BUSINESS

Jean Coutu stepping up promotional activity as competition intensifies

10/08/2014 08:08 EDT | Updated 12/08/2014 05:59 EST
MONTREAL - Jean Coutu is stepping up its promotional activity to retain the loyalty of consumers in the face of intense competition from other pharmacy chains and discount retailers.

In the past quarter, the Montreal-area company offered deep promotional discounts by offering specials during two weekends that drove increased sales. That's on top of the regular weekly flyer it says is key to attracting customers into its stores.

"People expect promotions from the retailers even more," CEO Francois Coutu said Wednesday during a conference call about the company's second-quarter results.

He said Jean Coutu has to surprise shoppers by offering new deals as it competes hard, especially in the face of online sales that give consumers more shopping options than ever.

"We could see that aggressiveness will drag on probably past Christmas," Coutu told analysts.

As one of Quebec's largest pharmacy chains, dispensing the most prescriptions in the province, Jean Coutu is well-positioned to compete, the son of the company founder said.

Jean Coutu Group (TSX:PJC.A) said its business grew during the summer period but posted a smaller profit without last year's gains from the sale of shares in Rite-Aid.

The company earned $53.6 million, or 28 cents per share, in the quarter ended Aug. 30. That compared to $208.2 million or 99 cents per share in the second quarter last year which included a $158.3-million gain from the sale of some of its stake in Rite-Aid, a U.S.-based company that Jean Coutu had been divesting in stages. It sold the last of its Rite-Aid shares later in 2013.

Excluding the Rite-Aid gain, Jean Coutu's net income in the second quarter this year was up from $49.9 million or 24 cents a year earlier.

Revenue was up 3.15 per cent to $674.4 million from $653.8 million a year earlier. Same-store sales — a key retail measure for the activity of stores open at least a year — were up 2.4 per cent during the quarter. Pharmacy same-store sales grew 2.7 per cent and front-of-store same-store sales up 1.6 per cent.

Jean Coutu was expected to earn 28 cents per share in adjusted profits on $664.8 million in revenues, according to analysts polled by Thomson Reuters.

The company said revenue increased mostly because of market growth and the expansion of its network of franchised stores, which offset increased sales of lower-priced generic drugs.

Sales at its generic manufacturing subsidiary Pro Doc continued to grow in the quarter, increasing 7.8 per cent to $48.1 million, generating $22.1 million in pre-tax operating income.

Generic drugs accounted for 68.1 per cent of all prescriptions filled during the quarter, up from 67.2 per cent a year ago.

While the number of generic drug prescriptions continued to rise, they did so at a slower pace than in the past.

Still, Francois Coutu said the company expects Pro Doc's sales have room to continue growing since the penetration of generic drugs in Quebec remains well below the 82 per cent average use in the United States.

"I could see growth maybe not at the same pace as we did in the first three, four years of Pro Doc but we'll see good growth from an existing base," he said.

The growth in generic drugs is fuelled by provincial governments and private health insurance plans that are seeking cost savings by requiring patients to use lower-priced alternatives to branded drugs that have lost their patent protection.

Several new generic drugs are expected to be added annually even though no blockbuster drug like Lipitor is forecast to be added to the generic portfolio.

Meanwhile, Francois Coutu said Quebec pharmacists are eagerly awaiting more information from the province's health minister on government's plans to expand the role of pharmacists that could drive traffic into stores.

The idea is designed to reduce pressure on the medical system, especially in small communities, by freeing up the time doctors spend on routine visits. The change would allow pharmacists to renew some prescriptions, administer some medicines that don't require a diagnosis and to order lab tests.

On the Toronto Stock Exchange, Jean Coutu's shares gained 10 cents at $24.51 in Wednesday midday trading.

Follow @RossMarowits on Twitter