April 26, 2012 / 4:39 PM / in 6 years

UPDATE 3-Shoppers Drug Mart profit edges higher

* Q1 EPS 0.56 vs C$0.57 analyst expectation

* Sales up 2 pct; same-store sales rise 1.5 pct

* Stock dips 0.8 pct to close at C$42.00

By Susan Taylor

April 26 (Reuters) - Shoppers Drug Mart Corp reported lackluster profit and sales growth on Thursday as Canada’s biggest pharmacy chain again felt the squeeze from government reforms that have cut prescription drug margins.

As a consequence, the company may have little choice but to keep working to control costs and buy back its own shares as a way to boost profitability, some analysts said.

“What we’re going to see out of Shoppers going forward is less of a focus on network expansion. We’ve seen their square footage growth year-over-year come down quite substantially from levels two years ago,” said Canaccord Genuity analyst Derek Dley.

“The focus now is going to be on returning cash to shareholders and improving profitability, and we’ve seen that through dividends and increased share buybacks.”

Shoppers opened or acquired 14 stores in the first quarter, taking its store count to 1,334. That pace of expansion is down sharply from the same period in 2010, when it had 27 new stores for a network total of 1,303 stores.

”That’s why we have a “hold,” said Edward Jones analyst Brian Yarbrough, referring to the brokerage’s rating on the stock. “There’s limited sales growth and they’re doing what they can to control expenses.”

PROFIT “LOW QUALITY”

Net income rose to C$119 million ($120 million), or 56 Canadian cents a share, in the quarter ended March 24, from C$118 million, or 54 Canadian cents, in the year-ago period.

Analysts, on average, had expected earnings of 57 Canadian cents a share.

A share buyback program, which reduced the outstanding shares by 2.6 percent, along with lower taxes and finance expenses, helped boost profit, the company said.

“The way they made earnings was through lower interest, share buybacks and a lower tax rate which is kind of low quality,” said Yarbrough.

Overall sales rose 2 percent to C$2.39 billion in the quarter - just shy of analysts’ average forecast - while sales at established stores, a key measure for retailers, grew 1.5 percent.

The company said sales were crimped by a milder cold and flu season and additional statutory holiday in the quarter.

A 2.5 percent gain in front-of-store sales, which include over-the-counter medications, food and drinks and cosmetics, overshadowed a smaller 1.6 percent gain in prescription revenue.

Generic medication made up 57.6 percent of prescriptions in the quarter, up from 56.6 percent in the same period last year. Prescription sales made up 48.8 percent of total sales, notching down from 49 percent in the same period last year.

PRESCRIPTION FILES STILL PRIORITY

Despite the challenges of its pharmacy operations, Shoppers repeated that it is working on “a number of deals” to buy prescription files from other pharmacy chains.

It passed on the purchase of such files from Zellers because of the price, said Chief Executive Dominic Pilla on a conference call with analysts.

U.S. discount chain Target Corp 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, but will not buy Zeller’s prescription files.

“We didn’t think it was worth the value that they were looking for,” said Pilla. “In terms of other files, we do have a fairly active pipeline.”

The company is working on a number of deals and sees itself doing a “decent volume” on such purchases in 2012 and 2013. “You’ll definitely see some of that in Q2,” said Chief Financial Officer Brad Lukow.

Shoppers shares fell 0.8 percent, or 34 Canadian cents, to close at C$42 on the Toronto Stock Exchange on Thursday.

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