Investors await Jean Coutu's prescription for tough retail sector

For Jean Coutu Group (PJC) Inc., the prescription is "Deploy major corporate strategy plan. Urgently."

A tough retail sector is getting even tougher as U.S. giants such as Target Corp. and Wal-Mart Stores Inc. set up shop or expand operations in Canada, including selling groceries and drugs.

Pharmacy chains are under pressure to consolidate amid thinning profit margins.

Loblaw Cos. Ltd. is taking over Shoppers Drug Mart in a $12.4-billion deal that will accelerate the blurring of the lines between drugs, grocery, fashion and merchandise retailing, as well as creating a major challenger to Coutu's market dominance in Quebec.

Coutu's management team must find ways to expand beyond its Quebec base and better position itself to successfully fight rising competition in the quickly shifting retail landscape.

The Longueuil, Que.-based chain happens to be sitting on a pile of cash of about $460-million, with the resources to spend more than $1-billion on everything from a share buyback or a special dividend to a significant takeover of another, smaller chain.

So far, president and chief executive officer François Coutu has been tight-lipped about what the company plans to do. Investors hope he opens up on Wednesday, when Coutu releases its second-quarter results and Mr. Coutu and senior executives hold a conference call.

Among potential takeover targets are the Rexall pharmacy banner owned by closely held Edmonton-based Katz Group Canada Ltd.; Lawtons Drugs, part of Stellarton, N.S.-based Sobeys Inc.'s portfolio; and any Shoppers stores that may come up for sale in the merger with Loblaw.

Coutu is spending $190-million to build a new head office and distribution centre, suggesting it is preparing for further expansion. "We still want to grow a number of stores, we still want to grow the possibilities, not only in this province but elsewhere," Mr. Coutu said on his previous conference call.

But there is also much speculation that Montreal-based Metro Inc. would love to emulate Loblaws-Shoppers by doing a similar deal with Coutu.

Analyst Derek Dley of Canaccord Genuity said in a recent research note looking ahead to the second quarter: "We will be looking for increased clarity on Jean Coutu's plans to deploy its sizeable cash balance of approximately $2 per share, following the recent sale of its entire remaining interest in Rite Aid, for proceeds of roughly $192-million."

Mr. Dley forecasts second-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) of $86-million, up from $77-million in the year-earlier period, and earnings per share of 26 cents, compared with 23 cents and slightly above the analysts' consensus of 25 cents.