Lupin 2023

SDM in good hands as it awaits permanent CEO

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TORONTO — Shareholders attending Shoppers Drug Mart’s (SDM’s) annual meeting here earlier this month got to see David Williams perform capably in his new and temporary role of interim president and chief executive officer.

At a board meeting the previous week, Williams had shed his role as chairman and was succeeded in that position by longtime board member Holger Kluge. Williams had been obliged to step into the CEO role in February after the departure of Jürgen Schreiber.

At the meeting Kluge noted how smoothly the board reacted to the situation. Within 24 hours the board’s human resource and compensation committee recommended that the board form a four-person search committee, and suggested members for the committee.
Kluge said the committee was making good progress.

The likely timing for an announcement of the board’s selection was not discussed at the annual meeting, but in an analysts conference after the release of SDM’s first quarter results Williams said he hoped a selection would be announced by the end of June.

Williams and vice president and chief financial officer Brad Lucow reported much better results for 2010 than seemed likely when the reforms in pharmacy remuneration by some major provincial drug plans were unveiled last year.

Sales reached $10.4 billion (Canadian), an increase of 3.9%, with particular strength in western Canada and in Quebec. Same-store sales increased by 2.1%. Prescription sales were $5 billion, an increase of 2.8%.

Lucow noted that the decline in revenue per prescription was partially compensated for by a 4.7% increase in prescription numbers.

On a same-store basis, prescription sales increased 1.7%. Front-end sales, at $5.4 billion, grew by 4.9% with increases in food, confections, beverages, cosmetics and over-the-counter drugs leading the way. Same-store sales in the front store were up 2.5%
Net earnings for the year were $591 million — or $598 million with an adjustment for an extraordinary charge — compared with $585 million in 2009, for an increase of 2.2%.

During the year the company added 800,000 square feet of selling space through the opening or acquisition of 75 stores, 43 of which were relocations, and the consolidation or closing of 10 smaller drug stores and three home health care stores.

Capital expenditures for the current year are budgeted at $360 million, significantly below last year’s $591 million figure. These expenditures, 75% of which will be devoted to the stores, are expected to result in a 7.5 % increase in selling space.

The momentum achieved in 2010 is being carried forward, as is evident from the results of the first quarter of 2011.

Sales in the quarter increased 2.7% to $2.4 billion, with same-store sales up 2%. The front-end sales, up 6% to $1.2 billion, helped compensate for a reduction in prescription sales, down 0.4% on both a total and same-store basis. Continued growth in the number of prescriptions filled was offset by a reduction in the average prescription reimbursement rates.

Despite the changed environment for prescription reimbursement, the company showed a year-over-year increase in earnings in the quarter. Net earnings were $118 million, compared with adjusted net earnings of $114 million in the prior year.

In his informal remarks on the company’s progress and positioning, Williams reminded shareholders of some of the company’s unique strengths. SDM, he said, has extraordinary brand loyalty among Canadians and 90% of Canadians live within driving distance of one of the chain’s stores.

In addition, Williams noted, SDM’s store formats are unusually attractive and its associates, store staff and central office staff are what he calls “best in class.” Financially, he said, the company consistently produces strong ­results.

Williams commented on SDM’s expansion plans for 2011, saying that the emphasis this year is to drive sales and efficiency in the existing space, to “lead in our commodities,” even though a substantial sum is being devoted to capital expenditures.

“While the larger stores are certainly winning formats and the company will continue to invest in them, the proportion of capital devoted to their construction will be reduced in favor of more relocation and expansion of smaller stores,” he said. “Optimization of our assets requires that we devote attention to our 550 smaller stores.”

The company has had good experience with the smaller prototype it experimented with last year. This year, Williams said, 40 stores will be remodeled in the smaller format.

Williams said that as a result of the reforms in pharmacy remuneration there will be more rapid consolidation of the market. “Shoppers is well positioned to be a consolidator,” he said.

In a subsequent interview Williams acknowledged that the number of transactions consummated thus far is lower than expected, suggesting that sellers have not yet made the adjustment to the price expectations that the new economics dictate.


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