Coutu’s successes written in black and white, not grey
His drugstores’ healthy balance sheet gives CEO François Coutu cause to look so youthful — and resistant to big acquisitions, Nick VanPraet writes.
François Coutu is talking about his grey hair. Or more accurately, his lack of it.
A photographer is taking his picture at Jean Coutu Group Inc. headquarters in Longueuil, Que., on a hot summer day and the drugstore executive jokes he has a few more silver strands in his blackish mop than the last time his portrait was snapped.
If that’s true, it’s not noticeable. Unlike his father Jean Coutu, the 87-year-old Quebec retail icon who controls the company with supervoting shares, the 59-year-old CEO son shows no sign of the follicle aging that befalls most men. And while both his older brothers went grey long ago, he hasn’t.
“I don’t know where I got this from,” he says. “But it’s so funny because a lot of people are saying I’m dyeing my hair.”
There certainly hasn’t been much grey-inducing stress for Coutu of late, at least in his mind.
Business is hyper-competitive but good. Revenue held steady at about $2.7 billion again last year, even with the deflationary impact of more generic drugs, while earnings per share on the main business rose 12 per cent. Pro Doc, the company’s generic-drug manufacturer, now accounts for about 25 per cent of EBITDA and rising.
The stock is up 21 per cent since January, outpacing the S&P/TSX Composite’s 12-per-cent gain over the same time.
Most importantly, Coutu says he’s still not feeling any of the strain to do a big merger or acquisition even as the rest of the industry morphs in front of his eyes. The company will continue to grow by buying one drugstore at a time, he says. A big transaction is possible but doesn’t appear imminent.
When Loblaw Cos. announced a year ago it was taking over Shoppers Drug Mart Corp. for $12.4 billion in cash and stock, observers said the move would put a squeeze on rivals to strike their own deals or fade against the power of a fortified competitor. Jean Coutu shares gained on speculation it was next, perhaps in a marriage with grocer Metro Inc.
“It’s like managers in the stands,” Coutu says of the theorizing that took place. “For us, it doesn’t change anything. You know, we have our plan. We’re well-capitalized. We don’t feel the pressure of joining a group for synergies or anything. With the volume that we have, we benefit from the best price (from suppliers). And I think we have a momentum which still needs to (play out).”
Metro has come to a similar conclusion, saying it’s doing fine on its own. The grocer notes it sat out the last major round of industry consolidation in 1998. That year, Loblaw bought Provigo and Sobeys took over Oshawa Food Group.
The changes taking place now are no less transformational. In addition to the Loblaw- Shoppers merger, Sobeys has bought Safeway’s Canadian business, while Wal-Mart and Target are locked in an aggressive battle for Canadian customers that has produced some of the most attractive checkout prices in years.
Coutu, meanwhile, has retreated to its Quebec base after a largely abortive push into the United States that saw it sell its Brooks and Eckerd pharmacies for a stake in Rite Aid. It finally sold the last of its Rite Aid shares last year. Coutu doesn’t rule out a return to the U.S. market one day, but says it won’t be anytime soon, denouncing the nearly unilateral power that insurance companies and prescription benefit-management firms currently have over drug dispensing.
Besides, he says, there are opportunities for growth closer to home.
With an enviable reputation — Jean Coutu regularly features in lists of most-trusted Canadian brands — and a new $190-million headquarters and distribution centre in the works, the company has now set its sights on expanding significantly into small-town Quebec by acquiring independent pharmacies, as well as opening more stores in French-speaking areas of New Brunswick and Ontario.
“There’s going to be a lot of future in this,” Coutu says, adding that rivals have proven there is good business to be had in smaller centres.
The company just opened a store in Saint- Gabriel-de-Brandon, Que., well off the beaten path in the Lanaudière region northeast of Montreal.
The new distribution centre will help drive growth in smaller communities because goods will be shipped by unit if necessary instead of the current case-only system, Coutu says. That in turn, will help smaller stores better manage inventory.
In fiscal 2014, Jean Coutu opened six net stores, not including relocations. It currently has about 413 outlets in the chain. Coutu wants to get to 500 stores within five to 10 years, both by buying independents and building new stores. All the shops are franchised.
That’s not an ambitious target by any means. But the CEO says it’s realistic given that, unlike some other drugstore chains, Coutu invests in the real estate on which its stores sit.
The company employs one person full-time whose job is to criss-cross Quebec, building relationships with independent pharmacists in order to convert some to the Jean Coutu banner.
“Even in smaller communities, we want to be at the corner of Main and Main,” Coutu says. “That’s where you build your business in the long term. And if it takes time, we’re patient.”
A big takeover would speed things up. With no debt and assuming it doesn’t overpay, the company has the firepower to buy a decentsized chain without straining its leverage.
But management does not give the impression that anything is looming.
“We’ll look at any opportunity that arises,” Coutu says. “We won’t do it at any price though because we don’t need to.”
Answering speculation that the company could be interested in bil-
You know, we have our plan. We’re wellcapitalized. We don’t feel the pressure of joining a group for synergies. … And I think we have a momentum which still needs to (play out).
lionaire Daryl Katz’s Mississauga, Ont.-based drugstore chain Rexall, Coutu said conditions are “not ripe enough” for talks on a deal.
“There used to be some pretty good prices paid for a pharmacy in Ontario because it was quite lucrative,” he said. “Now ... the profitability has come down quite a bit. But they still want to have the prices that were paid a few years back. So you know, everybody is for sale. But at what price? It’s got to make sense for the buyer. It’s got to make sense for the seller.”
Katz “probably thinks that he could get what Shoppers got with Loblaws,” Coutu said. “But it’s not the same organization, let’s face it.”
Even buying Quebec’s other big players is problematic. Famili– prix, which has about 300 of the province’s 1,800 drugstores, is a co-operative. Most of its members would not agree to joining Coutu, the CEO says. Even if they did, competition regulators wouldn’t look too kindly at the fact the two companies are often the only game in town.
Uniprix is also a co-op. Brunet, which has about 150 locations, and Clini-Plus, which has 30, are owned by Metro.
“It sort of seems like they’re preparing for something significant,” given the company’s new distribution centre is capable of serving a much larger network, said Desjardins Securities analyst Keith Howlett. “But we don’t know what.”
It’s not clear if Coutu knows exactly what himself.
In the meantime, the company will continue trying to crank out earnings growth while returning money to shareholders. Like Metro, Coutu is buying back its stock and paying out more dividends. Repurchase programs from fiscal 2008 to 2014 have yielded $607 million to investors on 52.7 million shares with another 8.2 million approved for buyback in fiscal 2015.
Succession has been planned, too. François Coutu will continue running the company, and one day his nephew, Jean-Michel Coutu, currently vice-president of retail operations, will take over.
The family will retain its ownership of the chain, Coutu says. It’s not for sale.
“These are the good years for Jean Coutu,” the CEO says. “And we want to work hard at it to make sure it stays that way.”
And when he gets that first clump of grey hair? He laughs. “That means it’s time to go.”