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Jean Coutu chief likely to address future growth, pressure for acquisition

Jean Coutu has the resources to pull off a significant acquisition, or it could partner – or be acquired – in a rapidly consolidating retail landscape.

Christinne Muschi/The Globe and Mail

Jean Coutu Group (PJC) Inc. continues to enjoy a strong, profitable retail presence in its home province of Quebec. A move into generic drug manufacturing has proven to be a smart decision, with the unit – Pro Doc Ltd. – providing a reliable, if modest, income stream. And Coutu recently opted for an investor-friendly share-buyback program as well as a one-time dividend of 50 cents.

Yet there is fretting among many shareholders and analysts that the pharmacy giant's management team, led by François Coutu, is just sitting tight and failing to address the bigger picture.

The company has the resources to pull off a significant acquisition, or it could partner – or be acquired – in a rapidly consolidating retail landscape that has recently seen the takeover of Shoppers Drug Mart Corp. by Loblaw Cos. Ltd. and Sobeys Inc.'s acquisition of Safeway Canada.

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U.S. giants Target Corp. and Wal-Mart Stores Inc. are also making inroads in the drugstore sector.

Mr. Coutu will likely face questions on Thursday's third-quarter conference call about where future growth is going to come from in the chain's relatively limited Quebec market and in the face of increased competition and consolidation.

"They have the resources ready to deploy. They have a strong balance sheet," said Manish Kacker, associate professor of marketing at McMaster University.

"What they say in the third quarter may shed more light on the longer-term approach, whether to keep their powder dry on acquisitions or deploy capital to make themselves more attractive to an acquirer," he said.

RBC Dominion Securities analyst Irene Nattel said in a recent research note that although Coutu's challenge is to find avenues of growth, "annual dividend increases and consistent share buy-back should enable the company to deliver high-single-digit [earnings per share] growth over our forecast period [into fiscal 2016]."

Ms. Nattel said there are not many large-scale acquisition opportunities currently. Potential targets some observers have highlighted include Katz Group Canada Ltd.'s Rexall chain and Sobeys' Lawtons Drugs.

"On the [second-quarter] conference call, management noted that while it would be eager to make acquisitions, the most likely form of M&A remains small independents as there are no larger networks available," said Ms. Nattel, who is forecasting third-quarter EPS of 29 cents, slightly above the consensus of 28 cents.

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More


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