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Shoppers profit squeezed by milder cold season, stiffer competition

Shoppers Drug Mart’s prescription and drug counter at a Toronto outlet.

Deborah Baic/Deborah Baic

Shoppers Drug Mart Corp.'s fourth-quarter results were squeezed by generic drug reforms, a milder cough-and-cold season, heavier competition and costs tied to its deal to be acquired by grocer Loblaw Cos. Ltd.

In what is probably its last quarterly result as a separate public company, Shoppers said on Thursday its fourth-quarter profit fell to $169.4-million or 85 cents a share from $174.7-million or 85 cents a share a year earlier. Sales rose to $2.75-billion from $2.72-billion.

The country's largest drugstore retailer, which expects Loblaw's $12.4-billion agreement to buy it will close by the end of March, said that, excluding the effect of the $3-million transaction-related pretax costs, Shoppers' fourth-quarter profit was $172-million or 86 cents a share, which was what analysts polled by Thomson Reuters had expected.

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Last July, Shoppers and Loblaw announced the takeover deal, which is awaiting approval from the Competition Bureau.

Shoppers' pharmacy sales have been pinched by a reduction in the value of prescriptions as it dispenses more lower-cost generic substitutes.

In its fourth quarter, Shoppers' pharmacy same-store sales increased 0.5 per cent at stores open a year or more.

In the quarter ended Dec. 28, the retailer's average prescription value dropped 3.8 per cent, largely because of provincial government reductions in generic prescription reimbursement rates as provinces increasingly move to reduce costs while generic prescription use climbs.

Still, the number of prescriptions dispensed at Shoppers in the quarter rose 5 per cent from a year earlier and 4.7 per cent on a same-store basis, which is an important retail measure.

Shoppers' fourth-quarter non-prescription sales grew 1.1 per cent – and 1.7 per cent on a same-store sales basis – led by gains in cosmetics and food, the company said.

The growth, while restrained, is a relatively strong showing given a highly competitive marketplace with U.S.-owned discounters Target Corp., which arrived last year, Wal-Mart Stores Inc. and Costco Wholesale expanding in Canada.

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As well, the drugstore business has felt the pain of a milder cough-and-cold season, leading to declining sales of over-the-counter medications in the quarter at Shoppers compared with a year earlier.

"In what remains a highly competitive and challenging marketplace, it is clear that our value proposition and unwavering commitment to provide the best in patient care and customer service continues to resonate with patients and customers alike," said Domenic Pilla, chief executive officer of Shoppers.

Mr. Pilla told an analysts' call that the percentage of Shoppers' sales that are discounted offers has increased as consumers remain bargain-hungry.

Irene Nattel, retail analyst at RBC Capital Markets, said that, despite harsh, disruptive weather in parts of Canada, Shoppers' quarterly operating trends remain solid.

Shoppers "remains focused on executing the strategy that has been delivering industry-leading results," Ms. Nattel said in a note on Thursday morning.

The retailer is "going into the proposed acquisition by Loblaw with strong momentum," she said.

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She said that Shoppers' expectation of a first-quarter 2014 closing of the transaction implies that the competition bureau will give it the green light in the coming weeks.

Kenric Tyghe, retail analyst at Raymond James, said in a note last week that the competitive intensity in the quarter probably forced Shoppers to provide more discounts and promotions, particularly through its Optimum loyalty program.

"The impact of a milder flu season was, we believe, further compounded by the weather-related disruptions in late December," he said.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More


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