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Shoppers Drug Mart Corporation Reports Strong Fourth Quarter Results





-      ANNUAL DIVIDEND INCREASED BY 7.5% TO $1.14 PER SHARE -      RENEWAL OF SHARE REPURCHASE PROGRAM

TORONTO, Feb. 7, 2013 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today announced its unaudited financial results for the fourth quarter and fiscal year ended December 29, 2012.

Fourth Quarter Year-Over-Year Highlights

  • Sales increase of 4.4% to $2.722 billion
    • Same-store increase of 2.7%
  • Pharmacy sales increase of 3.7% to $1.221 billion
    • Same-store increase of 2.1%
  • Retail prescription count increase of 8.3%
    • Same-store increase of 6.1%
  • Front store sales increase of 5.0% to $1.501 billion
    • Same-store increase of 3.2%
  • Net earnings per share of $0.85, an increase of 3.7%

Fiscal 2012 Highlights

  • Sales increase of 3.1% to $10.782 billion
    • Same-store increase of 2.2%
  • Pharmacy sales increase of 2.1% to $5.101 billion
    • Same-store increase of 1.2%
  • Retail prescription count increase of 5.4%
    • Same-store increase of 4.5%
  • Front store sales increase of 4.0% to $5.681 billion
    • Same-store increase of 3.1%
  • Net earnings per share of $2.92, an increase of 2.8%
    • Adjusted net earnings per share of $2.94, an increase of 4.3%
  • Declared four quarterly dividends of 26.5 cents per common share
  • Repurchased 7,949,400 common shares at an aggregate cost of $330 million

Fourth Quarter Results (12 Weeks)

Fourth quarter sales were $2.722 billion, an increase of 4.4% over the same period of the prior year, driven by strong volume growth in pharmacy and continued sales and market share gains in the front of the store.  On a same-store basis, sales increased 2.7% during the quarter.

Pharmacy sales were $1.221 billion in the fourth quarter, an increase of 3.7% compared to the same period of the prior year, as strong growth in the number of prescriptions filled at retail, combined with sales gains in the Company's long-term care and specialty pharmacy business units, was partially offset by a further reduction in average prescription value.  On a same-store basis, pharmacy sales increased 2.1% during the quarter.  During the fourth quarter of 2012, the number of prescriptions dispensed at retail increased 8.3% compared to the same period of the prior year and was up 6.1% on a same-store basis.  Pharmacy volume growth was particularly strong in Ontario, driven by the successful implementation and acceptance of a program to waive the two dollar co-pay on eligible prescriptions for seniors, and in western Canada where the Company completed a number of acquisitions in the second half of the year.  Year-over-year, average prescription value at retail declined a further 6.0 % during the fourth quarter of 2012, largely the result of further reductions in generic prescription reimbursement rates due to recently implemented and ongoing drug system reform initiatives in most provincial jurisdictions, along with increasing generic prescription utilization rates.  Generic molecules comprised 60.2% of prescriptions dispensed in the fourth quarter of 2012 compared to 57.1% in the same period of the prior year.  In the fourth quarter of 2012, pharmacy sales accounted for 44.8% of the Company's sales mix compared to 45.2% in the same quarter of the prior year.

Front store sales were $1.501 billion in the fourth quarter, an increase of 5.0% compared to the same period of the prior year, led by strong growth in over-the-counter medications, cosmetics and food and confection.  The Company's store network development program, which has resulted in a 3.6% increase in drug store selling space compared to a year ago, continues to have a positive impact on sales growth, particularly in the front of the store.  Front store sales growth was also aided by effective seasonal marketing and promotional campaigns, a strong cough, cold and flu season, and solid program execution at store level.  On a same-store basis, front store sales increased 3.2% during the fourth quarter of 2012.

Fourth quarter net earnings were $175 million compared to net earnings of $176 million in the same period of the prior year.  On a fully-diluted basis, net earnings per share were 85 cents in the fourth quarter of 2012 compared to 82 cents per share in the same period of the prior year, an increase of 3.7%.  Operating income was $250 million in the fourth quarter of 2012 compared to $256 million in the same period of the prior year, as strong sales growth and a continued focus on cost reduction, productivity and efficiency initiatives in comparable stores was offset by further downward pressure on pharmacy margins and higher operating expenses related to the Company's network growth and expansion initiatives, along with increased Associate earnings.  Other factors that positively impacted net earnings for the fourth quarter of 2012 were lower finance expenses and a reduction in the Company's effective income tax rate.  In addition to the earnings factors noted above, the cumulative impact of the Company's share repurchase program had a positive impact on growth in net earnings per share during the fourth quarter of 2012, as there were 4.2% fewer fully-diluted shares outstanding (on a weighted average basis) compared to the fourth quarter of 2011.

Commenting on the results, Domenic Pilla, President and CEO stated, "We are pleased with our fourth quarter and full year results.  In spite of the persistent regulatory headwinds that we face as an industry and a Company, we remain encouraged by our underlying operating results and financial performance.  Clearly our brand and our value proposition, which is grounded upon the pillars of health, beauty and convenience, continue to resonate with our customers and patients in the communities we serve from coast to coast.  On behalf of our shareholders and the Board of Directors, I would like to thank our corporate and regional office employees, along with our Associates and their teams at store level, for their efforts and contributions to our collective success in 2012."

Fiscal 2012 Results (52 Weeks)

Sales in 2012 were $10.782 billion compared to $10.459 billion in 2011, an increase of $323 million or 3.1%, driven by strong volume growth in retail pharmacy, continued sales and market share gains in the front of the store and improved performance in the Company's complementary health care businesses.  Increased activity on the acquisition front, combined with the Company's capital investment and store development program, also had a positive impact on sales growth during the year.  On a same-store basis, sales increased 2.2% in 2012.

Pharmacy sales were $5.101 billion in 2012 compared to $4.997 billion in 2011, an increase of $104 million or 2.1%, as strong growth in the number of prescriptions filled at retail, combined with sales gains in the Company's MediSystem Technologies and Specialty Health Network businesses, was largely offset by a further decline in average prescription value.  On a same-store basis, pharmacy sales increased 1.2% during the year.  During 2012, the number of prescriptions dispensed at retail increased 5.4% over the prior year and was up 4.5% on a same-store basis.  Pharmacy volume growth was strongest in western Canada, driven in part by the acquisition, in August, of 19 drug stores and three long-term care pharmacies from Paragon Pharmacies Limited, and in Ontario where the Company increased its market share after the successful roll-out and implementation of a program to waive the two dollar co-pay on eligible prescriptions for seniors.  Year-over-year, average prescription value at retail declined by a further 4.3% in 2012, a decrease that can be largely attributed to further reductions in generic prescription reimbursement rates as a result of recently implemented and ongoing drug system reform initiatives in most provincial jurisdictions, combined with greater generic prescription utilization rates.  The Company's decision to waive the two dollar co-pay on eligible prescriptions for seniors in the Ontario market also contributed to the year-over-year decrease in average prescription value.  Generic molecules comprised 59.2% of prescriptions dispensed in 2012 compared to 56.9% in the prior year.  In 2012, pharmacy sales accounted for 47.3% of the Company's sales mix compared to 47.8% in the prior year.

Front store sales were $5.681 billion in 2012 compared to $5.462 billion in 2011, an increase of $219 million or 4.0%, with the Company posting sales gains in all core categories, led by cosmetics, over-the-counter medications and food and confection.  On a same-store basis, front store sales increased 3.1% in 2012.  In addition to square footage growth, effective marketing campaigns, impactful promotions and enhanced seasonal programs established positive sales momentum that drove sustained growth and market share gains in the front of the store throughout the course of the year.

Net earnings in 2012 were $608 million compared to $614 million in 2011.  Net earnings for 2012 are inclusive of a third quarter restructuring charge of $13 million (pre-tax) stemming primarily from the rationalization and realignment of the Company's central office functions, along with an offsetting gain on disposal of $13 million (pre-tax) in respect of a sale-leaseback transaction involving certain of the Company's retail properties.  In addition to these items, net earnings for 2012 also include a second quarter charge of $5 million (pre-tax) from the closure of two Murale stores.  Excluding the impact of the items noted above, adjusted net earnings for 2012 were $612 million or $2.94 per fully-diluted share compared to adjusted net earnings of $611 million or $2.82 per fully-diluted share in 2011.  Adjusted net earnings for 2011 exclude the impact of a third quarter gain on disposal of $3 million (pre-tax), which was also in respect of a sale-leaseback transaction involving certain of the Company's retail properties.  During 2012, strong top-line growth, particularly in the front of the store, combined with a continued focus on promotional effectiveness and margin enhancement initiatives, served to offset further downward pressure on pharmacy margins resulting in a year-over-year increase in gross profit dollars of 3.2%.  In 2012, operating and administrative expenses, including depreciation and amortization expense but excluding the items noted above, were up 4.8% over the prior year, driven in part by higher store-level expenses related to network growth and expansion initiatives, higher marketing expenses and increased Associate earnings.  Year-over-year growth in depreciation and amortization expense, after excluding the impact of the sale-leaseback transactions noted above, can also be attributed to the Company's network growth and expansion initiatives, along with additional investments in supporting infrastructure.  Other factors that positively impacted net earnings in 2012 were lower finance expenses and a reduction in the Company's effective income tax rate.  In addition to the earnings factors noted above, the cumulative impact of the Company's share repurchase program had a positive impact on growth in earnings per share during 2012, as there were 3.7% fewer fully-diluted shares outstanding (on a weighted average basis) compared to 2011.

Store Network Development

During the fourth quarter, the Company opened four new drug stores, all of which were relocations, and completed two major drug store expansions.  The Company also acquired four drug stores during the quarter, two of which were amalgamated with existing stores.  In addition to this activity, two drug stores were converted to smaller prototype formats and one smaller drug store was closed.  The Company also closed one Shoppers Home Health Care store during the quarter.  For the fiscal year ended December 29, 2012, the Company opened 41 new drug stores, 23 of which were relocations, and completed 12 major drug store expansions.  The Company also acquired 33 drug stores during the year, eight of which were amalgamated with existing stores.  In addition to this activity, 15 drug stores were converted to smaller prototype formats and five smaller drug stores were consolidated or closed.  The Company also closed two Murale stores and one Shoppers Home Health Care store during the year.  At the end of 2012, there were 1,363 stores in the system, comprised of 1,295 drug stores (1,240 Shoppers Drug Mart/Pharmaprix stores and 55 Shoppers Simply Pharmacy/Pharmaprix Simplement Santé stores), 62 Shoppers Home Health Care stores and six Murale stores.  During 2012, the selling square footage of the retail store network increased by 3.4% to 13.7 million square feet at year end.

Dividend

The Company also announced today that its Board of Directors has declared a dividend of 28.5 cents per common share, payable April 15, 2013 to shareholders of record as of the close of business on March 28, 2013.  This represents an increase in the Company's quarterly dividend payments of 7.5%, resulting in an annualized dividend of $1.14 per common share.

Normal Course Issuer Bid Program

During the fourth quarter of 2012, the Company repurchased 1,623,500 common shares under its normal course issuer bid program at an aggregate cost of $68 million, representing an average repurchase price of $41.66 per common share.  For the fiscal year ended December 29, 2012, the Company has repurchased 7,949,400 common shares under its normal course issuer bid program at an aggregate cost of $330 million, representing an average repurchase price of $41.52 per common share.  All repurchased common shares were subsequently cancelled.  The Company's current normal course issuer bid program will terminate on February 14, 2013.

The Company also announced today that its Board of Directors has approved the renewal of its normal course issuer bid program and has authorized the purchase of up to 10,200,000 of its common shares, representing approximately 5.0% of the 203,911,788 common shares currently outstanding, by way of normal course purchases effected through the facilities of the Toronto Stock Exchange (the "TSX").  Under its current normal course issuer bid program that expires February 14, 2013, the Company has repurchased 8,308,900 common shares at an aggregate cost of $346 million, representing an average repurchase price of $41.60 per common share.  8,168,900 of the repurchased common shares were subsequently cancelled, with the remaining 140,000 repurchased common shares expected to be cancelled on February 28, 2013.  Subject to approval of the TSX, it is anticipated that purchases under the new program may commence on February 15, 2013 and will terminate on February 14, 2014, or on such earlier date as the Company may complete its purchases pursuant to a Notice of Intention to be filed with the TSX.  Purchases will be made by the Company in accordance with the requirements of the TSX and the price which the Company will pay for any such common shares will be the market price of any such common shares at the time of acquisition, or such other price as may be permitted by the TSX.  In connection with the normal course issuer bid program, the Company intends to enter into an automatic purchase plan with its designated broker to allow for purchases of its common shares during certain pre-determined black-out periods, subject to certain parameters as to price and number of shares.  Outside of these pre-determined black-out periods, shares will be repurchased in accordance with management's discretion, subject to applicable law.  For purposes of the TSX rules, a maximum of 146,845 common shares may be purchased by the Company on any one day under the bid, except where purchases are made in accordance with the "block purchase exception" of the TSX rules.  Common shares purchased by the Company will be cancelled.

Commenting on the dividend increase and the renewal of the share repurchase program, Brad Lukow, Executive Vice President and Chief Financial Officer stated, "The Board's decision to increase the dividend and renew the share repurchase program reinforces the Company's commitment to return excess cash to shareholders.  It is a testament to the continued strength of our free cash flow generation capabilities and our ability to support both growth initiatives and shareholder distributions in order to enhance long-term shareholder value."

Fiscal 2013 Outlook (52 Weeks Ending December 28, 2013)

The Company expects total sales to increase by between 3.0% and 4.0% in 2013. This expectation is supported by anticipated sales growth of between 4.0% and 5.0% in pharmacy, an assumption that is underpinned by increased acquisition activity and above market prescription count growth.  On a same-store basis, the Company expects pharmacy sales growth of between 1.5% and 2.5% in 2013, as it will be building on strong comparable store pharmacy sales growth from last year, particularly in the second half of 2013.  In the front of the store, the Company expects to generate sales growth of between 2.5% and 3.5%, which reflects a smaller network development and expansion program and, as well, takes into consideration the anticipated impact of new market entrants.  On a same-store basis, the Company expects front store sales growth of between 2.0% and 2.5% in 2013.  In pharmacy, it is expected that above market prescription count growth will be partially offset by a further reduction in average prescription value, with the decline in average prescription value being largely attributable to continued reductions in generic prescription reimbursement rates as a result of recently implemented or announced drug system reform initiatives in most provincial jurisdictions.  Furthermore, it is anticipated that increasing generic prescription utilization rates will also serve as a contributing factor to the decline in average prescription value.  The anticipated further decline in average prescription value will continue to put downward pressure on pharmacy margins, resulting in an increased focus on cost and efficiency initiatives not only in the dispensary, but across the entire spectrum of the Company's operations.

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