Shoppers boosts dividend, gives rosy outlook

TORONTO — Shoppers Drug Mart Corp. (TSX:SC) gave a rosy outlook and raised its dividend Thursday after reporting strong sales of non-pharmacy items as the retailer works to reduce its reliance on prescription sales.

TORONTO — Shoppers Drug Mart Corp. (TSX:SC) gave a rosy outlook and raised its dividend Thursday after reporting strong sales of non-pharmacy items as the retailer works to reduce its reliance on prescription sales.

Canada’s largest drug store chain said Thursday that it is raising its dividend by six per cent, from 25 cents per quarter to 26.5 cents. It also said it expects sales to increase between 2.5 and three per cent in 2012.

Domenic Pilla, who became president and CEO in November, said he was pleased with the results.

“Considering the many challenges that we faced as a company in this past year, I am encouraged by our operating and financial performance,” Pilla told a conference call with financial analysts.

The retailer said Thursday that it earned $176 million in its latest quarter, up from $169 million during the same quarter a year earlier. Sales increased 4.3 per cent to $2.6 billion.

Excluding the impact of a $7-million tax impairment, the company earned $175 million, or 80 cents per share.

That narrowly missed average analysts expectations of 82 cents per share, while revenue was in line with their projections on Thomson Reuters.

For the full year, earnings rose nearly four per cent to $614 million from $592 million in 2010. Sales were up 2.6 per cent to $10.46 billion compared to $10.19 billion in 2010.

The stronger results come even as Shoppers grapples with generic drug reforms in many provinces that are lowering prices and eating into Shoppers’ revenues.

Changes in Ontario, Quebec and British Columbia reduced 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.

Bradley Lukow, the company’s chief financial officer, said the company expected the pressures to continue in 2012.

“That is definitely going to challenge and reduce margins in pharmacy,” he said, adding that Shoppersa will use promotions in the front of the store to help offset the pressure.

Looking ahead to 2012, the company said it expects 0.5 per cent to 1.5 per cent growth in pharmacy sales and between two to 2.5 per cent growth in front of store sales.

Shoppers expects its prescription count growth to remain strong at about four per cent, but believes that will be offset by a continued reduction in average prescription values.

The Toronto-based chain has been ramping up its focus on front of store sales, adding grocery offerings and general merchandise, including everything from candles to cameras.

Front of store sales were particularly strong in the fourth quarter, despite heavy promotional activity, said Peter Sklar, an analyst at BMO.

“Management referred to continued investment in pricing and promotional activities, which would have weighed on the margin of front-store sales,” he said.

Front of store sales — which were particularly strong in the beauty, candy and convenient food categories — jumped 5.5 per cent to $1.4 billion during the fourth quarter, while pharmacy sales grew 2.8 per cent to $1.7 billion.

Sales gains were led by Western Canada. Same-store sales were up 3.4 per cent.

Despite the impact of regulatory changes, prescription sales were up 2.8 per cent to $1.18 billion.

The increase was driven by three per cent growth in the number of prescriptions filled, but was partially offset by a reduction in average prescription value, largely due to lower generic drug prices on the back of the regulatory changes.

Generic drug sales are rising, which further reduces Shoppers’ margins on prescriptions. During the quarter, generics made up 57.1 per cent of prescriptions filled, up from 55.7 per cent in the year-earlier period.

As the chain moves to diversify from a reliance on pharmacy offerings for revenue, prescription sales accounted for 0.6 per cent less — at 45.2 per cent — of the company’s sales mix.

In 2012, the company plans to spend $350 million on its capital expenditure program, with about 75 per cent of that to be invested in its store network. It plans to build between 40 and 45 new drug stores and remodel between 25 and 30 stores.

Canada’s largest drug store chain could soon face stiffer competition from two major U.S. companies who are looking to establish a substantial presence in Canada’s drug store market.

California-based health-care giant McKesson Corp. announced last month that it will pay $920 million to buy a big chunk of a retail network belonging to Edmonton pharmacy operator Katz Group of Canada.

And discount retailer Target said it plans to have pharmacies in its Canadian stores operated by independent pharmacists under a franchise model when it opens its doors next year in former Zellers locations.

It could also face increased challenges in other provinces following an Ontario Court of Appeal ruling in December that backed a ban on pharmacies substituting their own brands of prescription drugs for name brands.

Shares in the company closed up 79 cents at $40.64 Thursday on the Toronto Stock Exchange.