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Anxious tone marks Shoppers Drug Mart annual meeting

At Shoppers Drug Mart’s (SDM’s) annual meeting here earlier this month, chairman David Williams, president and chief executive officer Jürgen Schreiber, and executive vice president and chief financial officer Brad Lucow were able to report that despite the recession 2009 was another record-breaking

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TORONTO — At Shoppers Drug Mart’s (SDM’s) annual meeting here earlier this month, chairman David Williams, president and chief executive officer Jürgen Schreiber, and executive vice president and chief financial officer Brad Lucow were able to report that despite the recession 2009 was another record-breaking year for the retailer in terms of almost every metric and that the first quarter of 2010 also came through strongly.

Nevertheless, all those present — board members, management, shareholders, financial analysts and financial journalists — were in a mood more sober than celebratory.

They were much preoccupied with the recent announcement by the Ontario Ministry of Health and Long-Term Care that the provincial government planned sweeping changes in the way pharmacies would be remunerated in the future. They knew this meant that the drug chain’s future could not be simply an extrapolation of its recent successful past. It was widely believed that whatever changes Ontario decreed would be closely examined by other jurisdictions and quite possibly imitated.

At the meeting, Schreiber’s tone was less combative than when the company initially reacted to the Ontario government’s proposals. He appeared to acknowledge that the health minister, Deb Matthews, was unlikely to be deterred from following through with her stated intention of ending the professional allowances paid to pharmacies by suppliers of generic drugs. But he still held out hope that an appropriate adjustment would be made to the regulated dispensing fee, which currently covers, on average, only some 50% of a pharmacy’s costs for the service.

At the time its first quarter 2010 results were released, SDM had already lowered its forecast of prescription sales growth for the current year from a range of 4% to 5% to a range of 2% to 3%, in response to likely changes in the regulations governing pharmacy income.

The company also announced a reduction in its plans for capital expenditures in 2010 from $560 million (Canadian) to $460 million, a major component of that reduction being the cancellation or deferral of a significant number of retail development projects.

“Shoppers’ results were fine but meaningless, as the entire focus is now on provincial drug reform and what the company might do to mitigate the damage,” commented one financial analyst on the company’s first quarter performance. “Shoppers lowered some immediate forecasts on sales and capex [capital expenditures], but we may be at the beginning of a long period of adjustment.”

SDM’s numbers for 2009 were excellent by any standard. At $9.99 billion, sales showed an increase of 6% over the preceding year. The company recorded net profits of $585 million, a year-over-year increase of 5.6%.

That fast growth pace continued through the first quarter of the current year. Sales increased to $2.32 billion, with the largest gains coming in Quebec and western Canada, regions the company has been emphasizing for expansion. Net earnings for the quarter increased 8.2% to $116 million.

Lucow attributed the results to the positive effects of top-line growth, improved purchasing synergies and a continued emphasis on cost reduction, productivity and efficiency, offset to some extent by costs associated with store expansion and “continued investments in pricing and promotional activities.”

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