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Executives

John Caplice – SVP, Treasurer and IR

Domenic Pilla – President and CEO

Brad Lukow – EVP and CFO

Analysts

Patricia Baker – Scotiabank

Irene Nattel – RBC Capital Markets

Chris Li – Bank of America Merrill Lynch

Peter Sklar – BMO Capital Markets

Michael Van Aelst – TD Securities

Keith Howlett – Desjardins Securities

David Hartley – Credit Suisse

Vishal Shreedhar – National Bank Financial

Kenric Tyghe – Raymond James

Chris Li – Bank of America

Shoppers Drug Mart Corporation (OTCPK:SHDMF) Q4 2013 Earnings Call February 6, 2014 3:00 PM ET

Operator

All participants, please stand by, your conference is ready to begin. Good afternoon ladies and gentlemen, welcome to the Shoppers Regular Fourth Quarter Analyst Conference Call. Please note that this call is being webcasted live and will also be archived on the Shoppers Drug Mart website at www.shoppersdrugmart.ca.

I would now like to turn the call over to Mr. John Caplice, Senior Vice President, Treasurer and Investor Relations. Please go ahead Mr. Caplice.

John Caplice

Thank you, operator, and good afternoon everyone and thanks for joining us today. My name is John Caplice, and on behalf of Shoppers Drug Mart Corporation, I would like to welcome all of you to our fourth quarter conference call.

During the call, we will review our fourth quarter financial results representing the flat rate [ph] period ended December 28, 2013 and provide a brief recap of our full-year results.

With me on the call today are Domenic Pilla, President and Chief Executive Officer of Shoppers Drug Mart Corporation, and Brad Lukow, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind everyone that participants in today’s discussion may be making certain statements containing forward-looking information with respect to the company’s future liquidity, operating and financial results, its capital expenditure plans, dividend and shareholder distribution policies, the ability to execute on its future operating, investing and financing strategies as well as statements concerning the expected completion date and anticipated benefits of the acquisition of the company by Loblaw Companies Limited.

These forward-looking statements reflect the company’s current estimates, beliefs and assumptions, which are based on management’s perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances and we caution you that actual results or developments may differ materially from those contemplated by such statements.

We direct everyone to the information set out below the forward-looking information and statements heading in our fourth quarter earnings release issued earlier today for a description of certain material risk factors and material assumptions that could cause actual results or developments to differ from expectations. Further information regarding these and other material risk factors and material assumptions is included in the company’s public filings with provincial securities regulatory authorities.

Finally, we note that any forward-looking information or statement provided in the context of today’s discussion represents the company’s views only as of today’s date and the company does not undertake to update any such forward-looking information or statement except to the extent required by applicable securities laws.

Earlier today we issued a news release on our fourth quarter and full-year results which included our Q4 financial statements. By now most of you have had an opportunity to review this information so I’ll turn it over to Domenic to make a few comments on the quarter, after which, Brad will briefly review our full-year results. When Brad is finished, we’ll open up the call to questions from the analysts.

Before handing it over to Domenic, I would like to remind everyone that the focus of today’s call is on the company’s Q4 results. Accordingly we intend to limit our comments in respect to details related to the pending acquisition of the company by Loblaw Companies Limited.

At this time there is no additional information to discuss or disclose related to this matter. Obviously, as the situation develops and events warrant, we will continue to provide additional disclosure related to the proposed transaction. Domenic?

Domenic Pilla

Thank you, John. I would like to recap you for by starting with the topline where total sales were $2.7 billion, an increase of 0.9% over the same period of the prior year, driven by sales gain in the front of store and continued strength in prescription-count growth. On a same-store basis, sales increased 1.2%.

Pharmacy sales which accounted for 44.8% of the Company’s sales mix in Q4 were $1.2 billion, an increase of 0.8% compared to the same period of the prior year. At strong growth in the number of prescriptions filled at retail was partially offset by further decline in the average-prescription value.

On a same-store basis pharmacy sales increased 0.5%. During the fourth quarter of 2013, the number of prescription dispensed at retail increased 5% compared to the same period of the prior year and it was up 4.7% on the same store basis. Pharmacy volume growth was evident in all regions of the country and remains particularly strong in Ontario.

Year-over-year, average-prescription value at retail declined a further 3.8% during the quarter, largely the result of further reductions in generic prescription reimbursement rates due to ongoing drug system reform initiatives in all provincial jurisdictions along with increasing generic prescription utilization rate. In the fourth quarter of 2013, generic molecules compromised 62.4% of prescription dispensed compared to 60.2% in Q4 of the prior year.

In the front of store, fourth quarter sales were $1.5 billion, an increase of 1.1% compared to the same period of the prior year led by strong growth in cosmetics and food and confection. This is a particularly strong result in the context of the marketplace and considering the assets of a strong cough and cold season compared to the fourth quarter of the prior year.

This result also reflects continued share gains as a testament of the effectiveness of the Company’s promotional campaigns and seasonal merchandising programs. On a same-store basis, front-store sales increased to 1.7% during the quarter.

Fourth quarter net earnings inclusive of transaction-related cost of $3 million were $169 million. Excluding the impact of this cost, adjusted net earnings were $172 million in the quarter of 2013 compared to net earnings of $175 million in Q4 of the prior year. On a diluted basis, adjusted net earnings per share were $0.86 in the fourth quarter of 2013 compared to net earnings per share of $0.85 a year earlier, an increase of 1.2%.

Year-over-year gross profit dollar increased 0.8% in the fourth quarter of 2013 essentially in line with total sales growth as the level of promotional intensity in the marketplace remained high. However, these gains were more than offset by higher operating and administrative expenses, inclusive of depreciation and amortization expense, which increased 2.4% year-over-year driven largely by higher store-level expenses, primarily occupancy, wages and benefits and by increase in marketing expenses.

Other factors that positively impacted net earnings for the fourth quarter of 2013 were lower finance expenses, a reduction in the Company’s – and a reduction in the Company’s effective income tax rate.

As well, the accumulative impact of the Company’s share repurchase program had a positive impact on growth in adjusted net earnings per share during Q4 as there were 2.4% fewer shares outstanding compared to the fourth quarter of the prior year.

As I stated in our news release, we were pleased with our fourth quarter results and full year operating and financial results. By any measure, our performance in the fourth quarter of 2013 was a successful conclusion to what was a very successful year for our Company and our shareholders.

However, what remains a very competitive and challenging marketplace, it is clear that our value proposition and unwavering commitment to provide the best in patient care and customer service continues to resonate with patients and customers alike. On behalf of our shareholders and the Board of Directors, I would like to thank our corporate and regional office employees, along with our associate owners and their teams at store level for their efforts and contributions to our collective success in 2013.

What I’d like to do now is hand it over to Brad to recap our full year results. Brad?

Brad Lukow

Thanks Domenic. For the full year of 2013, sales were up 2.6% to $11.1 billion as the Company experienced sales gains in all regions of the country driven by strong volume growth in retail and long-term care at pharmacy and by continued sales and market share gains in the front of the store.

The Company’s capital investment and store development program also had a positive impact on sales growth during the year. On a same-store basis, sales increased by 1.9%. In pharmacy, sales were up 2.5% to $5.2 billion representing 47.3% of the Company’s sales mix. On a same-store basis, pharmacy sales were up by 1.3%. Strong growth in the number of prescriptions filled at retail combined with further sales gains in the Company’s many system technologies business were partially offset by a further decline in average prescription value.

In 2013, the Company dispensed 107 million scripts at retail, an increase of 6.1% over the prior year or 4.8% on the same-store basis. Year-over-year, the average prescription value declined by 3.8% in 2013 largely due to further reductions in generic reimbursement rates in all provinces combined with greater generic prescription utilization rates.

Generic molecules comprised 61.5% of prescriptions dispensed in the year, up 230 basis points over the prior year. In the front of the store, sales increased by 2.6% to $5.8 billion with the Company posting sales gains in all core categories led by strong growth in cosmetics, OTCs and food and confection. On a same-store basis, front store sales were up 2.5% with solid market share gains in all core categories, again, led by cosmetics.

In addition to square footage growth, effective marketing and promotional campaigns, including further investments in pricing which proved to be impactful in terms of driving growth in transaction counts and basket size over the course of 2013.

Net earnings were $602 million in 2013 compared to $606 million in 2012. Net earnings for 2013 are inclusive of Loblaw transaction related cost of $17million pre-tax while the earnings for 2012 included a pre-tax charge of $13 million related to a rationalization and realignment of the Company’s central office functions, as well as the charge of $5 million pre-tax from the closure of two Murale stores.

So excluding the impact of these items, adjusted net earnings were $614 million in the year compared to $620 million in 2012.

On a diluted basis, adjusted net earnings per share were $3.5 compared to $2.97 in 2012, an increase of 2.7%. During the year, the Company maintained positive sales momentum and top-line growth by leveraging incremental pharmacy traffic and continuing to focus on promotional effectiveness resulting in year-over-year increase in gross profit dollars of 2.2%.

On an adjusted basis, operating and admin expenses, including depreciation and amortization were up 3.3% year-over-year. This increase was driven in part by higher store level expenses primarily tied to the Company’s network growth and expansion initiatives and by increased expenses at MediSystem in line with sales growth in the Company’s long-term care pharmacy business.

As well, the Company invested more in marketing and promotions in 2013 including additional amounts directed towards pharmacy services and beauty. Other factors that positively impacted net earnings in the year were lower finance expenses and a reduction in the Company’s effective income tax rate.

The Company’s share repurchase program also had a positive impact on growth and net earnings per share in the year as there were 3.4% fewer shares outstanding compared to the prior year.

On the store-development front, fourth quarter [indiscernible] opened eight new drug stores, three of which were relocations and complete four major drug store expansions. The Company also acquired five drug stores during the quarter, two of which were amalgamated with existing stores.

For the year, we opened 29 new drug stores, 11 of which were relocations and we completed 19 major drug store expansions. We also acquired 10 drug stores, 3 of which were amalgamated with existing stores and 1 long-term care pharmacy.

In addition to this activity, eight smaller drug stores were consolidated or closed and three outpatient hospital pharmacies were closed. At the end of the year, there were 1,377 stores in the system, comprised of 1,309 drug stores, 56 of which were medical clinic pharmacies and 62 Shoppers Home Health Care stores and 6 Murale stores.

In addition to investing in our strategy growth and store network expansion initiatives, the Company also returned a combined $430 million to shareholders in the year in the form of dividends declared $229 million and share repurchases in the amount of $201 million.

So let me now turn it back to the operator who will open up the call to questions from the analysts. I would ask if you please limit your questions to one and a follow up. If you have any additional questions, you’re encouraged to get back into the queue. Operator?

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone line. (Operator instructions) Our first question is from Patricia Baker with Scotiabank. Please go ahead.

Patricia Baker – Scotiabank

Thank you. And thank you for taking my question. Domenic, I wonder if you could provide a broader discussion around the fourth quarter positive comp trend, what you experienced vis-à-vis both traffic and basket? And notwithstanding the impact of the winter storm, how did the customer appear to you in the fourth quarter?

And did you have to engage in any different promotional efforts or strategies in this particular holiday season relative to last year?

Domenic Pilla

Well, thanks for that question. I think there are both three questions in there, Patricia, but I’ll try to answer all three of them. So the fourth quarter was quite active in terms of promotional activity. And so we did see continued promotional activity as we saw throughout the year quite a bit of intensity as additional square footage came into the market and it culminated in the fourth quarter.

We did have two phenomenas in the fourth quarter that we pointed out in our Press Release and one is the lack of a strong cough and cold season particularly when compared to the fourth quarter of 2012 and then of course some significant weather related effects particularly in Central Canada.

In terms of the first part of your question, we saw both increased in traffic and basket size, but more of our comp came from basket increases. So as Brad pointed out, we’re very proud of the fact that we’re able to convert increase traffic into larger basket and really show the strength of our personalize offers and the strength of our loyalty program and also the strength of the execution at the store level in terms in-stock [ph] position and the ability of our customers to respond positively to our sales and service providers.

And then in terms of the consumer, as you say, clearly there is continued pressure by the consumer that is extremely value conscious and price sensitive and where we see we have some strengths as we continue to evolve our loyalty offering to be one of moving from a mass offer to much more targeted relevant offer to our customers and areas that really resonate with them and are important for them from a value standpoint. And we saw the benefit of that in the fourth quarter of 2013.

Patricia Baker – Scotiabank

Okay, thank you very much. Just a follow-up though maybe because perhaps this is the last time we’ll get to ask you this directly, do you have a view on how you think the consumers are going to be through the rest of ‘14 if you’re comfortable talking about that?

Domenic Pilla

We’re not really talking about ‘14.

Patricia Baker – Scotiabank

Okay.

Domenic Pilla

I would say that there will be ongoing pressure. And the consumer will be price sensitive and value conscious.

Patricia Baker – Scotiabank

Okay, thanks.

Operator

Thank you. Our next question is from Irene Nattel with RBC Capital Markets. Please go ahead.

Irene Nattel – RBC Capital Markets

Thanks and good afternoon, everyone. Just staying with front store – front-store sales patterns and consumer behavior, recognizing that consumers remain extremely price conscious, are you seeing a higher proportion of your transactions being done with some kind of optimum promotion?

Domenic Pilla

Well not necessarily just optimum promotion, but our percentage of sales on promotive products continues to increase as a percentage of our total sales across all the promotional vehicles whether that’s buy or sales, whether that’s in-store promotion, other media or certainly around our loyalty program.

But in total and aggregate, we’re seeing that. And where we’re encouraged is within our own promotive products, a greater and greater share of our promotive product is moving to personalized offers as a proportion within us. But overall, you’re absolutely right in your observation that the percentage of promotive products is increasing at the percentage of total sales.

Irene Nattel – RBC Capital Markets

That’s great, thank you. And just if you could please remind us what proportion of front of store sales is OTC?

Domenic Pilla

[Indiscernible], it’s around 30. I mean we’ve always spoken about that before, that’s our front store.

Irene Nattel – RBC Capital Markets

Right, okay. So in front store mix hasn’t really changed that much on?

Domenic Pilla

OTC and out.

Irene Nattel – RBC Capital Markets

Yes.

Domenic Pilla

[Indiscernible].

Irene Nattel – RBC Capital Markets

Okay, that’s great. Thank you.

Operator

Thank you. Our next question is from Chris Li with Bank of America. Please go ahead.

Chris Li – Bank of America Merrill Lynch

Hi, good afternoon. Domenic, I wonder if you can provide us with some comments with in terms – in terms of how you finish in terms of market share for 2013 for both the pharmacy and the front-store segment and [indiscernible]. I want to find out if you’ve managed to gain market share in pharmacy and also for front store whether the market share gains were across the border or mostly focused on the food and cosmetics?

Domenic Pilla

Well, first of all, Brad will provide some additional detail, but first of all, we grew market share both in pharmacy and in front store, and so we’re very pleased about that. Our relative performance was very good throughout the year, but we continued that momentum in the fourth quarter, so we grew at both segments.

And then in terms of the specifics, like category, we did grow in all categories. And some, of course, we would highlight as significant growth starting with cosmetics, but I’ll let Brad talk about that.

Brad Lukow

Sure. In the cosmetics area, we look at the last quarter, we gained 50 basis points of market share. So we were extremely pleased with that performance and 30 basis points in food. And for the entire year, it gained more share in each category. So we’re able to, again, as Domenic said, convert that increase transaction, customer count into the store to larger basket, greater share of wallet.

In the pharmacy, we are particularly pleased with our performance. And our market share gain is in the order of 54 basis points for the quarter. And a significant share of that is coming from increased share in Ontario, but we saw gains across the board.

Chris Li – Bank of America Merrill Lynch

Okay, great, that’s helpful. Maybe a follow up just on the front store, what would you adjust for the impact of the bad weather, what would have been your front-store comp [ph] be if you would adjust for that? You haven’t –

Domenic Pilla

Yes. We adjust for two elements really, the incomplete absence of the cough and cold season and the ice storm. We’ve calculated that’s roughly 80 basis points or adjusted comp would be 2.5% which is actually our full-year number.

Chris Li – Bank of America Merrill Lynch

Perfect, okay. I’ll get back into the queue. Thanks.

Domenic Pilla

You’re welcome.

Operator

Thank you. Our next question is from Peter Sklar with BMO Capital Markets. Please go ahead.

Peter Sklar – BMO Capital Markets

In your commentary, you indicated that you closed five independent pharmacy acquisitions during the quarter, that’s a little bit more than you – than you typically do? And so I’m just wondering has anything changed in the backdrop in terms of industry consolidation or it just happened that a lot of things fell into the fourth quarter?

Brad Lukow

Yes, it’s just the timing of the events. When we’re looking at acquisitions, there are two types of acquisitions, the buy and operate where we’ll continue to operate them separately and probably in the future expand this square footage of it. And the other type of acquisition are script files, so we will roll that into an existing store.

On the buy and operate, we typically will look to operate for a period of time and then we may be able to move that to another site or re-low [ph] it into a larger footprint. And that’s consistent with our past practice.

Peter Sklar – BMO Capital Markets

Okay. And Brad, just one other question, if you can answer this, on the Shoppers’ dividend, the dividend – [indiscernible] dividend I think around mid-March and if the acquisition of the company is completed before then, have you – can you tell us how you’re going to handle the dividend?

Brad Lukow

Yes. I think in accordance with the arrangement agreement, I think, it’s Section 5.12 we specifically set out that the companies will align our dividend dates to ensure that shareholders of Loblaw Companies and shareholders at Shoppers Drug Mart Corporation will receive a dividend and not receive two dividends. So we therefore have aligned the dates.

So in the past, our date would have been March 31st, a data record pay for 15th. We have now aligned that with Loblaw Companies to be at the middle of March with the pay date the April 1.

Peter Sklar – BMO Capital Markets

And so does the dividend have to be pro-rated or you just get a full dividend on the Loblaw Companies?

Brad Lukow

There’s either a dividend paid to Shoppers Drug Mart shareholders or if the deal has closed, you will now be a shareholder of Loblaw and you’ll receive a Loblaw dividend.

Peter Sklar – BMO Capital Markets

Okay.

Brad Lukow

And that’s set out in the arrangement agreement.

Peter Sklar – BMO Capital Markets

Okay, thank you.

Brad Lukow

You’re welcome.

Operator

Thank you. Our next question is from Michael Van Aelst with TD Securities. Please go ahead.

Michael Van Aelst – TD Securities

Hi. Looking at the drug deflation numbers, they were up – drug deflation was up about 110 basis points in Q4 compared to Q3. Can you explain, I guess, what’s going on? And given the penetration of generic drugs didn’t increase all that much, so can you explain that shift in Q3 to Q4 and then what your outlook is for 2014 for generic drug deflation?

Brad Lukow

Sure. What definitely had an impact in the quarter was a significant increase in the number of flu shots delivered within our pharmacy, so they are significantly lower average value. And as a result, the average value decrease in Q4 was 3.8%, 100 basis points greater than that of the third quarter.

And the generic penetration continues to increase.

Michael Van Aelst – TD Securities

Okay, so with your services expected to increase next year, I guess we should continue to see some deflation coming from that part of it. But what are you – what are you expecting from regulatory impact from what you know right now?

Domenic Pilla

Well, the – there are two parts of your question. In terms of services, as Brad alluded to it for sure, when one of the services is a flu shot, there’s an impact on the value of the product because of the product itself is administered by the pharmacist.

In some other cases, it obviously doesn’t affect the price of product when there’re unrelated products like prescribing from minor elements or med’s checks or adherence programs that are reimbursed for their service. So it will depend on how expanding scope of practice or professional services evolve in 2014.

So that’s one part of it. What was the second part of your question?

Michael Van Aelst – TD Securities

What’s the outlook for the generic, drug regulation for this year?

Domenic Pilla

Yes So the Council of the Federation has been meeting throughout 2013 in examining the prices for generics. And we understand that they are contemplating further reduction of some molecules in 2014. Our best information right now is they’re contemplating four molecules for implementation on April 1, 2014.

Where we’re encouraged was the Council of the Federation as they continued to be consulting us as a Company as well as across a sector. We’re working collaboratively with them. And there’s a tremendous interest in reinvesting any of the savings that would ensue in expanding the scope of process and new professional services and we’re very encouraged by that.

At this stage, we haven’t seen any announcements by the Council of the Federation, but we think that we have good market intelligence that this is what they’re contemplating.

Michael Van Aelst – TD Securities

And when you say contemplating they’re reducing the price on four molecules, so that’s down to the 18% level as well?

Domenic Pilla

That’s correct.

Michael Van Aelst – TD Securities

Great. Thank you.

Operator

Thank you. Our next question is from Keith Howlett with Desjardins Securities. Please go ahead.

Keith Howlett – Desjardins Securities

Yes. I just wondered on the pending British Columbia attempt to move down to 20%. Can you just recap where Alberta got too on their attempt and where you see this might get to?

Domenic Pilla

Yes. So what we saw in Alberta is a good evidence that the Council of the Federation is obviously considering very strongly is good evidence that the threshold of 18% is not sustainable for most molecules. And therefore, as they went through that process, many manufacturers withdrew from the market and weren’t able to support the market for many, many of their molecules at the 18%.

And what the Council of the Federation has recommended was with six molecules at 18% after much study proved to be the implementation that happened right across Canada in 2013. And that’s pretty much where Alberta ended up, those six molecules plus the rest had very similar prices to the rest of Canada.

Our sense is that that’s what’s unfolding in British Columbia as well in early 2014 and that we remain interested in working with and implementing recommendations as the Council of the Federation has the best process across Canada for establishing prices of generics because that work takes into account all the particularities and complexities on a molecule by molecule basis and ensures the balance between the best price for the public payer, on the other hand no unintended consequences and no shortages of supply or other issues related to that.

And I think it’s in the process. And our sense is British Columbia and Alberta are now aligning themselves to those processes.

Keith Howlett – Desjardins Securities

Okay, thank you. And I apologize I missed the first part of the call. Did you have any stores closed for any period during the ice storm?

Brad Lukow

Yes. We were impacted by the ice storm. And we had for up to two days [indiscernible] 112 stores that were down. And then we – over the course of the next several days got them back up and running.

Keith Howlett – Desjardins Securities

Great, thanks. And just in terms of the cosmetics business, can you, given we may not chat again or at least not in the context of Shoppers, can you give what your cosmetic share is sort of at the – as you exit the year?

Brad Lukow

It’s not a market share number that we put out.

Keith Howlett – Desjardins Securities

Okay. And what about – I guess the script share that one I know is more publicly accessible, but do you speak to your script share?

Brad Lukow

We’re roughly 17.5% on count.

Keith Howlett – Desjardins Securities

Okay, thanks. And just on the target impact, have you – have you noticed any difference in a target store versus when you so compete with the Zellers sort of in the same mall or very close by?

Domenic Pilla

Well, there is some difference in the value proposition, the effect that we’ve seen on our businesses been mostly on OTC, health and beauty and some mass cosmetics. But despite what I just told you, we already told you that in those categories, we have a big share in the market. And so our view is we would have gained more share hadn’t been for their entry. But at this stage not a large difference between the way Zellers are operating them and the way target seems to be operating them at this stage.

Keith Howlett – Desjardins Securities

Great, thank you.

Operator

Thank you. Our next question is from David Hartley with Credit Suisse. Please go ahead. Mr. Harley, your line is now open.

David Hartley – Credit Suisse

I noticed the four molecules that you referenced maybe going down to 18% based to [ph] your intelligence that you have, could you give us an indication of what you think the share of generics that they are?

Domenic Pilla

I don’t have that number.

David Hartley – Credit Suisse

But obviously would it be significant when they fall behind the first six types of molecules that went down to 18%?

Domenic Pilla

That’s correct.

David Hartley – Credit Suisse

Okay, that’s great. And on the cosmetics, can you talk a little bit about the [indiscernible] in terms of sales or market share gains, et cetera for the different categories in cosmetics or prestige and mass?

Domenic Pilla

No, we don’t break that down, but I would tell you that it’s across the board in all four major categories of prestige, fragrance, skin care and mass.

David Hartley – Credit Suisse

That’s great. Thank you very much.

Operator

Thank you. Our next question is from Vishal Shreedhar with the National Bank Financial. Please go ahead.

Vishal Shreedhar – National Bank Financial

Thanks very much. I just got on the call recently, so I apologize if this has been asked. But I’m wondering how we should think about the impact of FX [ph] and particularly the decline of the Canadian dollar on their purchasing power in generic drugs, is that a factor?

Brad Lukow

No, it isn’t. Most of the drugs are purchased in Canada.

Vishal Shreedhar – National Bank Financial

Okay. So would it be a factor to the provinces when they do their analysis determining if, you know, the effective price that a Canadian should pay for generic drugs. Is that something they consider? Is that not relevant?

Domenic Pilla

What they do to do cross country comparisons, but they would, you know, bring it back to domestic pricing and it isn’t a big factor. Almost all drugs, you know, generic drugs are manufactured for Canada, specifically for Canada and then in many cases, in Canadian plant [ph], so I don’t believe it’s a factor.

Vishal Shreedhar – National Bank Financial

Okay. In terms of the minimum wage in Ontario and that increase, pretty substantial. I’m just wondering what your thoughts are on that.

Brad Lukow

Well, we’re seeing over the last several years, quite a significant step ups over time in various provinces in the minimum wage rate. And you’ve seen based on our historical performance that we continue to push for productivity improvements and we delivered significant gains in that regard throughout the store networks that we see. This is nothing different.

Vishal Shreedhar – National Bank Financial

Okay. And the last question is just in terms of the Eaton Center store with that new cosmetic section, I’m just wondering how that was doing and is that a model that we should be seeing more broadly rolled out across Canada?

Domenic Pilla

Our enhanced beauty store at Bayview Village which was our first prototype is doing extremely well and continuous on its momentum. And Eaton Center, we’re very pleased with the results at Eaton Center and continues to be very strong across the board of all four categories I mentioned earlier. And so we are anticipating building more of those starting in 2014.

Vishal Shreedhar – National Bank Financial

Okay. Is that an especially for mat those, as in select markets or do you see that having that mass appeal?

Domenic Pilla

More select markets.

Vishal Shreedhar – National Bank Financial

Okay. Thank you very much.

Operator

Thank you. Our next question is from Kenric Tyghe with Raymond James. Please go ahead.

Kenric Tyghe – Raymond James

Thank you and good afternoon. Domenic, I wonder – you’ve highlighted the impact that’s more targeted promotions are having annual front store share. I wanted you to share with us how far down the road do you think you are with respect to your analytics initiatives or perhaps asking the question other way. How much more room you still think you have to continue to refine those and personalize those offerings.

I mean, you know, my impression of the consumers that is early days. I guess the question is how early day is it? And how far do you think you still have to go on that regard?

Domenic Pilla

It is early days and we do have a long way to go. We’re extremely encouraged by the progress that we’ve made and study truth where we’re really encouraged is the response of the consumer to those types of offers and to the, you know, segmentation and end the ability for them to get relevance offered. But I would characterize is the tip of the iceberg.

Kenric Tyghe – Raymond James

Thank you. And then if I could just come back to the generics very briefly. Your shared gains realizing it on a split up between prestige and mass [ph], would they continue to surprise in the context of competitors are kind of refresh their offering or at least, you know, provided more focus to the cosmetics area? Could you sort of speak to what you believe continues to set you apart to enable you to continue to take shares given your existing very high level – I’ll share with in both prestige and mass [ph].

Domenic Pilla

Well, there’s probably four things that we’re doing that is influencing that. First of all, what continues to happen and we see it through our customer data and the work we do with our customer panel is that our differentiated service model continues to resonate with Canadian consumers.

And so the quality, knowledge and passion or our beauty advisers is coming through.

And therefore, that differentiated service offering, not only in terms of their service, but also the unbiased service across all brands. It seems to be the winning model in the Canadian consumers’ mind.

We do continue to convert double A and triple A beauty boutiques who are adding square footage, not only in adding the number of beauty boutiques, but we are converting some of our double A to triple A beauty boutiques.

And of course, through that process, either in adding stores or adding capacity in individual stores, we’re adding more brands. And so we’re also seeing more brands join our system or existing brands adding more doors or more participation in additional beauty boutiques. And, you know, at the stage now, we’ve grown to 348 beauty boutiques adding 23 in 2013.

So all of those factors combined, I think are resulting and that’s continuing to grow share. And really I would say after Rudavet [ph], it’s really the business model which is the differentiated service experience that we have. And of course, we’ve provided our beauty advisers with some tools to do an even both and automated with the help of a content on iPad would give them a tremendous ability to have a very personal interaction with their customers. And of course, those tools are enhancing again that differentiated service offering.

Kenric Tyghe – Raymond James

Thanks. Thank you and good luck. I’ll it leave it there.

Domenic Pilla

Thank you.

Operator

Thank you. We have a follow up question from Chris Li of Bank of America. Please go ahead.

Chris Li – Bank of America

Hi, Domenic. If I remember correctly, I think it was a couple of years ago that the BC I think passed a legislation that would allow them to ban rebates similar to what’s happening in Ontario. Have you – do you have any updates on that?

Domenic Pilla

Haven’t heard anything at any province about rebates throughout 2013.

Chris Li – Bank of America

Okay. And then maybe just one for Brad. For your gross profit, it was up $90 million roughly for the full-year. Can you help us better understand, you know, how much of that was – came from the front store versus from the pharmacy?

Brad Lukow

What I’ll say is we had solid growth in dollars, in both the pharmacy and the front store.

Chris Li – Bank of America

Okay. I’m trying to understand a bit better. You know, you’ve really just assumed, you know, that there is no more big job reforms [ph] and assuming the [indiscernible] environment doesn’t kind of deteriorate from here. Would it be fair to assume you could expect higher growth, profit growth as you start to cycle through some of these headwinds?

Brad Lukow

Yeah. I’m not going to add anymore comment to the margin. Obviously, as we set out in our notes, that the company is, you know, has experienced significant drug reform and over the past year, we saw the council of the federation of other provinces and implement, reduce reimbursement which we have not yet laughed until the middle of this coming year. So clearly, much more of a hit in the ‘13 periods that will end sort of middle of 2014.

Chris Li – Bank of America

Okay. Thank you.

Brad Lukow

You’re welcome.

Operator

Thank you. We have a follow up question from Keith Howlett with Desjardins Securities. Please go ahead.

Keith Howlett – Desjardins Securities

Yes, I’m just wondering across the landscape. Are you seeing independents closed or [indiscernible]. Are you seeing brave independents opening in any scale.

Domenic Pilla

I would say, net, we’re seeing a slight decline in total. However, what we are seeing and continue to see is significant activity of independents selling to other independents. So they’re still as active as we’ve seen in the last two years including the fourth quarter of this year.

So several transactions independent to independent. Of course we are, you know, very selective and very patient and, you know, work on those stores that we think makes sense for our network. And as you saw, we closed on some in the fourth quarter.

But the activity level remains very high. But the numbers, total net numbers are just slightly in the cling [ph].

Keith Howlett – Desjardins Securities

Is the expected or the I guess the buyer – the seller always has an expectation, but our actual prices of transactions, about the same or declining or –

Domenic Pilla

There hasn’t – no that any material change in the past year.

Keith Howlett – Desjardins Securities

Okay. Thanks very much.

Domenic Pilla

You’re welcome.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Caplice.

John Caplice

Okay. Thanks, operator. And as there are no more questions, this concludes our call for today. So thanks again for joining us everyone.

Operator

Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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