Jean Coutu: Third Quarter Results Hit by Increasing Competition

A combination of factors lead to a tough quarter for Jean Coutu.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Jean Coutu (TSX: PJC.a) reported a 0.8% decrease in revenue for the quarter, and an 11% increase in net income.  However, the increase in net income was due to lower taxes and lower expenses.  Though not great, these results appear reasonable, however the most troubling point is that same store sales growth was weak – never a good sign.

Same Store Sales Fall

Same store sales growth refers to sales that come from existing stores and allows us to differentiate from sales growth that comes from opening new stores.  As we can see in the chart below, same store sales growth has been hit hard this quarter, with overall same store sales growth declining 1.3%.  This compares to pretty robust same store sales growth in the same quarter of 2013.

Third Quarter 2014 2013
Same Store Sales
  Total -1.3% 2.6%
  Pharmacy -1.6% 2.7%
  Front-end -1.3% 2.0%

Competitive Landscape Intensifies

Retailers have become increasingly aggressive in an attempt to capture their share of the consumers’ dollars.  We have recently seen Target (NYSE: TGT) enter the Canadian market, and although they have been struggling, they represent another competitor that Jean Coutu has to deal with.  Last year, the current Target locations were under the Zellers banner and Zellers was pretty inactive in the marketplace.  This compares to Target, who is actively pursuing a strategy in order to step up its business.  Back in August, Target announced that they had partnered with Metro (TSX:MRU) for the operation of the Target pharmacies.

But this is just another competitive pressure in an already intense competitive environment.  The likes of Costco and Walmart, for example have been gaining market share here in Canada for many years.

Generic Sales on the Rise

Jean Coutu’s pharmacy sales were hit this quarter by an increase in the proportion of generic drugs sold.  As we know, generics sell at lower prices than branded drugs, hence the lower revenue.  The generic penetration rate increased to 66.7% this quarter, compared to 61.8% in the same period last year.  As payors (government and insurance plans) are increasingly mandating that the generic drug be the drug of choice, expect continued growth of generics, and erosion in pharmacy revenues.

Strong Balance Sheet

On the bright side, Jean Coutu has a very healthy balance sheet with no debt.  Back in the fall of last year, the company paid out a special dividend to shareholders and instituted a share buyback plan as a way to return cash to shareholders.

Growth Strategy

While management has stated that they are interested in participating in the consolidation of the industry and making acquisitions of independent pharmacies, they have also stated that it is slim pickings out there.  In fact, they are not very optimistic that they will find an opportunity.  So they are looking to grow by opening new stores in smaller markets, where they have found that they have been successful in the last couple of years.  They have seen that smaller markets provide good growth as the population is older and fill more prescriptions as compared to the big cities.

Bottom Line

While Jean Coutu is clearly feeling the effects of a difficult environment, the company at least has its pristine balance sheet going for it.  But this quarter and the difficulties that have been brewing over at Jean Coutu do not bode well for the stock price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas does not own shares in any of the companies mentioned.  The Motley Fool owns shares of Costco.

More on Investing

Profit dial turned up to maximum
Tech Stocks

$1,000 Invested in Constellation Software Stock Would Be Worth This Much Today

Constellation Software (TSX:CSU) is trading above $2,000 today. Why this stock is so expensive, and is it worth buying?

Read more »

Dividend Stocks

Passive Income: 3 Top Canadian Stocks to Buy for Monthly Dividends

Companies such as Pembina Pipeline and Killam Apartment REIT pay investors monthly dividends, making them top bets for income-seeking investors.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Stocks for Beginners

TFSA Investors: Top TSX Stocks to Buy With $6,000

Here are two safe, dividend-paying TSX stocks for your long-term portfolio.

Read more »

Gold medal
Investing

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Are you looking for growth stocks that could be huge winners in the next decade? Here are three top picks!

Read more »

Retirees sip their morning coffee outside.
Investing

Retirees: How to Make Over $95/Week in Passive Income TAX FREE!

Canadian retirees who are hungry for passive income should look to snag stocks like Sienna Senior Living Inc. (TSX:SIA) in…

Read more »

Man holding magnifying glass over a document
Investing

Where to Invest $500 in the TSX Right Now

Given the massive correction, long-term investors can start buying stocks like Shopify and goeasy to outpace the broader markets by…

Read more »

Aircraft wing plane
Investing

Air Canada Stock Is a Fantastic Deal Right Now

Air Canada (TSX:AC) is a great stock to own, as market fear turns into hope amid falling recession fears.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Investing

Beginner Investors: Get Passive Income by Investing in REITs!

You can get passive income by investing in REITs like Northwest Healthcare Properties REIT (TSX:NWH.UN).

Read more »