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Shoppers strikes cautious note for year ahead

Shoppers Drug Mart location at Woodbine and O'Connor Avenues in Toronto.

Deborah Baic/Deborah Baic/The Globe and Mail

In the face of profit-challenging drug reforms and heavy discounting of other products to entice customers into stores, Shoppers Drug Mart Corp. is being cautious about the coming year.

In a departure from last year, the company refrained from providing a profit forecast for 2012. And in predicting moderate sales growth, it warned that it would have to implement "sustained" price markdowns and other promotions to pump up business – moves that can cut profit margins.

"The consumer is still a very nervous consumer," Brad Lukow, chief financial officer at Shoppers, told an analyst call on Thursday. "We're anticipating a very similar environment [in]2012."

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Amid the rocky environment, Shoppers is racing to rev up its beauty and food sales while slashing costs to make up for shortfalls at the pharmacy counter. A growing number of provinces are introducing generic-drug reforms, reducing the prescription reimbursements they provide to Shoppers and other pharmacies even as the cheaper generics become more popular. A shaky economy and spooked consumer add to Shoppers' predicament.

"They're really going to have to squeeze more profitability out of everything that they do," said Bob Gibson, retail analyst at Octagon Capital. "They're cutting costs. I think that's going to have to continue."

Drug reforms have been a leading factor in pushing Shoppers' annual operating profit gains of close to 15 per cent in the past to between 3 and 9 per cent over recent years. As provincial governments continue to look for ways to reduce their health-care spending, the pressure on Shoppers and other drugstore retailers will mount.

To help ease the pain, Shoppers is talking to smaller rivals about buying them, Mr. Lukow said. But industry consolidation has been moving slowly, and competition to buy rivals may heat up, analysts warn..

Late last month, McKesson Corp., the country's largest drug wholesaler, signed a $920-million agreement to buy the companies that supply marketing and other services to Katz Group's independent and franchised stores, including IDA Guardian and Medicine Shoppe Canada Inc.

Now Katz Group, whose flagship chains are Rexall and PharmaPlus stores, may be freed to become a fierce competitor to Shoppers in acquiring small chains of drug stores and prescription files, Keith Howlett, an analyst at Desjardins Capital Markets, has said. Late last month, Katz scooped up an 18-store pharmacy chain in Hamilton, Ont.

Shoppers has said it is eyeing customer prescription files of discounter Zellers, whose stores are mostly being taken over by U.S. discounter Target Corp. Last month, Target said it will not acquire the pharmacies within the Zellers outlets it is buying.

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On Thursday, Shoppers CEO Domenic Pilla told analysts he does not think the McKesson acquisition would change his company's prospects of finding attractive pharmacies to acquire. He said he is looking for drugstores with a high number of older customers, because they need more medications.

On the non-pharmacy side, Mr. Pilla is pushing to launch a smaller store format that can generate more productive sales. He is also moving to bolster its lucrative and fast-growing beauty business by testing "super beauty boutiques" that will be one-third larger than the current ones.

Robust beauty and food sales helped Shoppers increase its fourth-quarter profit by 4.2 per cent, to $176-million or 82 cents a share, meeting analysts' expectations generally. Overall sales rose 4.3 per cent to $2.61-billion, while sales at stores open a year or more, a key measure in retailing, rose 3.4 per cent.

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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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