Victhom

The Right Price for Rite Aid

Jean Coutu expects U.S. to boost fortunes

Results plummet 88 per cent, but Quebec-based chain is confident that election focus will put more money into health care
BERTRAND MAROTTE

January 11, 2008

MONTREAL -- Jean Coutu Group (PJC) Inc. is counting on a renewed commitment to health care spending in the U.S. to help boost the fortunes of troubled drugstore giant Rite Aid Corp., which now carries Coutu's hopes for expansion south of the border.

Coutu, which has a 32-per-cent stake in Rite Aid, is confident the third-largest pharmacy chain in the U.S. will get through the current economic slowdown, successfully integrate its new stores and reap benefits from an expected revamping of the U.S. health system, said president and chief executive officer François Jean Coutu.

No matter who wins the U.S. presidential election in November, new money will be invested in health care to extend coverage to a larger part of the population that doesn't have any, Mr. Coutu said in an interview. That, in turn, will help drive sales growth at the pharmacy counter, he added.

He made the comments after Longueuil, Que.-based Coutu revealed that second-quarter profit fell 88 per cent on a big hit from its share of losses at Rite Aid.


Mr. Coutu also said he has full confidence in the ability of Mary Sammons, Rite Aid's chairman, president and chief executive officer, to turn around the chain and successfully integrate the Brooks and Eckerd drugstores it acquired from Coutu last June.

"We've offered feedback and advice from the beginning on the integration. These are not easy times, but we have to be patient," he said.

Coutu has four of 14 seats on the Rite Aid board after closing a $3.9-billion (U.S.) deal last June to sell its U.S. pharmacies to Rite Aid. The transaction included $2.36-billion in cash and 250 million Rite Aid shares, or about 32 per cent of the outstanding stock.

Investors have been growing skittish over Coutu's heavy exposure to Rite Aid, whose stock value has been slashed almost in half over a host of factors, including a weaker-than-expected 2008 outlook and a significant third-quarter loss.

Coutu's second-quarter results - $9.5-million (Canadian), compared with a profit of $79.3-million in the same period last year - include an after-tax loss of $26.1-million or 10 cents a share on its Rite Aid holding.

On a conference call yesterday, Andre Belzile, Coutu senior vice-president for finance and corporate affairs, said there appears to be a market overreaction to what should be a normal period of adjustment as Rite Aid works to integrate the Brooks and Eckerd stores.

"It's really early to make any conclusions on the outcome of the situation."

Both he and Mr. Coutu said the integration is going smoothly.

"I realize Rite Aid is going through an integration process - the economy is not extremely strong south of the border - but this is a long-term investment," Mr. Coutu said on the call.

"Our shareholders should look at it the same way."