UPDATE 4-Shoppers Drug profit rises on non-pharmacy sales

Wed Apr 27, 2011 4:18pm EDT

* EPS $0.54 meets forecasts; revenue trails estimates

* Front-store sales rise 6 percent

* CEO search in final stages

* To replace board chairman

* Shares close down 1.6 percent (Adds analyst's comments, conference call details)

By S. John Tilak

TORONTO, April 27 (Reuters) - Shoppers Drug Mart Corp SC.TO, Canada's biggest drugstore chain, posted a higher quarterly profit on Wednesday, helped by robust sales of non-pharmacy products.

The company picked up market share for health, beauty and convenience products from grocers and other retailers in the quarter by offering discounts.

But the gains came at the expense of gross profit margins, and the shares slipped about 1.6 percent after the results.

A 6 percent increase in front-store sales - the food, drink and beauty items that account for about half of Shoppers' sales - offset a continued slump in prescription drug revenue.

"It's a positive sign. Shoppers is as much a convenience store as it is a pharmacy," Morningstar analyst Matthew Coffina said. "It helps to balance out some of the headwinds in the pharmacy side," he added.

Metro Inc MRUa.TO, the first of Canada's big three grocers to report results this quarter, last week noted "the difficult competitive environment" as its revenue dropped marginally and same-store sales rose 0.2 percent.

"In the front of the store, what we've seen is a continuation of a highly promotional consumer environment," Shoppers Chief Financial Officer Brad Lukow said on a conference call with analysts.

An increasing percentage of the company's sales were coming under promotions and that was hurting down gross margins, he said.

"It's great to get the sales number, but it is weighing on profits," Edward Jones analyst Brian Yarbrough said. "They're definitely gaining some share because you're not seeing those sorts of comps from the grocery guys," he said, referring to the industry shorthand for comparable or same-store sales.

Sales at Shoppers Drug stores open for at least a year, a key measure for retailers, rose 2 percent in the first quarter.

But prescription sales, down 0.4 percent in the quarter, have taken a hit since the Ontario government last year instituted reforms that cut the prices of generic drugs in the province, the biggest market for Shoppers.

Shoppers, without a permanent chief executive since Jurgen Schreiber left in February, said Holger Kluge will succeed David Williams as the board's nonexecutive chairman. Williams is the interim CEO.

Kluge, who joined the board in 2006, has served as chair of the audit committee since May 2006.

The CEO search is in its final stages, Williams said during a confenence call with analysts.

Earnings for the first quarter rose to C$118 million ($123 million), or 54 Canadian cents a share, compared with adjusted earnings of C$114 million, or 52 Canadian cents, a year earlier.

Sales rose 2.7 percent to C$2.35 billion, missing the average analyst estimate of C$2.38 billion, according to Thomson Reuters I/B/E/S.

Shares of Shoppers, whose rivals include Jean Coutu Group Inc (PJCa.TO) and Katz Group's Rexall and PharmaPlus chains, closed down about 1.6 percent at C$40.76 on Wednesday afternoon on the Toronto Stock Exchange.

The stock is up 2 percent since the start of the year, compared with a 4 percent rise in the S&P/TSE Canadian Consumer Staples .GSPTTCS index.

($1=$0.96 Canadian) (Reporting by S. John Tilak; editing by Frank McGurty and Peter Galloway)

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