Shoppers Drug Mart Corp. managed to beat analysts forecast by generating as much profit in its fourth quarter as a year earlier despite tough new drug reforms which squeezed its bottom line.
While its prescription drug sales were pinched by the generic prescription drug changes, Shoppers offset the shortfall with a healthy non-prescription business in its fourth quarter, especially in its beauty, food and beverage aisles.
In the quarter, Shoppers' profit stood at $171-million or 79 cents a share, essentially the same as a year earlier, while sales increased 2.9 per cent to $2.56-billion. The profit in the latest period beat analysts' forecast of 75 cents a share, which would have been a decline from a year earlier.
The retailer's same-store sales at outlets open a year or more rose 1.7 per cent. Those sales are a key barometer of retail health at stores open a year or more, excluding the effects of annual store openings and closings.
"Given that fiscal 2010 was a particularly challenging year on a number of fronts, we are encouraged by our performance in the four quarter and the momentum it provides as we prepare to confront the challenges and capitalize on the opportunities that lie ahead in 2011 and beyond," David Williams, chairman of Shoppers board of directors, said in a statement on Thursday.
On Monday, Mr. Williams will take over as interim chief executive officer from Jurgen Schreiber, who is stepping down to head a fast-growing South African fashion retailer. It is owned by private equity firm Bain Capital and industry observers expect it will eventually be taken public.
The surprise announcement in late January of Mr. Schreiber's departure stunned investors, who pushed down the stock price. It recovered somewhat late last week when an Ontario court handed Shoppers a victory in its long-running battle with the Ontario government over its sweeping drug reforms. But amid other generic laws being implemented, the retailer faces continued uncertainty about its future as it searches for a new leader. As well, financial results are expected to get worse before they get better as drug reforms continue to be phased in this year.
The legislative changes will slash Shoppers' prescription operating profit by as much as half, analysts have estimated. In Ontario alone, they wipe out $750-million a year of rebates, or professional allowances, that pharmacies collected from generic prescription drug companies in exchange for stocking their products. The rules slash generic drug prices to 25 per cent of the price of their equivalent branded drug, down from 50 per cent previously.
On Thursday, Shoppers said its fourth-quarter profit was strong in light of the reforms in Ontario, Quebec and other provinces, which squeezed profit margins.
"Downward pressure on sales and margins in the [prescription]dispensary was offset by strong performance in the [non-prescription]front of the store, improved purchasing synergies and continued gains in productivity and efficiency across the store network and supporting infrastructure," the company said.
In 2011, Shoppers said it expects profit per share of between $2.80 and $2.90, which is higher than analysts' current consensus estimate of $2.78 per share. The company's 2011 outlook calls for sales to rise between 2 and 3 per cent, and earnings before interest, taxes, depreciation and amortization (EBITDA) to be between $1.22-billion and $1.25-billion.
Shoppers also announced it will boost its quarterly dividend by 11 per cent to 25 cents per share, payable April 15 to shareholders of record on March 31. And it said it will purchase up to 8.7 million of its shares, representing about 4 per cent of the 217.5 million shares currently outstanding, by way of normal course purchases in the next year or so.
In its fourth quarter, Shoppers' prescription sales dropped 0.2 per cent (or 0.5 per cent on a same-store basis) to $1.146-billion, hurt by the reduction in the average value of each prescription.
Non-prescription sales increased 5.5 per cent (or 3.7 per cent on a same-store sales basis) to $1.414-billion.