July 16, 2008 / 4:35 PM / in 9 years

UPDATE 2-Shoppers Drug profit up on strong sales, cost cuts

(Adds details, quotes, updates share price)

By Leah Schnurr

TORONTO, July 16 (Reuters) - Profit at Shoppers Drug Mart SC.TO rose about 14 percent in the second quarter, Canada's biggest pharmacy chain said on Wednesday, aided by stronger sales, cost reductions and a decrease in its income tax rate.

Shoppers, which also operates stores under the Pharmaprix banner, said it earned C$128 million ($128 million), or 59 Canadian cents a share, in the period ended June 14. That compares with a profit of C$112 million, or 52 Canadian cents, in the same period last year.

The company outpaced expectations by a penny, with analysts expecting a profit of 58 Canadian cents a share before items, according to Reuters Estimates.

The results helped send shares of Shoppers up C$2.32, or 4.5 percent, to C$53.42 by early afternoon on the Toronto Stock Market.

Shoppers said it had strong sales growth across the country, while it made gains in all of its product categories except tobacco, which is being phased out of stores in Western Canada that still carry tobacco products.

Same-store sales, excluding tobacco products, rose 4.6 percent, while overall sales were up 9.4 percent at C$2.1 billion.

Prescription drug sales on a same-store basis rose 6.4 percent. Total prescription sales rose 11.6 percent to C$1 billion, accounting for 47.9 percent of the company's sales mix.

Front-of-store sales, including products such as cosmetics, candy bars and over-the-counter medications, rose 3 percent, excluding tobacco, on a same-store basis.

Total front-of-store sales, excluding tobacco, were 7.4 percent higher at C$1.1 billion.

Shoppers has fared better than most of its competition as retailers struggle with the impact of soaring fuel prices, while the economy is beginning to show signs of strain.

"Our thesis has been that growth is inevitably going to slow for Shoppers," said David Hartley, analyst at BMO Capital Markets in Toronto.

"(Earnings growth) is not quite the 15-plus percent we've seen over the last couple of years. It is indeed slowing."

Toronto-based Shoppers competes with Jean Coutu Group (PJCa.TO), which last week posted a bigger quarterly loss on its stake in struggling Rite Aid. Rivals also include Katz Group Canada's Rexall and Pharma Plus chains.

Shoppers opened or bought 22 drug stores in the quarter, including nine relocations, while it shut two smaller drug stores. At the end of the quarter, the company had 1,171 stores, consisting of 1,106 drug stores and 65 Shoppers Home Health Care stores, which supply medical equipment and devices.

The company has been adding and expanding stores while extending its product line to include food, cosmetics and electronics, allowing it to operate like a mini-department store.

Early this month Shoppers said it was buying the HealthAccess division of Calea Ltd, which provides specialty drug distribution and patient support services. That sector includes complex, expensive drug therapies for certain chronic conditions, such as cancer.

Hartley said that Shoppers' expansion plan is helping the company out considerably, while it continues to win market share in the cosmetics area. ($1=$1.00 Canadian) (Additional reporting by Susan Taylor; Editing by Peter Galloway)

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