Openings, pricing cut Drug Emporium profits

Drug Store News, Dec 11, 1989

Openings, pricing cut Drug Emporium profits

COLUMBUS, Ohio -- Drug Emporium said higher than expected costs for new store openings in Los Angeles and Washington, D.C., plus lower pricing chainwide, will reduce earnings in the third quarter and full year.

The deep discounter said these results will not affect plans to increase the roster of corporate-controlled stores. Drug Emporium will open 13 by February, raising its count to 82, and "at least 18" in fiscal 1991, said ceo Gary Wilber.

"We're expecting less in gross margin in the second half than in the first, and it was planned," he noted about fiscal results. "Our estimates may in fact be overly conservative."

Lower-priced strategy

Reduced margins are part of a new lower-priced strategy on most categories. Launched in Philadelphia last year as part of a successful effort to turn around business in that market, the pricing was extended to other markets and went chainwide by September, said Wilber.

"They elected to go with a greater statement on price on an everyday basis, and less on a special promotional basis," said Ken Smith, analyst at Johnson Lane Space Smith & Co.

The chain reported a gross margin in the first six months ended Aug. 31 of 20.7 percent, higher than the 17 to 18 percent discounters typically favor. That apparently leaves room to slice a point or so in support of the pricing plan.

Meanwhile, costs in L.A. and D.C. were "much higher than we anticipated," Wilber said. In L.A., for instance, a new store opening was delayed up to two months due to dealings with the local government, said another chain spokesman. That store opened last month, its fourth in the past year in this market, raising the count there to nine. Five more are on tap for fiscal 1991.

Store openings

In D.C., it plans to open two more stores this month, raising the roster there to seven, and will add six more in fiscal 1991.

Costs of opening these new stores, plus stepped-up advertising of the new pricing strategy--especially in Atlanta and D.C.--hiked SG&A expenses.

Operating margin before payment of taxes and interest will be under 3 percent in the third quarter, compared with 3.5 percent last year, the chain said.

Wilber expressed comfort with analysts' downward adjustment of the chain's earnings to the 63 cents to 65 cents range for the year, down about 10 cents from earlier projections. Drug Emporium, in its sixth quarter as a public company, earned 66 cents last year, six cents of which was a non-operating gain from the sale of a minority interest in a franchise.

The revised forecast bumped Drug Emporium's share price on Wall Street last month from a recent range of $12 to $13, to $8. It closed Nov. 27 at 7 7/8.