07/09/2013 12:15 EDT | Updated 09/08/2013 05:12 EDT

Jean Coutu's new HQ, distribution centre could support Canadian expansion

MONTREAL - The Jean Coutu Group's new headquarters and distribution centre set to open in 2016 could serve as a springboard to expansion beyond its base in Quebec, the company said Tuesday.

"We're building for the future," CEO Francois Coutu said Tuesday during a conference call.

"We still want to grow a number of stores, we still want to grow the possibilities, not only in this province but elsewhere."

The company recently announced plans to spend nearly $190 million to build a new office in Varennes, Que., about 17 kilometres north of its current premises on Montreal's south shore.

The distribution centre will include excess capacity even after accounting for its own growth forecasts for the next 20 years, added chief financial officer Andre Belzile.

He said investments in automated equipment can be added in stages to accommodate growth.

"It is anticipating some acquisition of independent pharmacies to allow us to grow at roughly the same pace we did over the last few years," he told analysts.

Jean Coutu Group (TSX:PJC.A) said Tuesday it earned $108.6 million or 51 cents per share for the quarter ended June 1.

That was down from $397.3 million or $1.81 per share a year ago when the company realized gains of $348 million from its Rite Aid holdings, compared with $54.4 million in the most recent period.

The operator of franchised drug stores throughout Quebec and in Ontario and New Brunswick said revenue in what was the first quarter of its 2014 financial year was $681.6 million, almost unchanged from $681.5 million last year.

Excluding gains related to the investment in Rite Aid, the company earned $54.2 million or 26 cents per share in the quarter.

That was up from $51.6 million or 24 cents in the prior-year period and matched analyst expectations for per share earnings, according to figures compiled by Thomson Reuters. Analysts, on average, had expected higher revenues of more than $702 million.

Jean-Coutu recently sold 40.5 million shares of U.S. chain Rite Aid for US$110.8 million in net proceeds.

Once the largest shareholder of Rite Aid following the sale of 1,854 Brooks and Eckerd drugstores and distribution centres in 2007, Jean Coutu has reduced its holdings in the company to 7.2 per cent, or 65.4 million shares.

Same-store sales were up 0.6 per cent from a year ago, while pharmacy sales were stable and the number of prescriptions dispensed grew 4.3 per cent. Front-end sales for stores open a year grew 1.5 per cent.

Gross sales of its generic drug manufacturer Pro Doc grew nearly 21 per cent to $45.7 million in the quarter from $37.8 million a year ago as the penetration rate for generic drugs in its network set a new record. Two-thirds of all prescription drugs dispensed were non-brand names, up from 58.8 per cent a year ago.

The growth exceeded Jean Coutu's expectations, said Belzile.

But he said there remains potential for more growth if compared with the U.S. where the penetration rate for generics is more than 85 per cent. The conditions are different because insurance companies cannot dictate to doctors what they can prescribe.

"But yes, we believe that there's more and more pressure to reduce costs in the health-care system in both the private and public system," he said.

Analyst Irene Nattel of RBC Capital Markets said the first-quarter results were solid and "underscore the stability and predictability of Jean Coutu's earnings stream."

She wrote in a report that solid prescription drug growth, offset by the deflationary impact of higher generic drug penetration and modest front-of-store same-store sales and good cost containment "should enable Jean Coutu to continue to deliver high-single-digit EPS growth."

The Jean Coutu Group operates a network of 407 franchised stores in Quebec, New Brunswick and Ontario under the banners of PJC Jean Coutu, PJC Clinique, PJC Sante and PJC Sante Beaute.

On the Toronto Stock Exchange, Jean Coutu's shares lost 66 cents, or 3.71 per cent, at $17.15 in Tuesday morning trading.