Shoppers Drug Mart Corp. continued to feel the pinch of new generic drug rules in its third quarter, with results hit by provincial governments' moves to reduce payments for those prescriptions.
In its third quarter, Shoppers' profit rose to $172.4-million or 80 cents a share, from $154.7-million or 71 cents a share. Sales rose to $3.1-billion from $3-billion. The latest profit was helped by a one-time gain tied to a sale-leaseback transaction, and excluding the real estate matter profit was $170-million or 79 cents a share.
"This remains a difficult period of transition as we continue to work through government reform initiatives in a number of provinces and the resultant funding and reimbursement pressures this has placed on our pharmacy business," said Domenic Pilla, who became president and chief executive officer of Shoppers this month.
The CEO said he is encouraged by the results. Shoppers' profit met analyst estimates although the sales of $3.11-billion, while up 2.1 per cent, missed analysts' forecasts of $3.162-billion.
Asked about his plans on a conference call, Mr. Pilla focused on the company's prescription business. He said Shoppers is well-positioned to benefit from consolidation in the pharmacy business that has been driven by government efforts to reform laws governing drug prices. For Shoppers, the top drug-store retailer in Canada, drug sales are still vital because an aging population has a growing need to buy medications.
The previous CEO, Jurgen Schreiber, had shifted his attention to boosting the business in the front of the store, adding more beauty, food and other items to become something of an alternative – and convenient – department store. He also moved to shore up the pharmacy counter sales by introducing a potentially more lucrative private-label line of drugs, although it is in the midst of a legal challenge in the retailer's key Ontario market.
The company said its results were helped by a lower effective tax rate and efficiency gains at established stores, which partly offset higher operating expenses at new outlets.
Raymond James analyst Kenric Tyghe said front-of-store growth was weaker than he had expected, as the company eased up on aggressive promotions, a move he welcomed.
"I would rather see them protecting both the brand and their market position by having a more measured promotional campaign than just throwing points and throwing margin away," he said in an interview.
Chief financial officer Brad Lukow said the company has been pushing to improve the effectiveness of its promotions.
"What we really started to do in the second quarter of this year is really to try and get a better balance between traffic in the store, top line growth, and margin dollar growth," he said.
Shoppers' third-quarter overall sales were roughly divided evenly between prescription and non-prescription sales, with the front-of-store non-prescription sales being a big part of the retailer's growth strategy, including cosmetics, food and even mobile phones.
Prescription sales rose 1.5 per cent and 1.1 per cent on a same-store basis. Shoppers said it saw growth in the number of prescriptions filled, but a drop in average prescription value, which it attributed to a reduction in generic prescription reimbursement rates in some parts of Canada.
Non-prescription sales grew 2.6 per cent and 1.8 per cent on a same-store basis.
With files from Reuters