February 9, 2012 / 10:08 PM / in 6 years

Shoppers Drug Mart profit rises with higher sales

TORONTO (Reuters) - Shoppers Drug Mart Corp SC.TO, Canada’s biggest pharmacy chain, said on Thursday its quarterly profit rose along with sales, especially in its non-prescription business, and its shares rose 2 percent.

Front-of-store sales, which include over-the-counter medications, cosmetics, food and drinks, rose 5.5 percent in the fourth quarter, outpacing prescription revenue, which was up 2.3 percent.

“They delivered to expectations, which I think is solid,” said Scotia Capital analyst Patricia Baker. “It’s a tough economy out there.”

Shoppers also raised its dividend by 6 percent and renewed its share repurchase program.

Edward Jones analyst Brian Yarbrough said that considerable discounting in the quarter meant higher-than-expected sales did not translate into much higher earnings.

“Obviously it was very promotionally driven, and that’s been going on for two years now, and I don’t see an end in sight,” he said.

Margins on prescription drugs narrowed because of government reforms that have lowered the price of generics. That segment of prescriptions rose to 57.1 percent of the total in the quarter from 55.7 percent in the year-before period.

Yarbrough said drug reforms have been the biggest factor in pushing Shoppers from 15 to 18 percent earnings growth to 3 to 7 percent growth. He sees the headwinds persisting as more Canadian provinces consider the regulatory changes that are already in place in Ontario and Quebec.

PRESCRIPTION FILES

Asked on a conference call about the company’s interest in buying prescription files from other pharmacy chains, Chief Financial Officer Brad Lukow said such acquisitions are still a priority.

“The team is quite active on a number of fronts, on a number of deals, in number of provinces,” he said. “It’s still our expectation that we’ll see quite a bit more activity in terms of completed transactions in 2012, but it will be a build process throughout the year.”

U.S. discount chain Target Corp (TGT.N) is taking over the leases of many stores in Hudson’s Bay Co’s Zellers discount chain as part of its spring 2013 entry into Canada. It will not, however, buy Zellers’ prescription files, offering an opportunity for Canadian drugstores.

In November, Shoppers Chief Executive Domenic Pilla said the company would try to benefit from Target’s entry by taking some of Zellers’ prescription customers. The company did not mention Zellers on Thursday.

NET INCOME, SALES RISE

For the quarter ended December 31, Shoppers’ net income rose to C$176 million ($176.82 million), or 82 Canadian cents a share, from C$169 million, or 78 Canadian cents, in the same quarter last year. Analysts, on average, had expected earnings of 82 Canadian cents, according to Thomson Reuters I/B/E/S.

The company said it expects sales to increase between 2.5 and 3.0 percent in 2012, after a rise of 2.6 percent last year. As part of its C$350 million capital program, it plans to increase retail space by 3.5 percent, relocating about 20 stores, opening 20 to 25 new outlets, and expanding about 15 locations.

Shoppers raised its quarterly dividend to 26.5 Canadian cents a share. In renewing its stock repurchase program, it authorized the purchase of up 10.6 million shares, or about 5 percent of shares outstanding, by February 14, 2013.

The company’s shares closed up 2.0 percent at C$40.64 on the Toronto Stock Exchange on Thursday.

($1=$0.99 Canadian)

Reporting by Allison Martell in Toronto and Bhaswati Mukhopadhyay in Bangalore; Editing by Peter Galloway and Janet Guttsman

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