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Coutu sees potential in Rite Aid stake Add to ...

It has been a major headache for Jean Coutu Group (PJC) Inc. and made for much investor skittishness.

But François Coutu, the Quebec drugstore chain's president and chief executive officer, says he's confident its stake in troubled U.S. drugstore chain Rite Aid Corp. will eventually pay off as the shares rise in value.

"There is a new dynamic at work now," Mr. Coutu said in an interview yesterday after Jean Coutu posted a swing to a profit in the second quarter from a loss in the year-earlier period.

"The signs right now indicate that it's a good idea to hang on to the shares," he noted, adding that Rite Aid still faces major challenges from its two key rivals, Walgreen Co. and CVS Caremark Corp.

"It takes time to get this investment moving along," he said on a conference call for analysts. "There is still potential."

Jean Coutu said yesterday that it has written off the final portion of its 28-per-cent holding in Camp Hill, Pa.-based Rite Aid, after losses exceeded the carrying value of the investment.

Longueuil, Que.-based Jean Coutu's share of Rite Aid's second-quarter loss was $24.3-million, compared with $73.1-million a year earlier.

Jean Coutu acquired the Rite Aid shares in a deal two years ago, when it sold its 1,800 Brooks and Eckerd stores in the U.S. to the chain.

Rite Aid has been struggling to integrate the stores and deal with its huge debt load while also facing tough competition from rivals as well as non-traditional players such as Wal-Mart Stores Inc. and supermarket chains.

Mr. Coutu said Rite Aid has made strides in the past few months, including a refinancing of part of its debt and better operating results.

He added that Rite Aid and the rest of U.S. pharmacy sector stand to benefit if U.S. President Barack Obama's health care reform passes and more Americans get access to benefits.

But Howard Davidowitz, chairman of national retail consultant and investment banker Davidowitz & Associates Inc. in New York, says Rite Aid has bought some time with its refinancing but that it lacks the resources to invest in much needed store upgrades and remodellings to keep up with its rivals.

"Rite Aid is underperforming the sector. Walgreens and CVS are getting stronger but Rite Aid is unable to respond," he said.

On the home front, Mr. Coutu said Jean Coutu is investing in new stores and revamps as it moves to fend off the challenge from rivals, including Shoppers Drug Mart Corp. unit Pharmaprix.

"We want to make sure we don't lose sight and that we actually invest back in our market and invest a lot more than most of our competitors and that's why we stay number one in this market," he told analysts.

JEAN COUTU GROUP (PJC.A)

Close: $9.65 (Cdn), down 22¢

RITE AID (RAD)

Close: $1.50 (U.S.), up 2¢

****

Jean Coutu

Q2 / 2009 / 2008

Profit /$14.9-million / ($39.1-million)

EPS / 7 cents / (16 cents)

Revenue / $608.7-million / $567.5-million

Source: Company reports

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