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Jean Coutu Follows Up Metro Deal With Robust Sales Report.

VARENNES, Quebec -- The Jean Coutu Group saw net income for the second quarter of fiscal 2018 decline despite robust revenue growth, as profitability at its generic drug manufacturing subsidiary plummeted. Sales growth through the company's franchise retail network was fueled by robust gains at both the pharmacy and the front end (see adjacent story for the performance of the Jean Coutu franchise network).

However, the company's performance was overshadowed by the news that it has agreed to be acquired by Metro Inc., the leading food retailer in the province of Quebec. The news came as no surprise after members of the founding Coutu family bluntly declared last year in an interview that trends in the retail pharmacy industry in Quebec were making them rethink their long-term commitment to the business.

Net income for the 13 weeks ended September 2 declined 7.2% to $47.8 million (Canadian), or 26 cents per share, even though total revenues gained 6.1% to $744.3 million. The revenue growth was fueled by a 5.3% increase in sales to $665.4 million that was enhanced by a 13.7% rise in franchise fees and other revenues to $78.9 million.

According to the company's quarterly Report to Share holders, the big jump in other revenues was propelled by the franchiser's increase of its royalty rate on franchise sales to 0.4% enacted last year. The move triggered a lawsuit by franchisees, but it was upheld by the courts in January.

The growth of sales, which consist mainly of merchandise sales to franchisees through Coutu's distribution center, was fueled by an 8.9% surge in pharmaceutical items and a 6% increase in front-end products.

"During the second quarter network retail sales and front-end sales of our distribution centers showed a noticeable increase despite a still very competitive environment," president and chief executive officer Francois Coutu said in a statement.

Moving down the income statement, operating income before depreciation and amortization (OIBA) decreased 5% to $74.6 million, or 10.2% of revenues, a decrease in OIBA margin of 100 basis points. Consolidated gross margin contracted 208 basis points to 10.08%, more than offsetting a 6-basis-point reduction of general and operating expenses to 9.59% of total revenues.

The downturn in OIBA was driven, in part, by a 58.1% plunge in the contribution from Jean Coutu's Pro Doc generic drug manufacturing unit to $7.5 million, even though the unit's revenues advanced 10.7% to $54.7 million. Management attributed the decline to the removal of the ceiling on professional allowances paid by generic drug makers through the regulation of benefits authorized to pharmacists by the Ministry of Health and Social Services in Quebec. As a result, Pro Doc's OIBA margin tumbled to 13.7% from 36.2% a year ago.

In addition to the downturn at Pro Doc, consolidated OIBA was impacted by a $6.4 million gain on property and equipment sales during the fiscal 2017 quarter. Excluding that item, OIBA for the most recent quarter would have increased 3.5% from an adjusted $72.1 million a year ago. That improvement was largely a result of growth in sales and royalty revenues, but also aided by lower general and operating expenses arising from the company's move to a new headquarters and distribution center in Varennes.

With depreciation and amortization expense flat at $10 million, operating income fell faster than reported OIBA, receding 5.7% to $64.6 million.

Including financing revenues of $1 million in the most recent period and $500,000 a year ago, pretax profit dipped 4.9% to $65.6 million.

Bottom-line results took a further hit from an increase in the effective income tax rate to 27.1% from 25.4% a year ago.

Factoring in financing revenues of $1.8 million in the most recent half and $1 million a year ago, pretax income for the six months fell 6.2% to $127.9 million.

Early this month Coutu announced that it had agreed to be acquired by Metro Inc., the Montreal-based grocery and drug store operator, for approximately $4.5 billion.
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Title Annotation:MONEY
Geographic Code:1CQUE
Date:Oct 30, 2017
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