Murphy takes SDM in new directions: Front-end prices have been reduced

Chain Drug Review, April 29, 2002

NORTH YORK, Ontario -- Glenn Murphy, chairman and chief executive officer of Shoppers Drug Mart (SDM), was appointed to his position in June 2001. Since that time he has redefined the corporate objectives and managed the realignment of his senior management team. Murphy has reorganized the head office structure and significantly downsized it.

In addition, Canada's No, 1 drug chain has successfully completed an initial public offering (IPO), which raised $540 million (Canadian) in new capital and enabled the company to pay down a large portion of its senior indebtedness. Under Murphy's direction a new pricing strategy for front-end categories has been introduced, and category management has been given new emphasis.

In an interview with financial analysts following the release of results for fiscal 2001, Murphy casually mentioned he had been able to visit only 600 of SDM's stores but forecast he would have covered the remaining 227 outlets before the end of the first quarter 2002. No one asked what he had been doing with his time.

Despite the management attention that had to be devoted to the IPO and administrative changes and the effects of the events of September 11 on consumer sentiment, the year's results seemed to indicate that, already, Murphy's reforms are bringing tangible results.

For the fiscal year ended December 29, 2001, systemwide sales increased 10.2% to $5 billion. Prescription volume rose 13.7% to $2.25 billion, and front-end sales increased 7.4% to $2.74 billion. On a same-store basis systemwide volume advanced 9.2%, with prescription sales showing 13.4% growth and front-end sales increasing 5.9%.

Although fourth quarter sales gains were below the rate established in the first three quarters -- systemwide volume came in with an increase of 8.1% to $1.28 billion -- earnings before interest, taxes, depreciation and amortization (EBITDA) were $116 million compared with $104 million for the fourth quarter of fiscal 2000, a rise of 11.4%. EBITDA margins were 9.01% during the fourth quarter of 2001, a 27 basis-point improvement over the 8.74% equivalent rate for 2000.

SDM's EBITDA for all of fiscal 2001 amounted to $417 million. However, that figure includes the $20 million charge the company took for the staff restructuring that occurred in the second half of the year. Adjusting for that charge, fiscal 2001 EBITDA amounted to $437 million, a 12.1% improvement over the preceding year.

Excluding goodwill amortization and the impact of the staff restructuring charge, fiscal 2001 net earnings were $88 million. On a pro forma basis, incorporating those adjustments, assuming the $540 million equity issue that closed on November 21 had been completed at the beginning of the year and that the retailer's debt servicing charges had been proportionately reduced, SDM estimates that fiscal 2001 net earnings would have been $140 million.

Commenting on the events of his first seven months at the helm and looking at plans for the current year, Murphy conceded that he was satisfied with what had been accomplished but said he and his colleagues were "pleased to be able to put behind us the difficult tasks we had to accomplish in 2001."

"The strong sales the company experienced in 2001 were a testament to the strength of the Shoppers and Pharmaprix [the drug chain's banner in Quebec] names and the resiliency of the drug store sector," he added.

In the year ahead Murphy noted that he and his colleagues will be able to focus on top-line growth, gain of market share, and merchandising and operational issues. He said he is particularly anxious to address some of the opportunities he sees for new merchandizing initiatives and operational cost savings.

SDM realized sales per square foot of $920 in 2001. one of the highest figures in the sector and a 7.5% increase over the $879 achieved in 2000.

It seems likely that Murphy will continue to give high priority to helping the affiliates improve performance of their front ends. Critics of the company conclude that in the latter part of the 1990s SDM, along with most of its chain drug competitors, had been losing market share in over-the-counter medications and beauty care products to discounters and supermarkets.

Drug chains had relied on their convenience for prescription customers to buffer them in the front end from the pricing of their nontraditional competitors. But customers proved to be more price sensitive than they expected.

Since Murphy's arrival SDM has reduced prices on some 1.500 front-end items, and there are likely more reductions to come. The executive has held senior merchandizing and operational positions at Loblaw Cos. and Provigo. He is therefore extremely well versed in the operation of category management and is reportedly keen to reinvigorate SDM's commitment to that discipline.

Murphy indicates there will be no special program to reassure customers about the authenticity of the drug chain's commitment to everyday low pricing. The prices will speak for themselves.

In the effort to control expenses Murphy says the emphasis will be on reducing the cost of goods coming into the stores. He sees opportunities to more fully leverage the company's sales advantage and to reduce the costs of centralized services. There likely also will be a renewed emphasis on execution of central programs at store level where, in the past, SDM has been less disciplined than sector leaders in other mass market retail categories.