UPDATE 3-Shoppers Drug Mart prescription sales rise; shares jump

Tue Nov 13, 2012 1:22pm EST

* Earnings per share meet analysts' estimates

* Sales up 3.2 pct, slightly ahead of forecasts

* Prescription count jumps 6 pct

* Shares rise 3.2 pct to C$42.42 on Toronto Stock Exchange

By Allison Martell

Nov 13 (Reuters) - Shoppers Drug Mart Corp said on Tuesday revenue from prescriptions grew in the third quarter despite the drag of regulatory changes, sending its shares higher, even though profit slipped at Canada's largest drugstore chain.

Shoppers' retail prescription count jumped 6 percent, more than offsetting the impact of provincial reforms that cut government support and pulled down the average value of each prescription filled. The company's total prescription sales rose 1.7 percent to C$1.54 billion ($1.54 billion).

Edward Jones analyst Brian Yarbrough said the accelerating prescription count beat expectations, and was likely lifting the stock. In the previous four quarters, prescription count growth averaged 3.7 percent.

Higher operating and administrative costs held back profit at Shoppers, but share buybacks pushed earnings per share slightly higher.

"At the end of the day, the earnings were what they were - they were nothing special," Yarbrough said. "If it wasn't for share buybacks, there's very limited growth here."

Net earnings receded to C$168 million, or 81 Canadian cents a share, in the third quarter ended Oct. 6, from C$172 million, or 80 Canadian cents a share, in the year-before quarter.

After stock repurchases, the number of fully diluted shares outstanding dropped by 4.2 percent.

All told, sales rose 3.2 percent to C$3.21 billion, slightly higher than analysts' average forecast.

The company's shares were up 3.2 percent at C$42.42 on the Toronto Stock Exchange in afternoon trading Tuesday.

REGULATORY HEADWINDS

Morningstar analyst Matthew Coffina said the market was probably reacting to the strong prescription volume, which he said indicates that competition is not tripping up Shoppers. But he said the chain still faces regulatory headwinds.

In the mid-2000s, a flurry of studies found that generic drug prices were unusually high in Canada. Provincial governments, which spend billions each year on drug programs, saw an opportunity to cut costs.

New rules and price controls, first introduced in Ontario, swept across the country, holding back growth at Shoppers and competitors such as Jean Coutu Group Inc.

"The operating margins are still fairly high for Shoppers, compared, for example, to Walgreen in the U.S.," said Coffina. "To me, that indicates that given the current regulatory climate, there's certainly a chance of further regulatory reforms, in other provinces, but even again in Ontario."

COSTS WEIGH

Front-of-store sales, including over-the-counter medication, cosmetics and food, rose 4.6 percent, and overall same-store sales, a key measure for retailers, climbed 2.3 percent.

The company said it had to pay higher occupancy costs, wages and benefits, and its adjusted operating margin fell to 7.64 percent from 8.14 percent a year earlier.

Excluding a restructuring charge and other items, earnings slipped to C$168 million, or 81 Canadian cents a share, from C$170 million, or 79 Canadian cents a share.

Analysts, on average, had expected earnings of 81 Canadian cents a share, according to Thomson Reuters I/B/E/S.