07/18/2013 07:52 EDT | Updated 09/17/2013 05:12 EDT

Shoppers Drug reports $147-million profit in Q2, beating analyst estimates

TORONTO - A cool spring left Shoppers Drug Mart executives feeling a little chilled in the second quarter, as the retailer sold fewer of its high-margin sunscreen products and faced more price competition from rivals like Target and Walmart.

But the company, which is in the midst of a takeover by Loblaw (TSX:L), still posted better sales even though a growing amount came from slashing prices or offering deals.

"Clearly the consumer continues to be very value-conscious and price-sensitive," chief executive Domenic Pilla said on a conference call Thursday, after the company reported its quarterly results.

"The proportion of our sales on (lower priced items) continues to increase, and certainly that had an effect on margins," Pilla added.

The Shoppers board and management are supporting a $12.4-billion takeover offer from Loblaw, announced earlier this week.

The friendly deal is expected to allow Canada's largest grocery retailer to own the country's biggest chain of pharmacy stores, with a combined total of about 25 per cent of prescriptions issued each year in the Canadian market.

Shoppers, like many across the country, is grappling with the growing presence of discount giants like Target and Walmart. Both carry a wide array of the same products, including food and cosmetics, as well as operate pharmacies.

Target Stores, based in Minneapolis, began opening its first Canadian stores in Ontario in March, right around the start of Shoppers' second quarter.

"They are not the only people that have added square footage into the Canadian market," Pilla said.

"There is increasing square footage coming into the market ... (and) it is creating pressure again in a market that is relatively flat."

Despite the pressure, Canada's largest pharmacy chain managed to beat analyst expectations for the quarter as it earned $147 million or 73 cents per share — a penny better than the average estimate compiled by Thomson Reuters.

The results compared with a profit of $145.3 million or 69 cents per share a year ago when the company had more shares outstanding.

Overall sales increased to $2.54 billion from $2.46 billion a year earlier.

Sales rose in all regions of the country, with same-store sales, or locations open at least a year, rising two per cent. Pharmacy sales were up 1.3 per cent and the number of retail prescriptions increased by seven per cent from the same time last year.

Shoppers said its front of store sales grew 3.6 per cent, though some of the departments faced slower sales growth than the company hoped.

"Clearly we didn't have a great weather quarter for many Canadians," Pilla said.

"Last year we had a very strong sun care sales and, of course, in the second quarter this year that particular category was down. It's a good category for us and would have affected sales as well as margin mix."