Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Discuss your favourite picks, broker, and trading or investment style.
bones1
Contributor
Contributor
Posts: 317
Joined: 23 Apr 2009 19:17

Re: SC - Shoppers gets great Q2 results ...

Post by bones1 »

retireat50 wrote:In my opinion this points to the stock being priced to perfection. Great results this quarter and yet it drops in value. Alot of downside and not much upside.
Indeed. And the dividend yield is crap, so you're not being paid much to hold it.
Michael D
Contributor
Contributor
Posts: 733
Joined: 05 Nov 2008 16:23
Location: Ottawa

Post by Michael D »

Forward P/E of 14 for 2010 estimates, forward estimates around 10% growth.

Slow and steady. True, the dividend can catch up, but dividend growth is 20% in the past 3 years; although they missed in November 2008 with a raise.

Current div is $0.215. Perhaps November 2009 will catch-up, or at least resume 20%. A $0.25 quarterly would payout 33% 2010 estimates and yield 2.2% at today's price. More room to grow. I won't add, but I'll hold.
User avatar
brad911
Veteran Contributor
Veteran Contributor
Posts: 1150
Joined: 29 Jan 2007 16:45
Location: London ON
Contact:

Post by brad911 »

For those interested I published a short article on Shoppers Drug Mart.

Basic thesis of my idea is that political threats to their long prized pharmaceutical rebates has resulted in the lack of growth in the dividend and investors likely won't see an increase until later next year when a clearer picture of the governments negotiations should give them better guidance on the financial impact of these changes.

I still own shares in the company, but I think growth could be heavily impacted as they eye expanding Westward towards BC. If the other provinces adopt such tactics community pharmacies will disappear and although larger chains will pick up the market share their profitability will still be affected.
Triage Investing Blog - A Source for Value & Dividend Investing and Business Fundamentals
marty123
Veteran Contributor
Veteran Contributor
Posts: 2950
Joined: 23 Feb 2007 13:36
Location: Ontario

Post by marty123 »

Brad,

I've always been under the impression that:

- Consumer products, groceries, and OTC drugs were the real profit centre for an SD franchise; and
- For prescription drugs, more money is earned on dispensing fees than on the drugs themselves; and
- The franchise infrastructure, supply chain and pharmacists required to dispense prescription drug eat away at profitability.

How does SD make money off the franchisees? Is the SD corporate profit centre in prescription drugs and pharma rebates, contrary to the franchisees' profit centre?
User avatar
kcowan
Veteran Contributor
Veteran Contributor
Posts: 16033
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Post by kcowan »

brad911 wrote:I still own shares in the company, but I think growth could be heavily impacted as they eye expanding Westward towards BC.
They have their exclusive Post Office franchise but they face London Drugs for the other lines of business. London Drugs has computers, cameras, mobile phones and TVs to subsidize their outlets.
For the fun of it...Keith
User avatar
brad911
Veteran Contributor
Veteran Contributor
Posts: 1150
Joined: 29 Jan 2007 16:45
Location: London ON
Contact:

Post by brad911 »

marty123 wrote:Brad,

I've always been under the impression that:

- Consumer products, groceries, and OTC drugs were the real profit centre for an SD franchise; and
- For prescription drugs, more money is earned on dispensing fees than on the drugs themselves; and
- The franchise infrastructure, supply chain and pharmacists required to dispense prescription drug eat away at profitability.

How does SD make money off the franchisees? Is the SD corporate profit centre in prescription drugs and pharma rebates, contrary to the franchisees' profit centre?
SD takes a percentage of profits from franchisees (what that % is I've never been able to determine) but I do know the number fluctuates depending on the location, volume of sales and store traffic. Consumer products, groceries and OTC drugs are the higher margin products that help to drive profits in the front of store, but for prescription drugs it gets a little more interesting.

See...the rebates they receive(d) can't be found in any of their financial numbers and they get around this by a cute little accounting clause they use for all their inventory (groceries, cosmetics & drugs). SC classifies all rebates (whether from Saputo, Loreal or Pfizer) received from vendors as a reduction in the cost of inventory. They can do this because the rebates don't have anything to do with a reimbursement of a direct expense.

What an investor would need to do is look at the books of an independent pharmacy (that only sold drugs) and apply the historical sales mix for SC for pharmacy (46-48%) to get an idea of what amount of $$ we're talking about in relation to rebates. That's the closest tip I can give on how I came to my numbers I referenced in my article of between $180-300M in lost revenue. It's not really "revenue" because of how they account for it, but it will be an increase in the cost of inventory essentially if the government takes the larger share of these rebates.
Triage Investing Blog - A Source for Value & Dividend Investing and Business Fundamentals
pitz
Veteran Contributor
Veteran Contributor
Posts: 2878
Joined: 27 Oct 2005 18:41
Location: Canada/Costa Rica

Post by pitz »

brad911 wrote: SD takes a percentage of profits from franchisees (what that % is I've never been able to determine) but I do know the number fluctuates depending on the location, volume of sales and store traffic.
SC essentially targets a certain level for Associate compensation, and takes the rest, through various mechamisms. It is a modest augmentation over what a professional Pharmacist earns. Most of this additional incremental compensation is accumulated as equity in inventory.
See...the rebates they receive(d) can't be found in any of their financial numbers and they get around this by a cute little accounting clause they use for all their inventory (groceries, cosmetics & drugs). SC classifies all rebates (whether from Saputo, Loreal or Pfizer) received from vendors as a reduction in the cost of inventory. They can do this because the rebates don't have anything to do with a reimbursement of a direct expense.
In much of the industry, the 'rebates' are not cash amounts, but are rather, paid in product. For instance, order 2 bottles of a product, and an extra 2 bottles show up in the shipment, not on the invoice. More or less, its similar to how car dealers operate -- they can wave around an inflated invoice to their customer, claiming they'd lose money if they lowered their price -- but in reality, they're really acquiring the cars for less than the invoice price.
What an investor would need to do is look at the books of an independent pharmacy (that only sold drugs) and apply the historical sales mix for SC for pharmacy (46-48%) to get an idea of what amount of $$ we're talking about in relation to rebates.
Its been claimed at various sources that product rebates can pretty much, in a 3 person pharmacy, cover off the cost of a pharmacist.
That's the closest tip I can give on how I came to my numbers I referenced in my article of between $180-300M in lost revenue. It's not really "revenue"
1000 Shoppers' * $150k/pharmacist would put such rebates very much on the low side of your projections.
because of how they account for it, but it will be an increase in the cost of inventory essentially if the government takes the larger share of these rebates.
Offset by higher billings for pharmacists (because they will be able to do prescribing, and bill for it), and offset by a reduction in staffing facilitated by expanded roles for pharmacy techs. And offset by reductions in leasing costs due to the real estate market.

I personally don't think there's a huge reason to worry that the SC business, or revenues are going to be significantly hurt in the next few years. But it does trade at a very high P/E multiple compared to the rest of the [Canadian] market, so strictly on a valuation basis, it could suffer a long period of stagnation as a stock.
bones1
Contributor
Contributor
Posts: 317
Joined: 23 Apr 2009 19:17

Post by bones1 »

marty123 wrote: - For prescription drugs, more money is earned on dispensing fees than on the drugs themselves;
That's got to be true! I've asked Shoppers if they'd consider a lower dispensing fee for drugs since I don't have a drug plan. They basically laughed in my face. Most other pharmacies will drop their listed dispensing fee if asked, but not Shoppers. I now buy my drugs at Costco, or the local grocery store. Screw Shoppers!
vince2
Contributor
Contributor
Posts: 504
Joined: 14 Sep 2008 11:25

Post by vince2 »

I believe that pitz has covered just about all the important points - I know a little about it because in my former life as a FP in a small one horse ( or was it mule) town I had to dispense medicine ( no pharmacy) and it seems as though the rules of the game have not changed over 20+ years.

I'm a more top down than bottom up kind of a guy when I look at stocks and that is why I really appreciate the contributions by people like scomac, brad911 et al. From a top down perspective the more the government buys (wrt) medicine, the less important the private market becomes and the fewer incentives for drug companies to give SC special deals. At the same time, the Generics companies become more profitable and powerful and the good ones soon become separated from the bad ones ( not all generics are created equal - I don't care what the companies say). By the way, they would also be interested in giving special deals.

Despite the bad press Big Pharma has, it's a tough business and getting tougher by the day. The days of easy medicine discovery and patenting are over. I'm not interested in carrying a torch for big pharma (they have enough paid lobbyists to do that) but there seems to be a general misconception that the patent rule gives them enough protection - in the mean time it takes approx 10-12 years to get a product through all the trials and approved by the FDA - and that leaves them 8 years to recoup their costs. Frankly, the easy money is gone. And that applies to SC too, they could do worse that emulate London drugs and start selling photography equipment, especially now that Black's photography has been taken over by Telus.

SC's emphasis on cosmetics is a smart move, high margins and if well executed it should be a profit spinner - lets hope they do not do it el cheapo - my wife contends that only people her age would be interested and could afford to buy expensive anti-aging creams and potions and lotions.
pitz
Veteran Contributor
Veteran Contributor
Posts: 2878
Joined: 27 Oct 2005 18:41
Location: Canada/Costa Rica

Post by pitz »

vince2 wrote: I'm not interested in carrying a torch for big pharma (they have enough paid lobbyists to do that) but there seems to be a general misconception that the patent rule gives them enough protection - in the mean time it takes approx 10-12 years to get a product through all the trials and approved by the FDA - and that leaves them 8 years to recoup their costs.
Yup. And one bad drug can basically bankrupt a company as well, especially when juries are allowed to levy such high punitive damages. For instance, fenfluramine basically sunk Wyeth. triazolam was a massive problem for Upjohn. Yes, there is some corporate misbehaviour in some of those instances, but the jury awards and the sheer cost of litigation was clearly quite excessive, and those two innovators in their industry were destroyed by the aftermath.

Personally, I don't think the patent protection should start at the time that the molecule itself was invented, but rather, should start at the time when the drug receives FDA approval. Let the companies have a solid 20 years of sales. This would also reduce a lot of the pressure to get products out the door, leading ultimately to safer products.

Getting back on topic here -- Shoppers Drug Mart pharmacists will soon be allowed to prescribe medications, under changes to laws in most provinces and nationally. Is this a move that might open Shoppers up to litigation, as the employer of these prescribers? Does anyone think that this is dangerous -- that the traditional seperation between prescribing and dispensing, be severed?

I mean, imagine for a moment if doctors both prescribed, and dispensed medications in Canada on a regular basis. The conflict of interest boggles my mind, and the use of a second health care professional for dispensing (the pharmacist) provides an independant check and balance on the suitability of medicines, especially if multiple health care providers are involved.
Michael D
Contributor
Contributor
Posts: 733
Joined: 05 Nov 2008 16:23
Location: Ottawa

Post by Michael D »

So Q3 results will be released November 11 :shock: (Toronto sure isn't as PC as Ottawa).

It has been 2 years without an increase in the dividend, if they don't announce tomorrow they will enter their third. Competition mounts, but the outlook is not that bad. I'd like to see a token increase inline with EPS growth.

..just talking into my hat in advance of tomorrow's news.
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Post by Taggart »

Michael D wrote:So Q3 results will be released November 11 :shock: (Toronto sure isn't as PC as Ottawa).

It has been 2 years without an increase in the dividend, if they don't announce tomorrow they will enter their third. Competition mounts, but the outlook is not that bad. I'd like to see a token increase inline with EPS growth.

..just talking into my hat in advance of tomorrow's news.
Unfortunately, investors are not going to get a dividend increase.

The Company also announced today that its Board of Directors has declared a dividend of 21.5 cents per common share, payable January 15, 2010 to shareholders of record as of the close of business on December 31, 2009.
Michael D
Contributor
Contributor
Posts: 733
Joined: 05 Nov 2008 16:23
Location: Ottawa

Post by Michael D »

The November announcement is usually the last one at the prevailing rate. Increases have always been announced in February with the annual results. We'll see then.
User avatar
Spidey
Veteran Contributor
Veteran Contributor
Posts: 4556
Joined: 11 Jan 2009 19:55
Location: Ottawa

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by Spidey »

Many of the experts seem to recommend this stock, but I always find that I have to use my own judgment and discretion.

There seems to be 2 models for selling pharmacy items - The stores where they have a proven grocery or department store business with pharmacy as a secondary component (such as Walmart or Loblaws) and the stores where pharmacy is the main business and they attempt to convert the rest of the store into a department store of sorts. To me, it seems like the first model is winning out. Whenever I'm in Loblaws or Walmart there is a lineup of people waiting for prescriptions. When I walk into Shoppers not only does the store seems relatively empty but even the pharmacist is not that busy. Last time I went there to get some pain medication for my daughter, I could walk up and ask the pharmacist which brand was preferable because he was sitting there like the Maytag repairman. As they move westward, they will face stiff competition with London Drugs which seems to have done a better job at defining what they want the non-pharmaceutical side of the store to represent.
If life seems jolly rotten, then there's something you've forgotten -- and that's to laugh and smile and dance and sing. - Eric Idle
User avatar
augustabound
Veteran Contributor
Veteran Contributor
Posts: 2546
Joined: 17 Mar 2007 09:56
Location: GTA

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by augustabound »

I have to agree with Spidey. I also noticed that many of the outlets that Shoppers made the grocery larger and the hours longer have reverted to their shorter hours. There doesn't seem to be as many 24 hours Shoppers as there used to be, they seem to close around 10 now. I don't know if this is a sign of their business or just a mis-step a few years ago with the direction of the company.
I would assume they just misjudged the need for 24 hour service though.
I find myself shopping less and less at Shoppers, my wife also. I started actually looking at prices now ( I used to just buy what I needed and when I needed it, rather than comparison shop). Prices are significantly higher at Shoppers for most things we need.
"Whenever I'm about to do something I think, would an idiot do that? And if they would, I do not do that thing." - Dwight K. Schrute
Serenity
Contributor
Contributor
Posts: 151
Joined: 26 Oct 2005 21:21
Location: Scarborough

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by Serenity »

Spidey wrote:Many of the experts seem to recommend this stock, but I always find that I have to use my own judgment and discretion.

When I walk into Shoppers not only does the store seems relatively empty but even the pharmacist is not that busy.
Your observation may be true in your area (Ottawa?), but the various Shoppers Drug Mart stores in my area (GTA) usually seem to be plenty busy selling all manner of merchandise. There is absolutely no way I would endure the long lineups at the local Wal-Mart to buy everyday items such as milk or eggs when I can pop into the nearby Shoppers for the same items and get out quickly! I once picked out a birthday card at Wal-Mart only to put it back on the shelf when I realized it would take at least 15-20 minutes to get through the absurdly long checkout line.

However, I recently sold my shares in Shoppers as the stock seems stuck in its current range and there are other stocks that pay better dividends with superior prospects.
schmuck
Veteran Contributor
Veteran Contributor
Posts: 1706
Joined: 21 Sep 2006 20:06
Location: Vancouver area

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by schmuck »

Serenity wrote: There is absolutely no way I would endure the long lineups at the local Wal-Mart
Nobody goes there anymore cause it's too crowded.
Yogi Berra
User avatar
brad911
Veteran Contributor
Veteran Contributor
Posts: 1150
Joined: 29 Jan 2007 16:45
Location: London ON
Contact:

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by brad911 »

augustabound wrote:I don't know if this is a sign of their business or just a mis-step a few years ago with the direction of the company.
The disappearance of many 24 hr locations is a direct result of cost controls the company has implemented. If overnight sales don't hit a certain target they would rather save costs.
Triage Investing Blog - A Source for Value & Dividend Investing and Business Fundamentals
User avatar
Bylo Selhi
Veteran Contributor
Veteran Contributor
Posts: 29494
Joined: 16 Feb 2005 10:36
Location: Waterloo, ON
Contact:

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by Bylo Selhi »

<OT>
brad911 wrote:The disappearance of many 24 hr locations is a direct result of cost controls the company has implemented. If overnight sales don't hit a certain target they would rather save costs.
Which raises an interesting off-topic question that you may be particularly well-suited to answer. Suppose you're seen/treated at Emerg late in the evening and prescribed some medication. Where do you get it filled if there are no longer any 24-hr pharmacies, SDM or otherwise? This isn't theoretical. About a year ago my mom was discharged from a local Emerg after midnight (having arrived with me at 10am and first seen by an MD at 6pm, but I digress...) with a prescription for antibiotics. It took at lot of pleading on my part to get the hospital to dispense one (yes, 1!) capsule to last her until morning.
</OT>
Sedulously eschew obfuscatory hyperverbosity and prolixity.
marty123
Veteran Contributor
Veteran Contributor
Posts: 2950
Joined: 23 Feb 2007 13:36
Location: Ontario

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by marty123 »

Bylo Selhi wrote:<OT>
brad911 wrote:The disappearance of many 24 hr locations is a direct result of cost controls the company has implemented. If overnight sales don't hit a certain target they would rather save costs.
Which raises an interesting off-topic question that you may be particularly well-suited to answer. Suppose you're seen/treated at Emerg late in the evening and prescribed some medication. Where do you get it filled if there are no longer any 24-hr pharmacies, SDM or otherwise? This isn't theoretical. About a year ago my mom was discharged from a local Emerg after midnight (having arrived with me at 10am and first seen by an MD at 6pm, but I digress...) with a prescription for antibiotics. It took at lot of pleading on my part to get the hospital to dispense one (yes, 1!) capsule to last her until morning.
</OT>
At our small hospital, in a small community where we have no 24hr pharmacy, doctors give the first dose at no cost from their own stock before sending us off with the prescription for that exact reason. No pleading required in the 2 instances they did it. It's happened to me with antibiotics (after midnight), and it's happened to my wife with painkillers (late evening, "just in case the pharmacist would be closed"). Even if you live in a better serviced community, it might be wise to ask the doctor and tell him/her that your favorite pharmacist is not opened overnight.
vince2
Contributor
Contributor
Posts: 504
Joined: 14 Sep 2008 11:25

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by vince2 »

Where I came from, the local pharmacies came together and and opened a single all night pharmacy, and took turns to man it and presumably split the profits and shared the expenses. It was shuttered during the day.

If there was only one pharmacy, either the local hospital provided enough to last the night (and charged for it) or the local (only) pharmacist had a contact tel number and would come out and dispense what was required.
'A slow death to those who become slaves of habit, who repeat the same track every day, who do not change pace, who do not risk and change the colour of their clothes, who do not talk and who do not learn.'
Pablo Neruda
User avatar
Peculiar_Investor
Administrator
Administrator
Posts: 13271
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by Peculiar_Investor »

Q4 numbers are out today and they look OK. A small dividend increase was announced, see http://www.financialwisdomforum.org/for ... 98#p371398. Shoppers weathered the downturn reasonably well, but I'm not seeing anything in their future that puts them back growing the Sales and EPS at their previous levels, and thus I'm left to wonder about the premium PE multiple being applied to this name. If EPS growth is going to stay in the high single digits, shouldn't an investor expect the PE multiple to compress?

Which interestingly enough leads me back to the title of this topic, "why so beaten down lately?" from 2005, when the stock was sitting at $40.
Last edited by Peculiar_Investor on 07 Feb 2014 07:04, edited 1 time in total.
Reason: replace old domain name with www.financialwisdomforum.org to reflect new domain name effective 19-Jan-2014
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by Taggart »

No dividend increase in 2009, and as of today, not quite a 5% increase. Five year compounded dividend growth average is roughly 17%, and 12% on three years, so Shoppers must be going through a rough patch.

Disclosure: I own shares in SC.
User avatar
Peculiar_Investor
Administrator
Administrator
Posts: 13271
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by Peculiar_Investor »

From the Q4 Press Release,
In reference to the dividend increase, Mr. Schreiber went on to say, "The amount of this increase is essentially in-line with our rate of growth in reported net earnings and as such, serves to maintain our dividend payout ratio at a sector-leading 33 percent."
EPS Compound Growth has been:
2008-09 5.5%
2007-09 8.9%
2006-09 11.4%
2005-09 12.7%
2004-09 13.4%
2003-09 14.6%
2002-09 15.7%

The trend is not your friend on this name, both for growth investors and dividend growth investors. From 2002-07, the PE ratio was pretty consistently between 19 and 26. Now that EPS growth has slowed so significantly, so has the PE multiple that investors are willing to pay. It sort of reminds me of the Loblaw story, excellent earnings growth rewarded with a premium multiple, then earnings growth dries up and so does the PE multiple, leading to a stagnant stock price.

I've watched this stock for a number of years, but the fundamental and valuation deterioration has kept me out of the stock. YMMV.
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
User avatar
investor99
Veteran Contributor
Veteran Contributor
Posts: 1003
Joined: 22 Nov 2006 20:53
Location: Brantford, Ontario
Contact:

Re: Shoppers Drug Mart (Symbol-SC) -- why so beaten down lately?

Post by investor99 »

I think all signs are pointing to the stock dropping from here. P/E's below 14x would start to get interesting. I think that they will easily return to growing EPS at double digits. Since I already own a bunch of Walgreen (WAG) I probably won't buy it but I might pick some up for one of our accounts if something strange happens and the stock falls to a P/E of 12x (~$33)
The best time to plant an Oak tree was twenty five years ago. The second best time is now.
--
http://themoneygardener.com/
Post Reply