New focus on front end drives 3Q sales at Shoppers Drug Mart

Drug Store News, Nov 17, 2003 by Michael Johnsen

TORONTO -- Strong front-end sales helped Shoppers Drug Mart exceed analyst expectations for its third quarter ended Oct. 4, the company reported earlier this month.

The No. 1 Canadian drug store chain posted third quarter EBITDA of C$171 million (U.S.$128 million), an increase of 13.6 percent over the comparable period last year. Glenn Murphy, Shoppers Drug Mart chairman and chief executive officer, identified successful cost-cutting measures and a strong merchandising mix as two factors that drove success during the quarter. "The overall [front-end] mix improvement, which is something we're very focused on, drove a big chunk of the improvement, Murphy told analysts during a Nov. 5 conference call. "[However, there's] still a lot of work to be done on mix. Our cosmetics business, which is a strong growth margin for us, continues to be a bigger part of our business going forward."

The chain's larger-box prototype continues to perform well Murphy noted. The current 13,000-square-foot-plus stores are expected to experience a longer period of growth than the typical new Shoppers Drug Marts (with an average of 6,900 square feet of selling space) because of the amount of space afforded to the chain's key categories. The extra space gives Shoppers Drug Mart's category buyers more leeway in building their sets, especially in beauty and over-the-counter areas, Murphy said. "[In] categories where we've never had the right representation we felt was appropriate in the past ... we are now able to use the increased size of our stores" to achieve an appropriate product mix that our customers have always wanted from us, but we've been unable to deliver."

And Shoppers Drug Mart continues to tweak its product mix within the prototype, Murphy said. "We've elevated our cosmetics department to a beauty boutique. We've recently evolved our nutrition sections, now called Healthy Living. Six months ago, we [reset] our photo lab business," he noted. "The work now is becoming less about design and more about working the merchandising ... and that work has lust begun."

For instance, a key focus for 2004 will be adding digital self-service functionality to its photo department, Murphy reported, a service currently available in about 10 stores.

The chain is about halfway through revamping its private label program, having introduced more than 200 repackaged or new store brand products during the quarter. Shoppers Drug Mart has targeted more than 400 private label offerings to be refurbished and plans to introduce some 100 new store brand items by year's end, Murphy said.

One concern facing Canadian pharmacy operators has been the integrity of the country's drug supply given the added drag from American demand. However, that currently is not a concern for Shoppers Drug Mart, Murphy noted. But we understand there are some independents, particularly in western Canada, who are supplied by wholesalers [in that region] who might be finding the supply a little more challenging than has been historically [recorded]," he said. With its three distribution centers located throughout the country, Murphy said he does not anticipate any shortage problems will affect Shoppers Drug Mart.

And Murphy put to rest speculation that Shoppers Drug Mart may be interested in extending its reach into the United States through an Eckerd acquisition. "Somebody has put our name down for probably the wrong reasons. We have so much to do in Canada," he said. "I think that was a mistake to put our name down for Eckerd."

Total sales at Shoppers jumped 23.4 percent to reach C$1.8 billion (U.S.$1.3 billion), representing prescription same-store sales growth of 9.6 percent and a front-end comp sales increase of 4.1 percent. Drug store sales per square foot were C$994 (U.S.$744) at the end of the third quarter compared with C$959 for the prior year.

Third quarter net earnings increased 23.4 percent to C$79 million (U.S.$59.1 million), or 37 Canadian cents per share, up from 30 Canadian cents per share a year ago. The per-share profit beat a consensus estimate of 27 Canadian cents per share from five analysts Reuters Research polled.

During the third quarter, Shoppers Drug Mart opened 16 new stores and closed one.