TORONTO — Shoppers Drug Mart (TSX:SC) believes its profits will grow by as much as six per cent this year, despite drug reforms in several provinces that will continue to erode pharmacy sales.
Heartened by an Ontario court decision last week that will allow Canada’s largest drug store chain to cut costs by selling its own private label drugs, Shoppers estimated that earnings per share for 2011 will be between $2.80 and $2.90 per share, up from $2.72 per share last year.
“We are encouraged by our performance in the fourth 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,” said David Williams, Shoppers chairman, who will takeover as interim CEO next week.
Chief executive Jurgen Schreiber is leaving the company effective Feb. 15.
Schreiber had been a vocal opponent of the Ontario government’s move to cut the price of generic drugs paid for by the provincial drug plan and reduce the payments generic companies make to pharmacists.
In a sign of confidence about the future, Shoppers boosted its quarterly dividend by 11 per cent to 25 cents per share after reporting better-than-expected fourth quarter results Thursday.
On a conference call with analysts Thursday, the company’s president and chief financial officer Brad Lukow projected sales will grow by about two to three per cent in fiscal 2011.
The growth is projected to come from growth in non-prescription drug sales, while prescription sales are expected to remain flat.
The number of prescriptions filled is expected to grow next year, given an aging population, but that is expected to be offset by lower prices as generic sales make up a greater percentage of pharmacy sales.
Changes in Ontario, Quebec and British Columbia cut generic drug prices to 25 per cent of the price of patented drugs — down from 50 per cent — by cutting professional allowances, a move that Shoppers said would cost an estimated $750-million a year in revenue.
To help make up the difference, Shoppers has ramped up its focus on sales of things in the front of its stores including everything from cameras to candy and cut costs.
Shoppers earned $171.2 million, or 79 cents per share in the 12 weeks ended Jan .1, compared with $171 million a year ago. The average analyst estimate had been for a profit of 75 cents per share.
Revenue for the quarter totalled $2.56 billion, up three per cent from $2.49 billion a year ago, driven by sales of beauty products, candy and groceries. Non-pharmacy sales increased 5.5 per cent to $1.4 billion.
Same-stores sales at locations open at least a year grew 1.7 per cent, led by gains in Alberta and Quebec.
Meanwhile, prescription sales fell 0.2 per cent to $1.1 billion, as three per cent growth in the number of prescriptions filled offset lower prices, as generic drugs became cheaper and more common.
Generic drugs made up about 57 per cent of all prescriptions filled in the fourth quarter, compared with 53 per cent a year ago.
The better-than-expected results indicate it’s doing a good job of offsetting some of the negative effects from the drug reform with cost cutting and increasing efficiency, said Brian Yarbrough, a retail analyst at Edward Jones.
But the company still faces questions about its leadership and future rounds of drug reforms that will begin to be phased in this spring, when generic drug prices begin to fall for customers not covered by a public plan.
“That’s going to be where it gets interesting here as we watch that occur, its going to be hard to grow earnings growth for the next two, two and half year, there’s going to be a lot of headwinds,” he said.
Shoppers shares gained six cents to close at $38.54 Thursday on the Toronto Stock Exchange.