Chain Drug Review, February 12, 2018

14 Chain Drug Review February 12 2018 Business Coutu results recede as sale to Metro moves forward VARENNES Quebec The Jean Coutu Group saw declines in corporate revenue earnings and operating results for its fiscal 2018 third quarter Meanwhile the company reaffirmed the closing timetable for its acquisition by Canadian food and drug retailer Metro Inc The 45 billion Canadian Coutu Metro merger transaction announced in early October and approved overwhelmingly by Coutu shareholders in late November is expected to be completed in the first half of 2018 After the deal is finalized Coutu is slated operate as a stand alone division with its own management team led by current president and chief executive Together Metro and Coutu will form a 16 billion food and drug retail company with 1308 stores in Quebec Ontario and New Brunswick In the third quarter ended December 2 Coutus sales dipped 06 to 7589 million from 7637 million in the year ago period The company attributed the decrease primarily to lower revenue from its Pro Doc Ltd generic drug business and to the timing of shipments of front end products in the store network Gross sales for Pro Doc drugs totaled 43 million for the quarter down 159 from 511 million a year earlier Coutus corporate income consists of sales plus other revenue from franchising activities in Canada with merchandise sales to franchisees through its distribution centers representing most of the companys income Network retail sales increased significantly in the third quarter of fiscal 2018 despite a challenging regulatory environment and a highly competitive environment This growth demonstrates the effective implementation of our business plan François Coutu said We intend to pursue the development of dynamic business strategies to ensure the evolution of our offer and contribute to the growth of retail sales Third quarter net earnings were 421 million or 23 cents per share down from 512 million or 28 cents per share a year ago The decrease reflects the lower Pro Doc contribution to net income and 85 million in costs associated with the Coutu Metro transaction Analysts on average had forecast Coutus third quarter earnings per share at 28 cents according to Zacks Investment Research Operating income before amortization OIBA came in at 664 million for the quarter down 169 from 799 million a year earlier Coutu said the decline stems mainly from the lower contribution by Pro Doc and 85 million in expenses related to merger with Metro OIBA as a percentage of revenue 105 in the prior year period For the 39 weeks Coutu posted 3 from 219 billion a year ago The company said the uptick was driven by overall market growth despite the deflationary prescriptions and generic drug price reductions Gross sales for Pro Doc fell about 28 to 1478 million for the year to date period from 152 million a year earlier Coutu reported net income of 1354 million or 74 cents per share for the 39 weeks down from 1517 million or 82 cents per share a year ago On the corporate side OIBA Year to Date Stock Trends officer François Coutu Chain drug stocks Close as of 1 31 18 Close at start of year 1 2 18 Net change year to date change year to date revenue of 225 billion up impact of increased generic 52 week high was 87 compared with 52 week low Div Yield P E ratio Dow Jones Composite Average 862477 836091 26386 316 879954 687356 CVS Health 7869 7352 517 703 8400 6645 200 25 16 Rite Aid 218 213 005 235 615 138 14 Walgreens Boots Alliance 7526 7495 031 041 8969 6382 160 21 21 Canadian chain drug stocks Close as of 1 31 18 Close at start of year 1 2 18 Net change year to date change year to date 52 week high 52 week low Div Yield P E ratio Jean Coutu Group 2424 2455 031 126 2490 1924 035 22 24 Loblaw includes Shoppers Drug Mart 6663 6859 196 286 7887 6465 072 16 16 Figures are in Canadian dollars Parent companies combo operators Close as of 1 31 18 Close at start of year 1 2 18 Net change year to date change year to date 52 week high 52 week low Div Yield P E ratio Ahold Delhaize combos 2230 2215 015 068 2320 1765 123 56 18 AmerisourceBergen GNP 9967 9404 563 599 10627 7190 152 15 61 Cardinal Health Medicine Shoppe 7179 6323 856 1354 8488 5466 185 25 20 Kroger combos 3036 2830 206 728 3475 1969 050 16 18 McKesson Health Mart 16888 15900 988 621 17886 13382 136 08 8 Supervalu combos 1584 2200 616 2800 3129 1455 Other retailers Close as of 1 31 18 Close at start of year 1 2 18 Net change year to date change year to date 52 week high 52 week low Div Yield P E ratio Costco 19487 18832 655 348 19988 15000 200 11 31 Freds 331 404 073 1807 1914 308 Sears Kmart 257 378 121 3201 1432 237 Target 7522 6763 759 1122 7870 4856 248 32 16 Walmart 10660 9859 801 812 10998 6634 204 19 28 came in at 2125 million for the year to date a decrease of 97 from 2354 million a year ago As a percentage of revenue OIBA was 94 for the period versus 108 a year earlier Coutu attributed the decrease to the lower contribution of Pro Doc to the OIBA accrued expenses of 85 million related to the agreement with Metro and in the prior year period a gain on sale of property and equipment and investment property of 68 million These were partially offset by higher royalty revenue Looking ahead Coutu said it is very well positioned to capitalize on the growth in the retail drug store industry Demographic trends are expected to contribute to growth in prescription drug consumption and to the increased use of pharmaceuticals as the primary intervention in individual health care Management believes these trends will continue and the corporation will maintain its growth in revenue through differentiation and quality of offering and service levels to its network of franchised stores with a focus on its real estate program and operating efficiency the company said in a statement The growth in the number of generic drug prescriptions with lower selling prices than brand name drugs would however have a deflationary impact on retail sales in pharmacy Coutu added Additional generic drug price decreases will reduce the profitability of the subsidiary Pro Doc For the acquisition Metro will acquire all of Coutus outstanding Class A subordinate voting shares and Class B shares for 2450 per share Coutu shareholders will receive 75 of the purchase price in cash and 28 million common shares of Metro representing approximately 25 of the total consideration To fund the cash component of the purchase Metro disposed of the majority of its investment in ACT for proceeds net of fees and commissions of 153 billion Metro also issued a private placement of unsecured senior notes of a 12 billion aggregate principal amount with maturities ranging from five to 30 years It also has access to a term credit facility totalling 500 million comprising three tranches with maturities of one to three years and a one month 250 million bridge loan Same store sales at Jean Coutus store netowork rose 34 Store network keeps delivering solid gains VARENNES Quebec Retail network sales climbed in the fiscal 2018 third quarter at the Jean Coutu Group For the quarter ended December 2 Coutus franchised store network sales totaled 113 billion Canadian up 35 from 109 billion a year earlier Revenue edged up 25 in the front end and 4 in the pharmacy Sales of nonprescription drugs which accounted for 9 of overall retail sales increased 39 versus 28 in the prior year period Same store sales grew 34 year over year reflecting gains of 23 in the front end and 4 in the pharmacy Prescription count rose 29 overall and on a comparable store basis Coutu noted that generic drugs represented 72 of prescriptions filled during the third quarter up 714 from a year ago The company reported negative impacts of 01 to pharmacy retail sales from introductions of new generics and 05 on retail sales from generic price reductions In addition the elimination of periodical withdrawals by the Ministry of Health and Social Services in April lifted the pharmacy retail sales by 12 The retail network opened three stores including two relocations renovated two stores and closed one store in the quarter As of the periods end Coutu operated a network of 419 franchised stores under the banners PJC Jean Coutu PJC Santé and PJC Santé Beauté in Quebec New Brunswick and Ontario For the 39 week period Coutus store network tallied revenue of 339 billion a yearover year gain of 26 Sales increased 38 in the front end and 22 in the pharmacy Same store sales in the year to date are up 47 reflecting gains of 23 in the front of the store and 62 in the pharmacy Script count also is up rising 3 versus a year ago on both an overall and a comparable store basis the company said