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Shoppers Drug Mart Corp
Symbol C : SC
Shares Issued 203,911,788
Close 2013-02-06 C$ 41.64
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Shoppers Drug Mart earns $608-million in 2012

2013-02-07 12:14 ET - News Release

Mr. Domenic Pilla reports

SHOPPERS DRUG MART CORPORATION REPORTS STRONG FOURTH QUARTER RESULTS

Shoppers Drug Mart Corp. today released its unaudited financial results for the fourth quarter and fiscal year ended Dec. 29, 2012.

Fourth quarter year-over-year highlights:

  • Sales increase of 4.4 per cent to $2.72-billion;
  • Same-store increase of 2.7 per cent;
  • Pharmacy sales increase of 3.7 per cent to $1.22-billion;
  • Same-store increase of 2.1 per cent;
  • Retail prescription count increase of 8.3 per cent;
  • Same-store increase of 6.1 per cent;
  • Front-store sales increase of 5.0 per cent to $1.50-billion;
  • Same-store increase of 3.2 per cent;
  • Net earnings per share of 85 cents, an increase of 3.7 per cent.

Fiscal 2012 highlights:

  • Sales increase of 3.1 per cent to $10.78-billion;
  • Same-store increase of 2.2 per cent;
  • Pharmacy sales increase of 2.1 per cent to $5.10-billion;
  • Same-store increase of 1.2 per cent;
  • Retail prescription count increase of 5.4 per cent;
  • Same-store increase of 4.5 per cent;
  • Front-store sales increase of 4.0 per cent to $5.68-billion;
  • Same-store increase of 3.1 per cent;
  • Net earnings per share of $2.92, an increase of 2.8 per cent;
  • Adjusted net earnings per share of $2.94, an increase of 4.3 per cent;
  • Declared four quarterly dividends of 26.5 cents per common share;
  • Repurchased 7,949,400 common shares at an aggregate cost of $330-million.

Fourth-quarter results (12 weeks)

Fourth quarter sales were $2.72-billion, an increase of 4.4 per cent over the same period of the prior year, driven by strong volume growth in pharmacy and continued sales and market share gains in the front of the store. On a same-store basis, sales increased 2.7 per cent during the quarter.

Pharmacy sales were $1.22-billion in the fourth quarter, an increase of 3.7 per cent compared with the same period of the prior year, as strong growth in the number of prescriptions filled at retail, combined with sales gains in the company's long-term care and specialty pharmacy business units, was partially offset by a further reduction in average prescription value. On a same-store basis, pharmacy sales increased 2.1 per cent during the quarter. During the fourth quarter of 2012, the number of prescriptions dispensed at retail increased 8.3 per cent compared with the same period of the prior year and was up 6.1 per cent on a same-store basis. Pharmacy volume growth was particularly strong in Ontario, driven by the successful implementation and acceptance of a program to waive the $2 co-pay on eligible prescriptions for seniors, and in Western Canada, where the company completed a number of acquisitions in the second half of the year. Year over year, average prescription value at retail declined a further 6.0 per cent during the fourth quarter of 2012, largely the result of further reductions in generic prescription reimbursement rates due to recently implemented and continuing drug system reform initiatives in most provincial jurisdictions, along with increasing generic prescription utilization rates. Generic molecules comprised 60.2 per cent of prescriptions dispensed in the fourth quarter of 2012 compared with 57.1 per cent in the same period of the prior year. In the fourth quarter of 2012, pharmacy sales accounted for 44.8 per cent of the company's sales mix compared with 45.2 per cent in the same quarter of the prior year.

Front store sales were $1.50-billion in the fourth quarter, an increase of 5.0 per cent compared with the same period of the prior year, led by strong growth in over-the-counter medications, cosmetics, and food and confection. The company's store network development program, which has resulted in a 3.6-per-cent increase in drugstore selling space compared with a year ago, continues to have a positive impact on sales growth, particularly in the front of the store. Front-store sales growth was also aided by effective seasonal marketing and promotional campaigns; a strong cough, cold and flu season; and solid program execution at store level. On a same-store basis, front store sales increased 3.2 per cent during the fourth quarter of 2012.

Fourth-quarter net earnings were $175-million compared with net earnings of $176-million in the same period of the prior year. On a fully diluted basis, net earnings per share were 85 cents in the fourth quarter of 2012 compared with 82 cents per share in the same period of the prior year, an increase of 3.7 per cent. Operating income was $250-million in the fourth quarter of 2012 compared with $256-million in the same period of the prior year, as strong sales growth and a continued focus on cost reduction, productivity and efficiency initiatives in comparable stores was offset by further downward pressure on pharmacy margins and higher operating expenses related to the company's network growth and expansion initiatives, along with increased associate earnings. Other factors that positively impacted net earnings for the fourth quarter of 2012 were lower finance expenses and a reduction in the company's effective income tax rate. In addition to the earnings factors noted above, the cumulative impact of the company's share repurchase program had a positive impact on growth in net earnings per share during the fourth quarter of 2012, as there were 4.2 per cent fewer fully diluted shares outstanding (on a weighted-average basis) compared with the fourth quarter of 2011.

Commenting on the results, Domenic Pilla, president and chief executive officer, stated: "We are pleased with our fourth-quarter and full-year results. In spite of the persistent regulatory headwinds that we face as an industry and a company, we remain encouraged by our underlying operating results and financial performance. Clearly our brand and our value proposition, which is grounded upon the pillars of health, beauty and convenience, continue to resonate with our customers and patients in the communities we serve from coast to coast. On behalf of our shareholders and the board of directors, I would like to thank our corporate and regional office employees, along with our associates and their teams at store level, for their efforts and contributions to our collective success in 2012."

Fiscal 2012 results (52 weeks)

Sales in 2012 were $10.78-billion compared with $10.45-billion in 2011, an increase of $323-million or 3.1 per cent, driven by strong volume growth in retail pharmacy, continued sales and market share gains in the front of the store, and improved performance in the company's complementary health care businesses. Increased activity on the acquisition front, combined with the company's capital investment and store development program, also had a positive impact on sales growth during the year. On a same-store basis, sales increased 2.2 per cent in 2012.

Pharmacy sales were $5.10-billion in 2012 compared with $4.99-billion in 2011, an increase of $104-million or 2.1 per cent, as strong growth in the number of prescriptions filled at retail, combined with sales gains in the company's MediSystem Technologies and Specialty Health Network businesses, was largely offset by a further decline in average prescription value. On a same-store basis, pharmacy sales increased 1.2 per cent during the year. During 2012, the number of prescriptions dispensed at retail increased 5.4 per cent over the prior year and were up 4.5 per cent on a same-store basis. Pharmacy volume growth was strongest in Western Canada, driven in part by the acquisition, in August, of 19 drugstores and three long-term-care pharmacies from Paragon Pharmacies Ltd., and in Ontario where the company increased its market share after the successful rollout and implementation of a program to waive the $2 co-pay on eligible prescriptions for seniors. Year over year, average prescription value at retail declined by a further 4.3 per cent in 2012, a decrease that can be largely attributed to further reductions in generic prescription reimbursement rates as a result of recently implemented and continuing drug system reform initiatives in most provincial jurisdictions, combined with greater generic prescription utilization rates. The company's decision to waive the $2 co-pay on eligible prescriptions for seniors in the Ontario market also contributed to the year-over-year decrease in average prescription value. Generic molecules comprised 59.2 per cent of prescriptions dispensed in 2012 compared with 56.9 per cent in the prior year. In 2012, pharmacy sales accounted for 47.3 per cent of the company's sales mix compared with 47.8 per cent in the prior year.

Front-store sales were $5.68-billion in 2012 compared with $5.46-billion in 2011, an increase of $219-million or 4.0 per cent, with the company posting sales gains in all core categories, led by cosmetics, over-the-counter medications, and food and confection. On a same-store basis, front store sales increased 3.1 per cent in 2012. In addition to square-footage growth, effective marketing campaigns, impactful promotions and enhanced seasonal programs established positive sales momentum that drove sustained growth and market share gains in the front of the store throughout the course of the year.

Net earnings in 2012 were $608-million compared with $614-million in 2011. Net earnings for 2012 are inclusive of a third-quarter restructuring charge of $13-million (pretax) stemming primarily from the rationalization and realignment of the company's central office functions, along with an offsetting gain on disposal of $13-million (pretax) in respect of a sale-leaseback transaction involving certain of the company's retail properties. In addition to these items, net earnings for 2012 also include a second-quarter charge of $5-million (pretax) from the closure of two Murale stores. Excluding the impact of the items noted above, adjusted net earnings for 2012 were $612-million or $2.94 per fully diluted share compared with adjusted net earnings of $611-million or $2.82 per fully diluted share in 2011. Adjusted net earnings for 2011 exclude the impact of a third-quarter gain on disposal of $3-million (pretax), which was also in respect of a sale-leaseback transaction involving certain of the company's retail properties. During 2012, strong topline growth, particularly in the front of the store, combined with a continued focus on promotional effectiveness and margin enhancement initiatives, served to offset further downward pressure on pharmacy margins, resulting in a year-over-year increase in gross profit dollars of 3.2 per cent. In 2012, operating and administrative expenses, including depreciation and amortization expense but excluding the items noted above, were up 4.8 per cent over the prior year, driven in part by higher store-level expenses related to network growth and expansion initiatives, higher marketing expenses, and increased associate earnings. Year-over-year growth in depreciation and amortization expense, after excluding the impact of the sale-leaseback transactions noted above, can also be attributed to the company's network growth and expansion initiatives, along with additional investments in supporting infrastructure. Other factors that positively impacted net earnings in 2012 were lower finance expenses and a reduction in the company's effective income tax rate. In addition to the earnings factors noted above, the cumulative impact of the company's share repurchase program had a positive impact on growth in earnings per share during 2012, as there were 3.7 per cent fewer fully diluted shares outstanding (on a weighted-average basis) compared with 2011.

Store network development

During the fourth quarter, the company opened four new drugstores, all of which were relocations, and completed two major drugstore expansions. The company also acquired four drugstores during the quarter, two of which were amalgamated with existing stores. In addition to this activity, two drugstores were converted to smaller-prototype formats, and one smaller drugstore was closed. The company also closed one Shoppers Home Health Care store during the quarter. For the fiscal year ended Dec. 29, 2012, the company opened 41 new drugstores, 23 of which were relocations, and completed 12 major drugstore expansions. The company also acquired 33 drugstores during the year, eight of which were amalgamated with existing stores. In addition to this activity, 15 drugstores were converted to smaller-prototype formats, and five smaller drugstores were consolidated or closed. The company also closed two Murale stores and one Shoppers Home Health Care store during the year. At the end of 2012, there were 1,363 stores in the system, composed of 1,295 drugstores (1,240 Shoppers Drug Mart/Pharmaprix stores and 55 Shoppers Simply Pharmacy/Pharmaprix Simplement Sante stores), 62 Shoppers Home Health Care stores, and six Murale stores. During 2012, the selling square footage of the retail store network increased by 3.4 per cent to 13.7 million square feet at year-end.

Dividend

The company also announced today that its board of directors has declared a dividend of 28.5 cents per common share, payable April 15, 2013, to shareholders of record as of the close of business on March 28, 2013. This represents an increase in the company's quarterly dividend payments of 7.5 per cent, resulting in an annualized dividend of $1.14 per common share.

Normal course issuer bid program

During the fourth quarter of 2012, the company repurchased 1,623,500 common shares under its normal course issuer bid program at an aggregate cost of $68-million, representing an average repurchase price of $41.66 per common share. For the fiscal year ended Dec. 29, 2012, the company has repurchased 7,949,400 common shares under its normal course issuer bid program at an aggregate cost of $330-million, representing an average repurchase price of $41.52 per common share. All repurchased common shares were subsequently cancelled. The company's current normal course issuer bid program will terminate on Feb. 14, 2013.

The company also announced today that its board of directors has approved the renewal of its normal course issuer bid program and has authorized the purchase of up to 10.2 million of its common shares, representing approximately 5.0 per cent of the 203,911,788 common shares currently outstanding, by way of normal course purchases effected through the facilities of the Toronto Stock Exchange. Under its current normal course issuer bid program that expires Feb. 14, 2013, the company has repurchased 8,308,900 common shares at an aggregate cost of $346-million, representing an average repurchase price of $41.60 per common share. Of the repurchased common shares, 8,168,900 were subsequently cancelled, with the remaining 140,000 repurchased common shares expected to be cancelled on Feb. 28, 2013. Subject to approval of the Toronto Stock Exchange, it is anticipated that purchases under the new program may commence on Feb. 15, 2013, and will terminate on Feb. 14, 2014, or on such earlier date as the company may complete its purchases pursuant to a notice of intention to be filed with the TSX. Purchases will be made by the company in accordance with the requirements of the TSX, and the price that the company will pay for any such common shares will be the market price of any such common shares at the time of acquisition or such other price as may be permitted by the TSX. In connection with the normal course issuer bid program, the company intends to enter into an automatic purchase plan with its designated broker to allow for purchases of its common shares during certain predetermined blackout periods, subject to certain parameters as to price and number of shares. Outside of these predetermined blackout periods, shares will be repurchased in accordance with management's discretion, subject to applicable law. For purposes of the TSX rules, a maximum of 146,845 common shares may be purchased by the company on any one day under the bid, except where purchases are made in accordance with the block-purchase exception of the TSX rules. Common shares purchased by the company will be cancelled.

Commenting on the dividend increase and the renewal of the share repurchase program, Brad Lukow, executive vice-president and chief financial officer, stated: "The board's decision to increase the dividend and renew the share repurchase program reinforces the company's commitment to return excess cash to shareholders. It is a testament to the continued strength of our free-cash-flow-generation capabilities and our ability to support both growth initiatives and shareholder distributions in order to enhance long-term shareholder value."

Fiscal 2013 outlook (52 weeks ending Dec. 28, 2013)

The company expects total sales to increase by between 3.0 per cent and 4.0 per cent in 2013. This expectation is supported by anticipated sales growth of between 4.0 per cent and 5.0 per cent in pharmacy, an assumption that is underpinned by increased acquisition activity and above-market prescription-count growth. On a same-store basis, the company expects pharmacy sales growth of between 1.5 per cent and 2.5 per cent in 2013, as it will be building on strong comparable store pharmacy sales growth from last year, particularly in the second half of 2013. In the front of the store, the company expects to generate sales growth of between 2.5 per cent and 3.5 per cent, which reflects a smaller network development and expansion program and, as well, takes into consideration the anticipated impact of new market entrants. On a same-store basis, the company expects front-store sales growth of between 2.0 per cent and 2.5 per cent in 2013. In pharmacy, it is expected that above-market prescription-count growth will be partially offset by a further reduction in average prescription value, with the decline in average prescription value being largely attributable to continued reductions in generic prescription reimbursement rates as a result of recently implemented or announced drug system reform initiatives in most provincial jurisdictions. Furthermore, it is anticipated that increasing generic prescription utilization rates will also serve as a contributing factor to the decline in average prescription value. The anticipated further decline in average prescription value will continue to put downward pressure on pharmacy margins, resulting in an increased focus on cost and efficiency initiatives not only in the dispensary but across the entire spectrum of the company's operations.

In fiscal 2013, the company plans to allocate approximately $275-million to its base capital expenditure program, with approximately 70 per cent of this amount to be invested in the store network. In addition to renovations and enhancements to existing stores, the company's store network investment program for fiscal 2013 includes the addition of between 30 and 35 new drugstores, approximately half of which will be relocations, and the completion of between 15 and 20 major drugstore expansions. This activity should result in an increase in retail selling square footage of approximately 3.0 per cent. The balance of the company's capital expenditures will be directed to investments in supporting infrastructure, including information technology and supply chain. Incremental to its base capital expenditure plans, the company will continue to pursue attractive opportunities in the marketplace to acquire drugstores and prescription files.

2012 annual report

The company's audited consolidated financial statements and the notes thereto for the year ended Dec. 29, 2012, will be available on or before March 27, 2013. Management's discussion and analysis for the year ended Dec. 29, 2012, including further discussion and analysis of fourth-quarter events or items that affected results of operations, financial position and cash flows, will also be available on or before March 27, 2013. Both documents will be contained in the company's 2012 annual report and will be available in the investor relations section of the company's website or on the Canadian Securities Administrators' website.

Other information

The company will hold an analyst call at 3 p.m. (Eastern Standard Time) today to discuss its fourth-quarter results and its outlook for fiscal 2013. The call may be accessed by dialling 416-695-7806 from within the Toronto area or 1-888-789-9572 outside of Toronto. The seven-digit participant passcode number is 8845571. The call will also be simulcast on the company's website for all interested parties. The webcast can be accessed through the investor relations section of the Shoppers Drug Mart website. The conference call will be archived in the investor relations section of the Shoppers Drug Mart website until the company's next analyst call. A playback of the call will also be available by telephone until 11:59 p.m. (Eastern Standard Time) on Feb. 21, 2013. The call playback can be accessed after 5 p.m. (Eastern Standard Time) on Thursday, Feb. 7, 2013, by dialling 905-694-9451 from within the Toronto area or 1-800-408-3053 outside of Toronto. The seven-digit passcode number is 1102811.

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