Jean Coutu feels heat in tough market, but doesn’t see immediate acquisitions

Jean Coutu Group (PJC) Inc. is feeling the heat from increased competition but an acquisition plan to fend off the threat is not in the cards for now, says the head of the drugstore chain.

"No question about it there is more competition with the entry of [U.S. giant] Target. Not just Target but all the retailers decided to be more aggressive this fall," Coutu president and chief executive officer François Coutu said on a conference call Thursday after the company posted higher-than-expected third-quarter net profit on lower revenues.

Some customers have been checking out rival chains' offers -- seeing "if the grass is greener somewhere else" -- but Coutu's prescription count remains robust and loyal customers are staying put, said Mr. Coutu.

A slow start to flu season also contributed to a 1.3-per-cent drop in same-store retail sales (stores open a year or more) in the third quarter, he said.

Longueuil, Que.-based Coutu posted net profit of $62.5-million or 30 cents per share, up from$56.2-million or 26 cents in the year-earlier period.

But revenues slipped to $712.5-million compared with $716.6-million.

The 30-cents-per-share profit in the third quarter of fiscal 2014 beat the analysts' estimate of 28 cents.

In the absence of significant acquisition opportunities, Coutu is focused on a strategy of opening new stores in smaller communities, Mr. Coutu said.

The company is also looking to bolster so-called "value propositions" for customers in the face of the heightened competition, he said.

"Out there it's tough. It's very competitive," he said.

Government-imposed price controls for generic drugs are also having a negative impact, he added.

With recent changes in the retail landscape -- such as Loblaw Cos. Ltd.'s acquisition of Shoppers Drug Mart Corp. and Sobeys Inc.'s takeover of Safeway Canada -- the expected rise in drug stores going up for sale has not materialized, said Mr. Coutu.

Coutu, which has no debt and has the financial resources to make a major acquisition, has found it difficult to find buying opportunities, he said.

Many observers have said that a merger with Quebec grocery chain Metro Inc. would make strategic sense for Coutu, the province's largest pharmacy chain.

Regarding third-quarter results, Coutu said it stands to book an income-tax saving of $53.6-million in the fourth quarter as a result of a tax deduction for donation to a charitable organization.

"The results of the third quarter of fiscal 2014 highlight the performance of our organization since the operating income and the profit per share recorded a significant increase in spite of a growingly competitive environment and a restrictive regulatory context," Mr. Coutu said in a news release.

"Our priority over the coming months will consist to continue the implementation of dynamic strategic initiatives that will contribute to increase sales, pursue our growth and maintain our leadership."

The company said that basic profit per share in the third quarter would have been 33 cents excluding the shares repurchased in the share buyback that was completed in November.

Coutu announced in October it planned to distribute up to $502-million to shareholders through a share buyback program as well as a one-time dividend of 50 cents.

The move perplexed some analysts, who were expecting Coutu to map out a consolidation strategy.

For the third quarter ended Nov. 30, 2013, pharmacy sales decreased 1.6 per cent and front-of-store sales fell 1.3 per cent, the company said.

Generic drug sales reached 66.7 per cent of prescriptions in the third quarter, up from 61.8 per cent in the year-earlier period.

The introduction of new generic drugs in the third quarter reduced pharmacy retail sales growth by 1 per cent and generic-drug price reductions also reduced the growth of those sales by an additional 1 per cent, said Coutu.