Price deflation from new generic drugs and government-driven price cuts for generics impacted revenue and same-store sales for the Jean Coutu Group and its franchise store network in its fiscal 2014 second quarter.

Jean Coutu Group, second quarter, fiscal 2014, Canadian drug chain, revenue, same-store sales, generic drugs, franchise store network, retail pharmacy sales, price reductions on generic drugs in Canada, over-the-counter medicines, Jean Coutu's retail network, PJC Jean Coutu, François Coutu, Rite Aid, Pro Doc, share repurchase plan, equity stake in Rite Aid

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Generics squeeze 2Q sales at Jean Coutu Group

October 9th, 2013

LONGUEUIL, Quebec – Price deflation from new generic drugs and government-driven price cuts for generics impacted revenue and same-store sales for the Jean Coutu Group and its franchise store network in its fiscal 2014 second quarter.

Net earnings surged in the quarter, however, as the company recorded a net gain from the sale of its equity stake in U.S. drug chain Rite Aid Corp. Adjusted net income was in line with financial analysts' consensus estimate.

Jean Coutu Group said Wednesday that for the second quarter ended Aug. 31, sales for its franchise store network inched up 0.4% year over year to $979.8 million (Canadian), reflecting gains of 0.1% in the pharmacy and 1.1% in the front end. Same-store sales were virtually flat, down 0.1%, with results edging up 0.5% in the front end but declining 0.5% in the pharmacy. Prescription count rose 4.9% overall and 4.4% on a comparable-store basis.

Generic drugs accounted for 67.2% of prescriptions during the second quarter, compared with 61% a year earlier. The rise in the number of generic prescriptions, which carry lower prices but have higher margins, negatively impacted retail pharmacy sales by 2.2% in the quarter, according to Jean Coutu Group. Also, price reductions on generic drugs in Canada shaved quarterly pharmacy sales by 1.1%.

Sales of over-the-counter medicines, which represented 8.5% of total retail sales, grew 1.4% in the second quarter, down from a 3.9% increase in the prior-year period.

During the second quarter, Jean Coutu's retail network opened seven stores (including two relocations), remodeled or expanded two stores, and closed one store. As of Aug. 31, the network encompassed 411 drug stores in Quebec, New Brunswick and Ontario under the banners PJC Jean Coutu, PJC Clinique, PJC Santé and PJC Santé Beauté.

"During the second quarter, we continued to implement efficiently our business plan, which allowed us to account for an increase of the operating income before amortization in spite of a difficult regulatory environment impacting pharmacy sales," François Coutu, president and chief executive officer of Jean Coutu Group, said in a statement. "Development of dynamic marketing programs and execution of our business strategies will remain our priorities to pursue our growth over the next quarters."

On the corporate side, revenue in the fiscal 2014 second quarter decreased 0.7% year over year to $653.8 million. Jean Coutu Group attributed the decline to the deflationary impact of the volume surge in generic prescriptions as well as the price reductions for generics, despite the overall market growth and the expansion of the franchise store network.

Jean Coutu Group's income consists of sales plus other revenue derived from franchising activities in Canada. Merchandise sales to franchisees through its distribution centers account for most of the company's sales.

Operating income before amortization (OIBA) came in at $77.2 million for the second quarter, up nearly 0.4% from $76.9 million a year earlier. The company said the gain stems mainly from a strong operational performance by its Pro Doc generic drugs subsidiary, which saw sales climb 16.4% in the quarter to $44.6 million.  

Jean Coutu Group reported net profit of $208.2 million, or 99 cents per share, in the second quarter, compared with $51.2 million, or 23 cents per share, in the year-ago period, with the increase coming primarily from a $158.3 million net gain on the company's sale of its remaining interest in Rite Aid for $315.8 million.

Excluding the gains from the sale of the Rite Aid stake, Jean Coutu's second-quarter net income was $49.9 million, or 24 cents per share, for the 2014 second quarter, compared with $50 million, or 23 cents per share, in the 2013 quarter.

On average, analysts had forecast Jean Coutu's adjusted earnings per share at 25 cents for the quarter, according to Zacks Investment Research.

On Tuesday evening, Jean Coutu Group announced a share repurchase plan of up to $502 million in which it offered buy up to 22 million of its outstanding Class A subordinate voting shares at $18.50 per share, along with a special one-time dividend of 50 cents per Class A subordinate voting share and Class B share.

"Following the sale of our equity stake in Rite Aid Corp. and given our significant cash flow from operations, we believe that the offer and the special dividend will provide an efficient means to distribute a significant amount of cash on hand to shareholders," CEO François Coutu stated.

"We continually invest in our [store] network to provide an enjoyable shopping experience for customers and invest in growth opportunities to supplement our network and support our franchisees," he added. "Jean Coutu Group does not have any outstanding debt, and we believe that this distribution of capital demonstrates our commitment to our shareholders without constraining our growth plan for the corporation."

Jean Coutu Group also has declared a quarterly dividend of 8.5 cents per share to be paid on Nov. 8 to shareholders of record (Class A subordinate voting shares and Class B shares) as of Oct. 25.

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