Shoppers Drug Mart’s (SDM’s) annual meeting here last month marked a double anniversary — half a century since the company was founded, 10 years since it went public.


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Inside This Issue - News

SDM has a look back and to the future

June 11th, 2012
by Alasdair McKichan

TORONTO – Shoppers Drug Mart’s (SDM’s) annual meeting here last month marked a double anniversary — half a century since the company was founded, 10 years since it went public.

Present to help mark the occasion was the redoubtable Murray Koffler, who, as usual at the company’s annual meetings, made a cameo appearance, reminding all those present of the drug chain’s roots and how the philosophy that he brought to it have guided it all those years.

Koffler told the audience that he was just 17 when his father died and left the two drug stores he owned to his wife and son. Some years later, in 1952, Murray Koffler made the two strategic decisions that turned out to be key to the nascent chain’s outstanding success in the years that followed: He converted the front of the stores to self-service and established the pharmacist-managers as store owners and associates. Both concepts were firsts in the pharmacy world, not just in greater Toronto but in all of Canada.

SDM president and chief executive officer Domenic Pilla told attendees that before he assumed that office last November, he had a lengthy, sit-down meeting with Koffler. They discussed many aspects of the company’s strategy and its operating style, but Pilla said the most forceful advice Koffler gave him was, “Don’t mess with the associate concept.”

Pilla assured the audience that he had taken the advice to heart and that he fully understood the importance of maintaining a strong corporate/associate relationship.

This was Pilla’s first SDM annual meeting, and just a few weeks before he had his initial meeting with financial analysts after the release of SDM’s first quarter 2012 results. At both occasions Pilla was well in charge of his facts and exhibited a clear sense of where he saw the drug chain going.

The year on which Pilla and executive vice president and chief financial officer Brad Lucow reported turned out somewhat better than expected. Throughout the year SDM had to absorb, in the most populous provinces, progressive reductions in compensation for dispensing. The company was, however, able to compensate to some extent through an increased prescription count, improved front-end results, strict expense control and a more restrained expansion policy than in the buoyant years of the mid-2000s.

Last year sales reached $10.5 billion (Canadian), a 2.6% year-over-year increase. Prescription sales, accounting for almost 48% of total volume, increased by just 0.8% overall and by 0.6% on a same-store basis. The number of prescriptions dispensed, however, rose by 3.8% both overall and on a comparable-store basis.

The company gained market share at the front of the store, with a 4.4% growth rate overall and a 3.2% gain on a same-store ­basis.

Net earnings came in at $614 million, compared with $592 million in the preceding year, a 3.7% gain. Pilla and Lucow explained that the strong performance at the front end was supported by increased investments in pricing and promotional activities. Those efforts were partially offset by additional pressure on sales and margins in the ­dispensary.

Pilla also noted that the company had enjoyed the benefits of improved purchasing synergies and cost reductions, productivity gains, and efficiency initiatives that together partially offset higher store-level operating expenses, which were attributable to SDM’s expansion program and increased associate earnings.

The expansion program, though modest in relation to previous years, still saw the addition of 56 outlets, 32 of which were relocations. Moreover, 35 major expansions were undertaken. Together, those activities led retail square footage to increase by 3.8% to 13.2 million.

For the current fiscal year the company has allocated $350 million for capital expenditures, with 75% of that sum earmarked for the stores. Management expects this expenditure to result in the opening of 40 to 45 outlets, 20 of which will be relocations. There are also expected to be 15 major expansions. As a result, square footage in the stores is projected to increase by 3.2%.

Lucow touched on some of the statistics that have changed for the better in the decade since SDM went public — sales of around $5 billion grew to $10.5 billion; EBITDA (earnings before interest, taxes, depreciation and amortization) grew from $437 million to $1.21 billion; the drug store count grew from 655 to 1,257; square footage rose from 6.1 million to 10.3 million.

There are now 305 Beauty Boutiques, and the number of private label SKUs has increased from 1,300 to 7,500. Ten years ago there were 6 million Optimum card holders; today there are some 10 million.

SDM’s overall results for the 2012 first quarter showed remarkable consistency with the prior-year period, despite the changing external circumstances. Sales increased 2% to $2.39 billion, while comparable-store volume advanced 1.5%.

Pharmacy sales increased 1.6% to $1.68 billion, while same-store results rose 1.1%. The retail prescription count advanced 2.9%, while for comparable stores the increase was 2.7%. Front-store sales were up 2.5% to $1.23 billion, and the same-store increase was 2%.

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