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Pharmhouse back in the black.

NEW YORK - A significant one-time gain stemming from the settlement of litigation against Woolworth Corp. paved the way for a return to profitability at Pharmhouse Corp. during the fiscal year ended February 1.

The deep-discount drug chain swung to a $1.33 million net profit for fiscal 1997, in contrast to a loss of $2.51 million a year earlier. However, after backing out extraordinary gains of $7.14 million in fiscal 1997 and $618,000 in 1996 Pharmhouse's loss expanded to $5.81 million from $3.13 million in the respective years.

Sales for the 38-unit chain grew 10.6% to $231.7 million from $209.5 million, reflecting the addition of 24 Rx Place stores from Woolworth in an April 1995 acquisition.

In January 1997 Pharmhouse settled litigation it had initiated against Woolworth regarding the acquired locations. Under the deal Woolworth agreed to forgive "substantial" indebtedness taken on by Pharmhouse. Also, Pharmhouse was given the option to return up to seven underperforming Rx Place stores to Woolworth during fiscal 1998.

The gain for fiscal 1997 was net of a $1 million provision for closing two Rx Place stores and other costs associated with the settlement.

The chain had a $1.58 million operating loss for fiscal 1997, reflecting a $600,000 provision for closing one Pharmhouse store and $700,000 in losses attributable to the seven underperforming Rx Place units (excluding inventory carrying charges or interest expenses related to the Woolworth indebtedness). That was in contrast to operating income of $419,000 a year earlier.

Companywide gross margins held firm for both years at 23.8%. Although margins in the Pharmhouse stores improved 0.8 points to 26.3%, that gain was diluted by a 0.9 point reduction in the RxPlace units to 21.9%.

The company's loss before the extraordinary gains was further exacerbated by a 19.5% increase in interest expenses to $4.23 million.

Noting that he was pleased with the effects of the Woolworth settlement, Pharmhouse president and chief executive officer Kenneth Davis says that resolution of the litigation "will enable the company to focus its complete energies on improving operations."

He adds that management believes the drug chain is heading into fiscal 1998 with "much improved ongoing operations." Davis points to recent favorable revenue trends in the Pharmhouse stores and certain Rx Place units, savings from expense controls implemented last year, the January 1997 launch of an in-store signing program coordinated with "strong" advertising and the favorable effects of the Woolworth settlement.

Pharmhouse's 38-unit store count at fiscal year's end included three locations that are currently being closed.

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Publication:Chain Drug Review
Date:May 26, 1997
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