January 10, 2008 / 12:51 PM / 10 years ago

Jean Coutu profit falls on Rite Aid hit

OTTAWA (Reuters) - Canadian drug store chain Jean Coutu Group (PJCa.TO) said on Thursday that second-quarter profit sank 88 percent on a big hit from its share of losses at partly owned U.S. pharmacy chain Rite Aid Corp (RAD.N).

But analysts said the results largely matched expectations and helped lift Jean Coutu’s battered stock, which has tumbled nearly 38 percent in the past six months amid worries about its stake in troubled Rite Aid.

Jean Coutu, which sold its Brooks and Eckerd drugstore chains to Rite Aid last year for cash and stock, reported net earnings of C$9.5 million, or 4 Canadian cents a share, for the quarter ended December 1.

That compares with a profit of C$79.3 million, or 30 Canadian cents a share, in the same period last year.

The results were “in line, if not a little bit better than expectations,” said Research Capital analyst Stuart Morrow. Coupled with details about the company’s Canadian operations, that helped lift the stock about 4.5 percent, he said.

Jean Coutu said its share of after-tax losses from Rite Aid was C$26.1 million, or 10 Canadian cents a share, in the quarter. So far this financial year, its portion of after-tax losses from the No. 3 U.S. pharmacy chain totals C$50.9 million, or 19 Canadian cents a share.

In December, Rite Aid posted a bigger than expected third-quarter loss of $84.8 million, citing consumer caution and a mild flu season, and cut its full-year forecast.

Jean Coutu also took a C$3.7 million provision to write down the value of its third-party asset-backed commercial paper in the quarter. It had C$35.5 million in the paper at December 1.

RITE AID “LONG-TERM INVESTMENT”

“I realize that Rite Aid is going through an integration process, the economy is not doing extremely strong south of the border, but for us, it’s still a long-term investment,” Chief Executive Francois Coutu said on a conference call.

“Our shareholders should look at it the same way.”

Coutu expects Americans to increase their investment in health care in the next two years, which will benefit the pharmacy sector.

“We saw it here in Canada. (The) United States is about to do the same,” he said. “We’ll be in a great position to grab that growth.”

The company said second-quarter revenue fell to C$583 million from C$3.19 billion without last year’s contribution from Brooks and Eckerd stores.

Operating income before amortization was up nearly 12 percent in Canada to C$59 million.

Retail sales at Canadian stores open at least 12 months rose 6.1 percent as same-store pharmacy sales increased 9.5 percent. Front-end sales were flat.

“Like other North American drug store retailers, front-end sales growth figures are being negatively impacted by substantial declines in the sale of allergy, cough, cold and flu medication due to a milder season this year,” Coutu said.

A C$105 million plan for store openings and renovations in the next year should spark gains in front-end sales, Morrow said.

Jean Coutu closed the Brooks and Eckerd deal last June for $2.36 billion in cash and 250 million shares of Rite Aid. As of December 1, it held a 31.7 percent equity stake in Rite Aid.

Jean Coutu stock added 44 Canadian cents to C$10.60 on the Toronto Stock Exchange on Thursday.

($1=$1.01 Canadian)

Reporting by Jonathan Spicer and Susan Taylor; Editing by Rob Wilson

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