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Duane Reade gets 4Q sales lift from new stores

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New stores gave a boost to sales at Duane Reade in the 2009 fourth quarter, while charges connected with its pending acquisition by Walgreens contributed to a bigger net loss.

Duane Reade said retail store sales rose 5.3% in the quarter to $451.3 million. New store openings, renovated store locations and strong pharmacy same-store sales growth fueled the revenue gain, according to the drug chain.

NEW YORK — New stores gave a boost to sales at Duane Reade in the 2009 fourth quarter, while charges connected with its pending acquisition by Walgreen Co. contributed to a bigger net loss.

The drug store chain said Tuesday that retail store sales, which exclude pharmacy resale activity, rose 5.3% in the quarter ended Dec. 26 to $451.3 million from $428.6 million a year earlier. New store openings, renovated store locations and strong pharmacy same-store sales growth fueled the revenue gain, according to the company. Total net sales including pharmacy resale activity inched up 0.1% to $465 million.

Overall same-store sales climbed 2.6%, reflecting a 5-basis-point increase in the front end and a 6% rise in the pharmacy.

Total front-end sales gained 3.5% but continued to reflect the reduced consumer demand associated with the recession, Duane Reade said. The uptick in front-end sales was driven mainly by new and renovated stores and a strong performance in food and beverage items and over-the-counter products, the company noted.

Pharmacy retail sales grew 7.7% in the fourth quarter, which Duane Reade attributed to strong same-store sales growth, new stores and increases in average prescription prices stemming from branded drug inflation. The same-store average weekly prescriptions filled increased 4%. Generic drugs represented 62.7% of pharmacy prescriptions in the quarter, which the company said adversely impacted the pharmacy same-store sales gain by about 2.9%.

On the earnings side, fourth-quarter adjusted FIFO EBITDA (earnings before interest, taxes, depreciation and amortization) rose 34.8% to $30.5 million, or 6.6% of net sales, compared to $22.6 million, or 4.9% of net sales, a year ago.

The operating loss improved to $1.4 million in the fourth quarter, compared with $3.6 million in the prior-year period. Duane Reade said the smaller operating loss was primarily due to the rise in adjusted FIFO EBITDA, partially offset by increased depreciation and amortization expenses of $2.2 million, a higher LIFO inventory valuation charge of $1.9 million and a $600,000 increase in other expenses.

Duane Reade noted that fair value adjustments for its redeemable preferred stock rose $59.5 million during the fourth quarter from a year ago, reflecting the increased probability at the year’s end of a future liquidity event due to the negotiations resulting in the $1.08 billion agreement to be acquired by Walgreens, which was announced Feb. 17. The increased fair value is recognized as a nonoperating charge on the company’s statement of operations.

As a result of the fair value charges, Duane Reade said, the net loss climbed to $84.8 million in the fourth quarter from $17.4 million in the prior-year period.

For the full year, retail store sales came in at nearly $1.76 billion, up 4% from $1.69 billion a year earlier. Overall sales, including pharmacy resale activity, advanced 3.6% to $1.84 billion.

Same-store sales for 2009 edged up 1.5%, including a 0.8% dip in the front end and a 4.6% gain in the pharmacy. Total sales increased 2.4% in the front end and 5% in the pharmacy for the year. 

Adjusted FIFO EBITDA increased 13.9% to $99 million in 2009, compared with $87 million a year ago. The operating loss for the year was $7.6 million, an improvement from $15.8 million in 2008.

The 2009 net loss came in at $124.3 million, down from $72.8 million in 2008. Duane Reade said the increase is due to the fourth-quarter fair value charge related to its preferred stock, partially offset by a $12.5 million gain on debt extinguishment related to a third-quarter debt refinancing and the improvement in the full-year operating loss.

At the close of 2009, Duane Reade’s total debt, including capital leases but excluding the liability associated with the issuance of redeemable preferred stock, was $458.2 million, a decrease of $97.5 million from a year earlier. The reduction is primarily attributable to the debt refinancing transactions in the third quarter, the company said.

"We are pleased with our operating results for the fourth quarter and full year as we demonstrated continued improvement in a number of important metrics despite the challenging economy," chairman and chief executive officer John Lederer said in a statement. "We are especially pleased that we exceeded our expectations for full-year adjusted FIFO EBITDA, which increased 13.9%."

Lederer also cited Duane Reade’s ongoing efforts to improve its stores, product selection, pharmacy operation and brand visibility. "Additionally, we are delighted with the continued positive traction of our business transformation, as evidenced by strong results in pharmacy sales, the launch of Look Boutique, our store-within-a-store beauty concept, as well as the introduction of our DR Delish exclusive brand, which we introduced through The Duane Reader, our in-store publication," he commented. "These accomplishments speak to our ever increasing desire and ability to better serve the needs of our core urban market."

During 2009, Duane Reade opened 10 new stores (including three in the fourth quarter) and closed four stores, compared with 15 new stores opened and six stores closed in 2008. As of Dec. 26, the retailer operated 257 stores, up from 251 stores a year ago.

The company added that it won’t be providing a fiscal 2010 outlook while the Walgreens acquisition agreement is pending approvals. The deal is expected to close in Walgreens’ current fiscal year, which ends August 31.

"As we enter 2010, we are cautiously optimistic about our prospects, given the current economy, and remain focused on improving the urban shopping experience," Lederer stated. "Additionally, we are delighted that Walgreens, the most respected national leader in our industry, has recognized the successful transformation under way at Duane Reade, and we view this recognition as a true testament to the efforts of our entire team. We look forward to extending our transformation into 2010 and beyond and to continuing to serve New Yorkers as Duane Reade, a name that they have come to know well over the past 50 years."


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