Jean Coutu to expand in smaller markets amid poor acquisition opportunities

MONTREAL – Jean Coutu plans to expand its presence outside large urban centres as the pharmacy chain looks for growth amid increased competition and the absence of large acquisition opportunities.

The Quebec-based retailer wants to continue adding smaller-sized stores in smaller communities which tend to have older customers who buy more prescription drugs than younger consumers.

“In the last year or two when we opened in smaller markets we realized that the prescription volume goes up quickly so that’s why we want to be more involved and more active,” Francois Coutu said Thursday in a conference call to discuss third-quarter results.

Jean Coutu (TSX:PJC.A) said Thursday it earned $62.5 million or 30 cents per share in the quarter ended Nov. 30, 2013, even though revenues fell to $712.5 million on the sale of more lower-cost generic drugs and the absence of flu that reduced sales.

The results compared with a profit of $56.2 million or 26 cents per share on sales of $716.6 million in the same period a year earlier.

Analysts on average had expected a profit of 28 cents per share.

The chain did not say Thursday how many small stores it plans to add.

Jean Coutu’s franchisees operate 413 stores including 331 regular stores of 11,000 square feet, 26 of 5,000 square feet and 56 counters in hospitals and other areas.

There’s been speculation about Jean Coutu’s next move in response to the pending $12.4-billion takeover of Shoppers Drug Mart (TSX:SC) — Canada’s largest pharmacy chain — by Loblaw (TSX:L).

The company said the best way of preserving its leading position in Quebec and offset competition is to maintain the loyalty of customers who buy prescription drugs.

“When you have a customer loyal at the prescription level you have something extremely strong and powerful for the long-term business and that’s why we want to keep up this being the backbone of our business,” Coutu told analysts.

Coutu also said he’s confident of winning back the non-prescription drug business of customers who have been lured to Target and other rivals, in part by expanding its offering of electronics and private label brands.

Expanding in smaller markets would allow Jean Coutu to avoid big-boss competitors like Target which is focused on large urban centres.

Jean Coutu also said Thursday it has secured undisclosed cost concessions from suppliers to its Pro Doc generic drug subsidiary in advance of possible further price reductions by governments. The move should allow Pro Doc to maintain margins of 40 to 45 per cent.

Jean Coutu continued to expand the sale of generic drugs which represented 66.7 per cent of all prescriptions in the quarter, up from 61.8 per cent a year ago. Pro Doc earned $21.6 million on $47.9 million of sales during the quarter, up from $16.1 million on $41.4 million of revenues a year earlier.

The lower prices however hurt same-store drug sales revenues which fell by 1.6 per cent despite a 4.5 per cent increase in the number of prescriptions. Front-end sales for stores open at least a year decreased by 1.3 per cent.

Analyst Derek Dley of Canaccord Genuity said Jean Coutu’s small-town expansion efforts is a natural move for a mature company that faces few available acquisition opportunities.

“The urban markets are becoming more saturated so they’re looking for growth…in smaller markets with smaller stores is something we’re going to see a lot of companies doing,” he said in an interview.

In the absence of a large acquisition, he expects Jean Coutu to use its mounting cash to further boost its dividend.

The company recently repurchased 22 million of its shares and paid a one-time cash dividend of 50 cents per share. The shares purchased represented 20.5 per cent of its outstanding shares and included 18.15 million controlled by the Marcelle and Jean Coutu Foundation, a trust controlled by the company founder and his family.

The move will generate a $53.6-million tax savings for the company after the founder and controlling shareholder gave the $199 million tax benefit to the company, added chief financial officer Andre Belzile.

On the Toronto Stock Exchange, Jean Coutu’s shares gained one cent at $18.64 in Thursday afternoon trading.