands will ‘provide critical mass to drive customer engagement and support our longer-term strategy’.

“The merger of the Guardian brand is on track to achieve our targets, with around 50 per cent of our identified members already committing to convert,” Ramsunder said.

“In parallel, we are rebuilding our internal capability to ensure we have the required skillset to support brand members, grow our private and exclusive label range, and pursue sustainable and profitable growth.”

As for the current financial year, Sigma highlighted the sale of its CHS Hospital distribution business for $44 million. Announced earlier this month, the company said while that business delivered $364 million in sales in FY23, it was not profitable due to structural margins in the sector.

“This is the fourth transaction as part of our strategy to simplify our business and focus on our core community pharmacy operations,” Ramsunder said.

“Hospital distribution was a very low-margin business that would require significant investment to integrate into our systems and distribution capability. The sale will release $35m million to $40 million of cash for the business.”

Following the disposal of the hospital distribution business, Sigma will rename it to Sigma Healthcare Logistics and pursue further opportunities in the third-party logistics sector.

“We currently have around 30,000 pallets of inventory under management for 3PL customers with latent capacity to absorb another 20,000 pallets following the recent extension of our Truganina Distribution Centre in Victoria.”

With these renewal plans in the works, Ramsunder told shareholders to expect improved financial performance during the ongoing financial year FY24.

“As we continue to implement our brand consolidation and business simplification, there will be some level of disruption in the year ahead, we are however in a much better place to implement our strategy, win back customers and deliver an improved financial performance,” Ramsunder said.

“Whilst it is too early to provide specific guidance for the full year ahead, we anticipate that the steps taken in the year to improve our operational performance and cash position will lead to Reported EBIT being between $26 million to $31 million in FY24.”

Shares in SIG are down 2.11 per cent to $0.60 per share at 11.56am AEDT.