July 19, 2012 / 8:56 PM / in 5 years

Shoppers Drug Mart adjusted profit, sales rise

(Reuters) - Shoppers Drug Mart Corp SC.TO, Canada’s largest pharmacy chain, said on Thursday its second quarter edged higher after excluding a charge for store closures, as solid sales growth outweighed higher operating costs.

The company said regulatory changes could affect its results in the second half, dragging on prescription profit.

Total sales rose 2.6 percent to C$2.46 billion ($2.43 billion) in the quarter, while sales at established stores, a key measure for retailers, rose 2.2 percent.

In recent quarters several provinces, including Ontario and Quebec, have cut prices for prescription drugs and put pressure on sales and margins at Shoppers and other Canadian pharmacy players like Jean Coutu Group Inc (PJCa.TO).

“We’ve seen, just in the last short period of time, many additional provinces launching additional reform that did not impact us in the first half of the year,” said Chief Executive Domenic Pilla on a conference call.

In a note to clients, RBC Capital Markets analyst Irene Nattel said regulatory reform is a “new normal,” as governments look to cut their prescription spending.

“Investors must recognize that regulatory reform will continue to be a fact of life in this space. But as the leading network in Canada, (Shoppers) is well positioned to partner with government to help improve efficiency of spend in this space,” she said.

Pilla said Shoppers was stepping up acquisitions. In May, the company said it had agreed to buy 22 pharmacies from TSX Venture-listed Paragon Pharmacies Limited PGN.V.

“There are a number of other decent-sized acquisition deals that are in the pipeline,” he said, adding that some would close in the current quarter.

Front-of-store sales, which include over-the-counter medication, cosmetics and food, rose 3.4 percent, and pharmacy sales were 0.8 percent higher.

Operating costs rose 5.0 percent excluding the Murale charge, in part because of labor costs and other expenses related to “network growth and expansion initiatives.”

The company took a C$5 million pre-tax charge as it closed two of the eight stores under its Murale banner. The stores, launched in 2008, sell makeup, perfume and skin care products.

For the quarter ended June 16 net income slipped to C$146 million, or 70 Canadian cents a share, from C$148 million, or 68 Canadian cents, a year earlier.

Excluding the Murale charge, adjusted net earnings edged up to C$149 million, or 71 Canadian cents a share.

Analysts, on average, had expected earnings of 70 Canadian cents a share on revenue of C$2.46 billion, according to Thomson Reuters I/B/E/S.

Shares of Shoppers Drug Mart closed up 1.0 percent at C$43.07 on the Toronto Stock Exchange on Thursday.

($1 = $1.01 Canadian)

Reporting by Allison Martell in Toronto and Ankur Banerjee in Bangalore; Editing by Frank McGurty

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