TORONTO -- Shoppers Drug Mart Corp. says its second-quarter sales were up 2.6 per cent from the same time last year, rising in line with expectations to nearly $2.5 billion.
The retailer's net income was $146 million or 70 cents per share, including the cost of closing two stores. Adjusted net income without the closures was $149 million or 71 cents per share -- up 4.4 per cent from the same time last year and a penny ahead of estimates.
The adjusted profit excluded a $5-million pre-tax charge from the closure of two stores.
The Toronto-based pharmacy operator said stores open at least a year saw their sales rise by 2.2 per cent on average, while pharmacy sales in those stores were up 0.8 per cent.
"We are pleased with our second quarter operating and financial results," said Domenic Pilla, president and CEO of Shoppers Drug Mart.
"This performance speaks to the strength of our value proposition in what remains a challenging economic environment."
"It is also a testament to the quality of our people, including our Associate-owners and their teams at store level, as they continue to execute on our strategic priorities and initiatives in order to mitigate the impact of regulatory reforms on our business."
The country's largest drug store chain has said it expects to face continued challenges from the impact of generic drug reforms that will erode pharmacy sales.
Changes last year in Ontario, Quebec and British Columbia have cut generic drug prices to 25 per cent of the price of patented drugs -- down from 50 per cent -- by cutting professional allowances, a move that Shoppers said would cost an estimated $750-million a year in revenue.
More recent changes in Ontario that further cut the costs for the top 10 generic drugs to 20 per cent of the price of the branded equivalent could hit Shoppers even harder in coming quarters.
"Investors must recognize that regulatory reform will continue to be a fact of life in this space, but as the leading network in Canada, Shoppers Drug Mart is well positioned to partner with government to help improve efficiency of spend," wrote RBC Capital Markets analyst Irene Nattel in a research note.
"Shoppers' underlying business should continue to deliver industry-leading top line and profitability, which management will augment by consistent share repurchase."
Nattel reiterated her "outperform" rating with a price target of $47, about nine per cent above the current market value. The stock was up 14 cents at $42.80 during mid-day trading Thursday.
Another hurdle for the chain to overcome is a an Ontario Court of Appeal ruling in December that backed a ban on pharmacies substituting their own brands of prescription drugs for name brands.
The company already sells its Sanis brand generic drugs in most of its key markets, including B.C., Quebec and Alberta. However the retailer has not been selling the Sanis drugs in Ontario, where Shoppers has roughly half of its stores.
Shoppers also could face stiffer competition from two major U.S. companies, retail giant Target and California health-care giant McKesson Corp., who are looking to establish a substantial presence in Canada's drug store market.
