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Well-run retailers provide bright spot in stock market

Jean Coutu is expected to post a 4-per-cent rise in revenue to $647-million and an 11-per-cent increase in adjusted profit to $47.2-million. THE CANADIAN PRESS/Ryan Remiorz


This could be a rough week for economic data, so let's try to brighten the picture by focusing on two retailers that will be in the news in the next few days.

Jean Coutu Group (PJC) Inc., Quebec's biggest drug retailer, posts quarterly results on Tuesday and Costco Wholesale Corp., the largest U.S. warehouse-club chain, reports on Wednesday. Both of these well-run retailers have been handsomely rewarded by the market over the last year. Jean Coutu shares have delivered a one-year return of 43 per cent, which compares with a 6-per-cent decline for the S&P/TSX composite index. And Costco's stock has registered a 30-per-cent return, which compares with a flat performance by the S&P 500 index.

Jean Coutu is expected to post a 4-per-cent rise in revenue to $647-million and an 11-per-cent increase in adjusted profit to $47.2-million, after delivering better-than-expected results in July for its first fiscal quarter.

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The Longueuil, Que.-based company has been facing tougher regulation in Canada and a challenging retail environment in the United States. But management has taken steps to protect the company.

On the regulatory front, both independent pharmacies and drugstore chains in Canada are feeling the effects of provincial efforts to lower health care costs. Legislation in Quebec and Ontario to reduce the price of generic drugs has hurt the finances of both Jean Coutu and rival Shoppers Drug Mart Corp.

But Jean Coutu has successfully cushioned the blow with its own generic drug manufacturer, Pro-Doc Ltd. Shoppers Drug Mart, Canada's largest drugstore chain, is trying to develop its own private-label generic drugs under the Sanis banner, but the Ontario government is fighting the move, arguing it represents a conflict of interest.

Jean Coutu has exposure to the U.S. market through its minority stake in Rite Aid Corp. Same-store sales at the chain have recently swung positive, but for months Rite Aid has underperformed competitors such as Walgreen Co. and CVS Caremark Inc. Jean Coutu announced in July that it was selling 10 per cent of its stake in Rite-Aid, acknowledging that the turnaround of the U.S. retailer was taking longer than expected.

Meanwhile, analysts like the pattern of rising cash flow at Jean Coutu and management's use of the cash to buy back shares, pay down debt and boost dividends.

For almost three decades, Costco has successfully challenged conventional thinking in the retail sector by charging customers an annual membership fee while marking up prices by no more than 15 per cent. The Issaquah, Wash.-based company announced this month that one of the chief architects of that model, co-founder Jim Sinegal, will retire at the end of the year. He is to be replaced by Craig Jelinek, the chief operating officer, who has been with the company since its early days.

Costco is clearly benefiting from belt-tightening by consumers in the U.S. and Canada. It recently pre-announced revenue figures for its fiscal fourth quarter, saying sales jumped 15 per cent to $27.6-billion (U.S.), in line with Wall Street's expectations. Analysts expect that profit rose 11.5 per cent to $481.8-million in the same period.

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Same-store sales have been expanding, rising 6 per cent in August. Looking ahead, Costco is investing in expanding its e-commerce presence and eyeing opportunities in Asia, where it has only 24 stores today, out of a total 592 worldwide. Mr. Jelinek told Bloomberg News this month that the company has the potential to reach 1,000 stores within the next 10 years.

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