ANNUAL REPORT PROJECT SHOPPERS DRUG MART CORPORATION
Presented to Mrs. Wendy Roscoe Professor in Financial Accounting ACCO-310/2-B Concordia University John Molson School of Business
Prepared by Azzea Huynh 9375910, Solen Heng 9357920, Yang Karen Chen 4693558, Hai Han Xing 9098143, Hang Li 5555930 John Molson School of Business Concordia University
December 3rd, 2009
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TABLE OF CONTENTS
Page INTRODUCTION.............................................................................................................1 Company Description .......................................................................................................2 Stock Market Analysis.......................................................................................................5 Ratio Analysis....................................................................................................................8 Common size analysis and trend analysis..........................................................................19 Analysis of particular Assets accounts..............................................................................22 CONCLUSION AND RECOMMENDATION................................................................28 APPENDIX A – Shoppers Drug Mart flow chart.............................................................31 APPENDIX B – Distribution of selected merchandise group sales..................................32 APPENDIX C – Comparative table of SDM’s competitors..............................................33 APPENDIX D – Ratio Analysis........................................................................................34 APPENDIX E – Comparison of Assets.............................................................................37 APPENDIX F – Further disclosures..................................................................................39 APPENDIX G – Horizontal and Vertical analysis............................................................40 BIBLIOGRAPH BIBLIOGRAPHY Y ............. .................... ............. ............. .............. ............. ............. .............. .............. ............. ............. .................................4 ..........................44 4
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INTRODUCTION
These past two years have been difficult for the World Economy. With the recession having its toll on many companies and investors, but mainly households, it is difficult to manage ones fund in order to have a positive return, or simply to break-even. Even though the recession has not left the Canadian economy devastated, it has shaken investor’s confidence in investing in any firm. However, according to Statistics Canada, Canada is slowly getting out of the recession: “Following three quarters of substantial declines, overall corporate profits and fixed capital investment of non-financial corporations increased in the third quarter.1” Inheritin Inheriting g a large sum of money in these uncertain times makes one debate what to do with it. Despite the negative outcome of the economy, investing in a firm is still a good option, as it is indicated previously. One of the possible good companies co mpanies to invest in is Shoppers Drug Mart. This is in fact the case of a friend that has just inherited a large sum of money. Due to the limited knowledge in accounting, our friend is seeking advice with respect to whether the company is a worthwhile investment. The following report will take into consideration all the information needed in order to understand this company. It includes a description of the company’s primary business activities, a historical summary and details concerning competitors; a summary about its stock market activity and a ratio analysis and comparison to industry averages for the assets. In addition, a common size analysis and trend analysis for both the Income Statement and Balance Sheet; an analysis of the presentation of particular asset accounts and a discussion about the accounting policy choices made along with an assessment of why certain policies were chosen and the impact on the Financial Statements will also be helpful in making the final decision. After reading this report, the potential investor should have a solid idea of the risks and returns associated with an investment in Sh oppers Drug Mart.
1
Statistics Canada – The Daily – Tuesday December 1, 2009 Financial flow accounts. http://www.statcan.gc.ca/daily-quotidien/091201/dq091201a-eng.htm
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Company Description
Shoppers Drug Mart Corporation (SDM) is a licensor of full-service retail drug stores in Canada (in Quebec, it is licensed under the name of Pharmaprix). The company offers front store merchandise categories like over-the-counter drugs (OTC), health and beauty aids, cosmetics and fragrances, everyday household needs and seasonal products, as well as prescription medication2. The company was founded by Murray Koffler, a Toronto pharmacist in 1962. Murray Koffler believed it was possible to build a national organization of drugstores without sacrificing the personalized service of the local community health professional. The company was purchased by a management group led by Kohlberg Kravis Roberts & Company. SDM launched its initial public offering in 2001. With the belief to provide a strong sense of pride, accountable and community spirit service, Murray Koffler’s vision continues to bear fruit in numerous ways. The company has now over 1,119 stores across Canada, Canada, 30 medica medicall clinic clinic pharmac pharmacies ies operati operating ng und under er the name name Shopper Shopperss Simply Simply Pharm Pharmac acy y ™ (Pha (Pharm rmap apri rix x Simp Simple leme ment nt Sant Santee in Queb Quebec ec)) and and two two luxu luxury ry beaut beauty y destinations operating as Murale™3. SDM is well-known for its high-quality private label products such as LifeBrand®, Quo®, Everyday Market®, Bio-Life®, Nativa®, Get™ and Easypix®. It is also known for its value-added services like the Healthwatch® progr program am whic which h allo allows ws pati patien ents ts to have have couns counsel elin ing g on medi medica cati tions ons and and dise diseas asee managem management. ent. It also also owns owns 66 Shoppe Shoppers rs Home Home Health Health Care® stores stores which which provid providee assist assisteded-liv living ing device devices, s, medica medicall equipm equipment ent and home-c home-care are product productss for patien patients. ts. Furthermore, the company has a great loyalty card program, viewed as being one of the largest programs in Canada: Shoppers Optimum® program4. (Please refer to Appendix A). The core value of the company is to fulfill the health and wellness needs of Canadians. It has done so for the past 47 years. “The success of [the] business is built upon the leadership of [their] people, the quality of [their] stores, the breadth of [their] products and the service excellence of [their] pharmacies.5” The company has always put 2
Dow Jones Company Report – Shoppers Drug Mart Inc 2009 F activa Inc. p. 2 Shoppers Drug Mart – 2008 Annual Report p.13 and Dow Jones Company Report – Shoppers Drug Mart Inc 2009 Factiva Inc. p. 3 4 Idem 3 5 Ibid 3 p.1 3
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the customer first and tries to accommodate them in any possible way. For example, over 400 stores open to midnight or 24 hours a day to respond to its customer’s busy lives. This commitment to customer’s complete satisfaction is demonstrated through SDM’s record sales of “$9.4 billion during the financial year ended December 2008, an increase increase of 11.1% over 2007. The operating operating profit of the company company was $822 million, million, an increase of 12.2%. As for Net profit, p rofit, it has increase 15.2% ($565 million)”6. Over Over the the past past few few year years, s, sale saless of pres prescr crip ipti tion on and and OTC OTC medi medica cati tion onss have have exploded in Canada. In 2005, the retail sales of drugs (including vitamins and health supplements) surpassed the $20 billion mark. (Refer to Appendix B). This has led to an emergi emerging ng phenom phenomenon enon in the retail retail market market with with the appearanc appearancee of more more and more p pha harm rmac acy/ y/dr drug ug stor stores es sell sellin ing g not not only only medi medica cati tion on but but also also food food and and gene genera rall merchandise7. SDM’s competitors competitors are not only Canadian Canadian based, but international international as well. Katz group Canada, a holding company of drugstore chains in Canada with over 1,800 stores across Canada, is one of them. However, this company is private and does not trade on the Toronto Exchange. Jean Coutu Group Inc, with 353 stores across Quebec, Ontario and New Brunswick is another competitor. In 2007, the company has purchased ProDoc, a company specializing in manufacturing generic drugs. Also its penetration rate for 2009 is 10.4% for its front-end retail stores8. Rite Aid, an American company, is also viewed as a competitor. In fact, it has bought Jean Coutu USA in 2007 for $2.31 billion USD in cash and 250 million issued shares of Rite Aid common stock 9. Other competitors include Walgreen Company and CVS Caremark Corporation all US based. By looking at the table table in Appendi Appendix x C, when when compar comparing ing the Canadian Canadian based based compan companies ies,, SDM is the leading drug store company.
As for the future, “SDM’s goal is to continue to invest in the business, while maximizing productivity and drive additional efficiencies while controlling cost. They 6
Dow Jones Company Report – Shoppers Drug Mart Inc 2009 F activa Inc. p. 4 Dube, Guillaume. Statistics Canada Canada – Competing for the Retail Drug Market Market http://www.statcan.gc.ca/pub/11-621-m/11-621-m2006048-eng.htm 8 Jean Coutu Group – 2009 Annual Report, p3. 9 Rite Aid Corporation – United States Securities and Exchange Commission report, p.28 http://www.sec.gov/Archives/edgar/data/84129/0001 http://www.sec.gov/Archives /edgar/data/84129/000104746909004278/a2192156z1004746909004278/a2192156z10k.htm#dc70801_item_1._business 7
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expect to increase their penetration rate of front store sales from 17% to 19% in the coming year 10.” They want to add new stores and capitalize on the opportunity to relocate and or expand current stores in order to accommodate all the products and services the company offers.
10
Shoppers Drug Mart – 2008 Annual Report p. 9
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Stock Market Analysis
Graph I – Shoppers Drug Mart (SC)11
As we see from the stock price chart, over the last 5 years, the price has a strong upward trend from 2005 to the third quarter of 2008, with the average annual return of 16.3%. The stock price went up from $37 in January, 2005 to a new high of over $55 at the end of June 2008. On June 18th 2008, Shoppers Drug Mart had the highest stock price trading at $58.23 CAD. Due to the fact that the price does no oscillate too much and there is no big volatility on the stock volume, Shoppers Drug Mart Corporation is less active than other big capital public companies that have similar features (big sales volume and high price volatility). However, the situation changed after the third quarter of 2008 where the stock price plunged from $55 to $42 within only a few days, and thereafter moved into a sideways
11
Globe Investor – Shoppers Drug Mart Corporation Website last accessed November 23 rd 09. http://www.globeinvestor.com/servlet/Page/ http://www.globeinvestor .com/servlet/Page/document/v5/data/sto document/v5/data/stock?id=SC-T ck?id=SC-T
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range. Since there is no specific news released about the decline, it is more likely caused by the global economic recession.
Sh oppers Drug Mart12 Graph II – Stock Price chart for Shoppers For this year, a significant observation is that the stock price has fluctuated substantially during the month of July. This is due to a warning by the province of Ontario concerning a drug reform that was issued on July 10. This drug reform consists of a major review of reimbursement plan for prescriptions, which potentially could put pressure on margins of pharmaceutical sales. Also, this has put pressure on the stock market of drug store companies.
12
Yahoo Canada Finance – Shoppers Drug Mart Corporation Website last accessed on November 23 2009. http://ca.finance.yahoo.com/q/bc?s=SC.TO
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The nature of the risk of Shoppers Drug Mart is considered to be low even if it is in the pharmaceutical area. Any lawsuits related to the malfunction of a prescription drug are directly targeted to the pharmaceutical company making the medication and not SDM. Of course, since it does manufacture manufacture its own brand and products, products, it is liable liable to its consumer’s well-being. Overall, the pharmaceutical industry is very profitable. Shopper Drug Mart was a growth stock and is now becoming more of a value stock. It has an increasing profit and EPS. However, the possible mandate to cut generic drug prices by the Ontario Ministry of Health may put pressure on SDM’s pharmacy profits 13. This is also making investors nervous. nervous. According According to Mr. Yarbrough, an analyst analyst with Edward Jones in St. Louis, Mo, the reform can lead “from zero impact to as much as $0.30 off the EPS14’. In addition, the adverse changes to the economic and financial conditions in Canada and globally and the continued financial market volatility and general uncertainty on the timing of a recovery will create a challenging operating environment, thus limiting sales growth and the Company’s ability to maximize gross margin dollars, operating cash flow and profits. Despite all of this, as mentioned before, Statistics Canada has compiled its data and it seems that Canada is slowly getting out of the recession.
Graph III – 3 year results of SDM 15
13
Lam, Eric. Drug sales shot in arm for Shoppers. Financial Post, November 11 2009. http://www.windsorstar.com/business/Shoppers+ http://www.windsorstar.c om/business/Shoppers+Drug+profit+rises/ Drug+profit+rises/2210536/story.html 2210536/story.html 14 Idem 15 Idem
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Ratio Analysis
In order to better understand the company in which one would like to invest in, in this case, Shoppers Drugs Mart, it is important to understand “the business, business risks, and industry16”. Analyzing the Financial Statements can be very complicated and time consuming. However, this process is critical. Ratio Analysis is a helpful tool since it allows one to “assess operating and financial risks by expressing the relationship between selected financial statement data17”. The ratios are used to identify trends over time for a compan company y and and to comp compar aree two two or more more comp compan anie iess at one one poin pointt in time time.. Fina Financi ncial al Statement ratio analysis focuses on four key aspects of a business: profitability, liquidity, solvency and market test. Financial ratios are a very good way to analyze this company’s finan financi cial al posi positi tion. on. Howev However er,, they they are are usel useles esss if not not comp compar ared ed to previ previous ous year years. s. Therefore, for some ratios, trend analysis will be done for SDM for the years 2005-2008. Industry analysis is as important as trend analysis. It allows one to compare SDM to another similar company. Because of the diversity of SDM, it is difficult to compare it to a speci specifi ficc indu indust stry ry.. Th Ther eref efor ore, e, the the comp compan any y Jean Jean Cout Coutu u will will serv servee as a basi basiss of comparison. All the calculations of the ratios can be found in Appendix D.
Profitability tests
As we all know, every company is concerned with its profitability. Profitability ratios are often used to determine the company’s bottom line. These ratios are important inte intern rnal ally ly (man (manag ager ers, s, empl employ oyee ees) s) and and exte extern rnal ally ly (cur (curre rent nt and and futu future re inve invest stor ors) s).. Profitability ratios show a company’s overall efficiency and performance, the higher the ratio, the better. Ratios that show margins represent the firm’s ability to translate sales dollars into profits at various stages of measurement. Gross Profit Margin This ratio looks at Cost of Goods Sold as a percentage of sales. It looks at how well a company controls the cost of its inventory and the manufacturing of its products. The larger the ratio, the better b etter it is. Gross Profit Margin =Gross Profit / Net Sales 16
Kieso, Weygandt et al. Intermediate Accounting Volume 1, 8 th Canadian version, John Wiley & Sons, 2007, p. 234. 17 Ibid p.235.
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SDM shows an increase in Gross Profit Margin from 9.27% to 9.37% in 2008, which is a good sign. As for Jean Coutu, it is 10.28%. The fact that Jean Coutu has a slightly higher percentage doesn’t mean that one should not invest in SDM. Net Profit Margin The net profit margin measures “how effective is management in generating profit on every dollar of sales during the period18”. When net profit margin is rising, this means more efficient management of sales and expenses. On a Shareholder point of view, it would be good to compare this ratio with other companies in the same industry to see how the company responds to changes in demand for the product and service. Net Profit Margin= Net Income / Net Sales
Net Sales= Sales revenue – any returns from customers and other reductions. For companies in the service industry, net sales = total operating revenues. For Shoppers Drug Mart, Operating revenues= Operating Income. The Net Profit Margin for SDM has been increasing for the past 3 years (61.81% in 2006, 62.08% in 2007 and 64% in 2008). This means that 64 cents of every dollar is profit. This increase shows efficient management of sales and expenses. As for Jean Coutu, in 2008, it was (16.68%). In this case, the ratio is negative because Jean Coutu demonstrated a net loss of 251.4 million dollars. Cash Flow Margin This ratio expresses the relationship between cash generated from operations and sales. It measures the ability of the firm to translate sales into cash. Cash Flow Margin =Cash from Operating Activities / Net Sales
For SDM, the ratio has decreased to 54.28% for 2008, while Jean Coutu has a ratio of 9.71%. In this case, the ratio favors SDM over Jean Coutu. Quality Quality of Income Income – Libera Liberall or Conser Conservat vative ive policy policy regard regarding ing revenu revenuee and expense expense recognition %= Cash from operating activities activities / Net Income measures how liberal or conservative
the company is in choosing various revenues and expense recognition policies. When the ratio is above 1.0, this means the company has more conservative policies and when it is below, it has more liberal policies. 18
Libby et al., Financial Accounting 3rd Canadian edition. P. 182
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A conservative policy implies the company does not record revenue too early or expenses too late, while a liberal policy implies speeding up revenue recognition or delaying expense recognition. For SDM, from 2005 until 2007 it has used a conservative policy (the ratios were all above 1.0). In 2008, it switched to a liberal policy (the ratio was 0.85). As for Jean Coutu, the ratio is (0.58), a liberal policy. Thee majo Th majorr caus causee of diff differ erenc ences es betw betwee een n net net inco income me and and cash cash flow flow from from operations is due primarily to sales that have not been collected and payment to suppliers of goods and services, which were larger amount than the amount of expenses recognized during the year. When looking at Jean Coutu, the company incurred a loss (in Income). In this case, it seems better to invest in SDM.
Ratios Ratios that that show show return returnss repres represent ent the firm’s firm’s ability ability to measur measuree the overall overall efficiency of the firm in generating returns for its shareholders. Return on Assets and Total Asset Turnover ratio The first one measures the efficiency with which the company is managing its investments in assets and using them to generate profit. “The return on assets ratio measures how much the company earned for each dollar of investment during the period. A high ratio suggests that the company is doing a good job selecting new investments, all other things being equal19”. Return on Assets = Net Income / Average Total Assets
Total Asset Turnover ratio measures “the sales generated per dollar of assets. A high ratio suggests that the company is managing its assets (resources used to generate revenues) efficiently20”. Total Asset Turnover ratio = Sales or Operating Revenues / Average Total A
The assets of all four years have grown over time. Shopper Drug Mart’s growth has been steady throughout the four-year time period. The ROA indicates how much the company earned in net income per $1 of assets. Based on this measure, Shoppers Drug Mart has shown a steady growth in its efficient utilization of resources over time from 0.086 to 0.09. It shows that the company has well19 20
Ibid p.124 Ibid p.123
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managed its assets over time because of the steady increase. As for Jean Coutu, the ratio is (0.1173) because it had a net loss. In this case, SDM’s results are more encou raging. The asset turnover ratio reflects how much revenue was produced per $1 of assets. Based on this measurement of efficiency, in 2008, the company produced $1.57 in revenue per $1 of assets, slightly less than last year (1.60$). As for Jean Coutu, the ratio is 0.70 which is over two times lower compared to SDM. Return on Equity This This measur measures es “how “how well well managem management ent used used the invest investmen mentt by shareh sharehold olders ers during the period21”. It shows how much the firm earned for each dollar of shareholder’s investment. Firms with higher ROE are expected to have higher share prices than firms with a lower ratio holding all other things equal. ROE= Net Income / Average Shareholders’ Equity
The ROE for SDM has decreased for the past 3 years from from 38.99% to 32.35%. This can be explained by the recent downfall in the economy which may lead to a lower ratio. As for Jean Coutu, since it had a net loss in 2008, the ratio is negative (14.36%). Earnings per share This ratio represents the portion of the profit allocated to each outstanding share of common stock. EPS= (Net Income available to common shareholders)/ WA of # of common shares and outstanding shares) Table I – Earnings per Share of SDM ($00 ($000s 0s,, exce except pt per per 2008 22 share data) 53 weeks Sales 9,422,911 Net earnings 565,212 Per common share: -Basic net earnings $2,60 -Diluted net $2,60 earnings
21 22
2007 52 weeks 8,487,382 493,628 $2,28 $2,27
2006 52 weeks 7,786,436 422,491 $1,97 $1,95
2005 52 weeks 7,151,115 364,494 $1,72 $1,69
Ibid p. 183 Ibid p.51
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Table II – Earnings per Share of Jean Coutu 23
Basic and diluted earnings: ($0.98) The Earnings per share of SDM are higher compared to the Jean Coutu: $2.60 vs (0.98). Fixed Asset turnover ratio ‘‘Fi ‘‘Fixed xed asse assett turn turnove overr rati ratio o meas measur ures es how how effi effici cient ently ly a comp compan any y uses uses its its investment in property, plant, and equipment over time24.” ‘‘It measures the sales dollars generated by each dollar of fixed assets used. A high rate normally suggests effective management. An increasing rate over ov er time signals more efficient fixed asset use.25’’ Fixed Asset turnover = Net sales (operating revenue) / Avr Net Fixed Asset
SDM’s fixed assets turnover ratio has decreased over the last three years, this is due to the fact that the company has recently gone through a massive expansion phase where it opened many new stores. This is why the ratio has been declining lately. As for Jean Coutu, the ratio is 1.10.
Liquidity Tests
Liquidity is the ability of the firm to convert assets into cash. The liquidity ratios are of particular interest to short-term creditors because the liquidity of the firm measures its ability to pay them. In this case, the higher the ratio, the better it is. Current Ratio This “measures the ability of a company to pay its current obligations.26’’ Current Ratio= Current Assets / current liabilities
“A high ratio normally suggests good liquidity, but a too high ratio suggests inefficient use of resources. An old guideline was that companies should have a current ratio between 1 and 2. Today, many strong companies use sophisticated management techniques to minimize funds invested in current assets, and, as a result, have current ratios below 1.27”
23
Jean Coutu Group – 2008 Annual Report p. 38 Libby et al., Financial Accounting 3rd Canadian edition p.464 25 Idem 26 Ibid p.529 27 Idem
24
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SDM’s current ratio for 2008 indicates that the company has $1.29 to pay each $1.00 in current liabilities. This shows the company’s liquidity position is getting better. As for Jean Coutu, it is $1.23. Accounts receivable turnover ratio This ratio “shows how many times average trade receivables were recorded and collected during the period. It is beneficial to the company to have a higher ratio because it can invest the cash collected to earning interest income or diminish borrowings to reduce interest expense.28” Receivable Turnover = Sales / Average Net Trade Account Receivables
Average Net Trade Account Receivables= (Beginning Net Trade Receivable + Ending Net Trade Accounts Receivable)/2 The average collection period measures in general, how much time it takes to collect the amount. Average Collection Period 29 = Average Trade A/R / [Credit Sales/ 365]
Credit Sales30 = Net Sales – Cash flows from operating activities SDM’s receivables turnover decreased from 2.32 to 2.15 in 2007 and 2008. Shoppers Drug Mart Corporation’s sales increased form $8,478,382,000 in 2007 to $9,442,911,000 in 2008. It appears that this company loosened its credit policy as it achieved this sizeable increase in sales. Selling products at the retail level in 2006 may have contributed to the decrease in receivables turnover. The receivables turnover ratio reflects how many times trade receivables receivables were recorded recorded and collected collected during during the period average. The higher the ratio, the faster the collection of receivables is. A higher ratio benefits the company because it can invest the cash collected to earning interest income or reduce borrowings to reduce interest expense31. As for Jean Coutu, the ratio is 9.13, which is significantly higher.
28
Libby et al., Financial Accounting 3rd Canadian edition. P. 359 Idem 30 Shoppers Drug Mart – 2008 Annual Report p.38,41 31 Ibid p40 29
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Inventory Turnover “This measures how many times the average inventory was produced and sold during the period. A higher ratio indicates that inventory moves more quickly through the production process to the ultimate customer, reducing storage and obsolescence cost. Because less money is tied up in inventory, the excess can be invested to earn interest income or to reduce borrowings, which reduces interest expense32.” Inventory Turnover = Cost of Good Sold / Average Inventory
Average Inventory= (Beginning Inventory + Ending Inventory)/2 The company has diminished its inventory turnover from 5.47 in 2005 to 5.07 in 2008. The rate is overall constant, there were not big fluctuations. However, what could explain a lower ratio in 2008 is probably the fact that the company has more and more lifestyle/every day use products such as soap, paper towel etc which can stay in inventory longer than drugs which has an expiration date. As for Jean Coutu, the ratio is 9.36. Accounts Payable turnover ratio This measure shows investors how many times per period the company pays its average payable amount. Accounts Payable Turnover= Cost of goods sold / Average Accounts Payable
Total supplier purchases/ average accounts payable The number has slightly went up, however it still is considerably in the same range (+8.30), meaning that the company is paying off its supplier in a timely manner. As for Jean Coutu, the ratio is 5.95. Solvency Tests
Solvency is the ability of the company to have enough assets to cover its liability. The lower the ratio, the better it is (except for the ability of the company to meet its long term obligations). Times in interest earned ‘‘The ratio measures the company’s ability to generate resources from current operations to meet its interest obligations. obligations.33”
32 33
Libby et al., Financial Accounting 3rd Canadian edition. p. 425 Ibid p.586
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Times in interest earned = (Net income + interest Expense + income tax expenses)/ Interest Expenses
“A high ratio is viewed more favorably than a low ratio. Basically, the ratio shows the amount of income before interest and income tax that is generated for each dollar of interest expense. A high ratio shows an extra margin of protection in case profitability deteri deteriora orates tes.. Analyst Analystss are partic particula ularly rly intere intereste sted d in a compan company’s y’s abilit ability y to meet meet its required interest payments because failure to do so could result in bankruptcy.34” SDM’s profit-making activities generated $ 13.81 for each dollar of interest in 2008. This company’s income could fall substantially before the company would appear to have troubl troublee meeti meeting ng its its intere interest st obliga obligatio tions ns with with resour resources ces genera generated ted by normal normal operations. As for Jean Coutu, the ratio was negative because of the large loss it incurred this year. Debt to Equity Debt to equity ratio generally measures how much debt the company uses to finan finance ce its its grow growth th and/ and/or or oper operat atio ions ns rela relati tive ve to equit equity y fina financ ncin ing g suppl supplie ied d by its its shareholders35. Debt to Equity= Total Liability / Total Shareholder’s Equity
By look lookin ing g at the the Fina Financ ncia iall high highli ligh ghts ts sect sectio ion n befo before re the the Mes Message sage to Shareholders: 2 008
0.40;
2 0 07
0.34;
2 00 6
0.32;
2 005
0.39;
20 04
0 .5 1
The Company’s debt-to-equity ratio has dropped drastically since 2004. This means that the company is using less and less debt to finance its operations. A lower debt-to-equity ratio suggests that the company is not a risky investment. However, for the past 2 years (2007 and 2008) the ratio is rising which means they could be expanding their operations. As a matter of fact, it is the case.
34 35
Ibid p.587 Libby et al., Financial Accounting 3rd Canadian edition. p. 70
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Market Tests
These tests consider the future earnings of the company. A higher ratio is what investors are looking for. These ratios relate the current market price of a stock to the return that might accrue to the investor. Price Earnings ratio This ratio shows the relation relation between current market price of stock and earnings per share. In this case, the price of the share is considered to be the one given by SDM on p3 of their report. P/E ratio= Current mk P per share / Earnings per share
The ratio has diminished for SDM from 23.46 to 18.48. This is in fact due to the harsh economic times. The ratio for Jean Coutu is negative; once again it is due to its net loss in 2008.
A further analysis of the company’s assets and comparing it to Jean Coutu can help decide if SDM is a good investment. When looking at the Balance Sheet of SDM Corpor Corporati ation on and the ratios ratios calcul calculate ated d in Appendi Appendix x E, it is possible to see that the compan company’ y’ss “Tot “Total al Asse Assets ts were were $6,41 $6,419, 9,306 306,0 ,000 00 at the the end of 2008 2008 comp compar ared ed to $5,621,977,000 at the end of 2007 an increase of $797 million or 14.2%36”. In fact $234, $23 4,000 000,0 ,000 00 of this this boos boostt is becau because se of an incr increas easee in Accou Account ntss Rece Receiv ivabl ablee and and Inventory with an offset by a reduction in prepaid p repaid expenses and deposits account37. Thee incr Th increa ease se in Acco Account untss Rece Receiv ivabl ablee and and Inven Invento tory ry is due to the the ong ongoi oing ng expansion of the store network and increased sales activity. As a matter of fact, during the the 2008 2008 fisc fiscal al year year,, the the comp compan any y has has opene opened d 142 142 drug drug stor stores es of whic which h 37 were were relocations and has closed 13 smaller stores38. Furthermore, throughout the year, the company has completed 14 major drug store expansions, has added 2 home health care stores and has launched Murale™ a retailer of prestige cosmetic products39. As for the decline in Prepaid Expenses and Deposits, it is because the funds deposited and held in escrow corresponding to the purchase of drug stores and land diminished because of successful transactions. 36
Shoppers Drug Mart Corporation Corporation – 2008 Annual Annual Report p.28, 53 Idem 38 Ibid p.15 39 Idem 37
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When When analyz analyzing ing Net Proper Property ty and Equipme Equipment nt40, ther theree was was an incr increa ease se of $316,000,000 (28%) over the past year. This is explained by the capital investment and store “revitalization program41”. The increase of $222,000,000 in Total Assets due to acquisition of drugs stores, prescription files, assets of the HealthAccess division of Calea Ltd. and 100% of its shares in Information Healthcare Marketing Corp; which increased the net balances of Goodwill and Other Intangible Assets42. Accounts Receivable The accounts receivable balance increased during 2008 to $448,476,000, so the compan company y reco record rded ed more more net sale saless than than it colle collect cted ed in cash cash from from custo custome mers rs.. Th Thee percentage of accounts receivable to total assets has increased for the past 4 years. It went up from 5.86% to 6.98%. Thus, the increase is subtracted from net earnings in the computation of SDM’s cash flow from operations. In 2008, the sales totalled $9.423 billion. Accounts also increased during the same period, indicating that the company did not collect this whole amount in 2008. That is why, the increase in accounts receivable is subtracted from sales revenue in computing the cash received from operating activities43. Inventory The costing method used is FIFO (first in, first out). The reason FIFO is chosen is because this is a drug store and all drugs have expiring dates, so old drugs needs to be sold first. In order to compare the change in inventory, we have divided inventory by total assets. The ratio for the past 4 years has not changed dramatically. It is around 27.16%. ‘‘The capital acquisitions ratio reflects the portion of purchases of property, plant, and equipment financed from operating activities without the need for outside debt or equity financing or the sale of other investments or fixed assets. A high ratio indicates less less need need for outsid outsidee financi financing ng for curren currentt and future future expansi expansion. on. This This provid provides es the company with opportunities for strategic acquisition, avoids the cost of additional debt,
40
Additional information in Appendix F Ibid p.29 42 Idem 43 Libby et al., Financial Accounting 3rd Canadian edition. P. 358 41
17
and reduces the risks of bankruptcy that come with additional additional leverage44.” The value of SDM is 1.42 which is good. Capital Acquisitions Ratio = Cash flow from operating activities/ cash paid for property, plant and equipment
A final ratio that may be helpful in determining why one should invest in SDM is the financial leverage ratio. This “measures the relationship between the total assets and the shareholder’s equity that finances the assets”: Financia Financiall Leverage Leverage ratio= ratio=
Average Average Total Total Assets / Average Average Shareho Shareholder lder’s ’s Equity Equity
The ratio is more or less constant (around 1.84), suggesting the company relies less and less on debt financing, which is a good sign. Jean Coutu has a ratio of 1.22 which is lower.
When these assets are compared to Jean Coutu, one can see there was an increase in Accounts Receivable, Inventory, Capital Assets, Goodwill and Other Assets. When comparing the actual numbers, one can see that the % of increase for SDM for its Assets is larger compared to Jean Coutu.
All of the ratios given above are a good indicator whether or not to invest in SDM. As indicated, the financial results of SDM are constant compared to last year. Of course, there was a slight decrease, but this is in fact due to the recession that is affecting the company as well as other companies. When compared to Jean Coutu, SDM seems to be in a better financial situation because SDM incurred a Net Earning, while Jean Coutu suffered a loss in 2008. Thus investing in SDM, by looking and comparing its ratios to Jean Coutu, is a better option. On a side note, a report made by Dow Jones Company Report gives all the ratios and are compared to the industry. The report has been included at the end of the project.
44
Ibid p.249
18
Common Size & Trend Analysis
In addition to evaluating a company’s performance based on ratios, trend and common size analysis are two alternative methods of analyses. These techniques allow an individual to gain some insight concerning the ongoing trends and changes within the Financial Statements over the years. By doing so, one can grasp a clearer picture of the financial situation of a particular company of interest and use it to aid in ones decisions concerning resource allocation. For the purpose of this analysis, year 2007 is used as the base year to evaluate Shoppers Drug Mart Corporation’ Corporation’ss trends. trends. For Income Statement, Statement, all items are proportionately relative to revenue and for Balance Sheet, all assets and liabilities are proportionately relative to total assets for the common size analysis. Shoppers Drug Mart Income Analysis Analysis of Shoppers Drug Mart’s Income Statement has indicated that there is a growth in most areas of the Income Statement. There appears to be mild growth from 2007 to 2008. However, as we all know that in 2008, the global economy had suffered a major setback. With such harsh economic environment, Shoppers Drug Mart’s figures are still climbing instead of dropping drastically like most other companies. It hasn’t been affected much by the overall economic climate. For the most part, this is good news. An increase in sales revenue and net income of 111 and 115 percent, from 2007 respectively, indicates an increase in prosperity. Income has also grown in size from 5.78% to 6% of total sales revenue. All this translates into a stable or higher rate of return for investors as well as in shareholders’ wealth. This has also allowed the company to have steady funds to expand their company to keep up their competitiveness. The offset to this is that cost has also increased horizontally. Cost of goods sold and other operating expenses has grown to 111 percent since 2007. However, on the bright side, the relative size of cost of goods sold and other operating expenses has decreased from 88.7 percent in 2007 to 88.46 percent in 2008. The decreased size of cost of goods sold and other operating expenses has caused an addition for operating income. However, the proportion of interest expenses has slightly increased from 0.62% to 0.68% in 2008 and therefore leads to a deduction of net income. However, overall, there still a slight increase of net income in 2008. Intuitively, this makes sense because the lower a company’s expenses are, the greater income from operations is and therefore a higher net
19
income. Now, if expenses would have increased in size rather than decreasing, income would have suffered instead. In this case, Shoppers Drug Mart’s overall expenses has decreased decreased a little little bit meaning meaning they are effectivel effectively y managing their costs. As a result, result, this shows that the company has become more productive and efficient over the years. If these trends continue, Shoppers Drug Mart will continue to increase profit and provide investors a great opportunity to increase their wealth.
Shoppers Drug Mart Balance Sheet Analysis Continuing in Shoppers Drug Mart’s Balance Sheet statement, analysis has shown a growth in most areas of the Balance Sheet. Cash has grown from 2007 to 2008 by 33 percent. This amounted to only 1 percent change in respect of size since 2007. Accounts receivables appear to be doing well as it has grown to 120 percent since 2007. In addition, its size has remained 7 percent, the same as to 2007. It’s a good thing for the company to not increase the portion of its account receivables as to total assets. Because, in normal economic times, this is not as bad as collections can be reasonably assured for most of the accounts. However, in bad times, like the one we are going through right now, the likelihood of customers paying their accounts would decrease, as available disposable income becomes a problem for more and more people. If a company has too much account receivable, the estimate of bad debt may increase and therefore reduce our accounts receivables. As a consequence, the company would have less cash to pay off its debt. Therefore, a company does not necessarily want a lot of sales on credit due to the issue of collection poses a problem. Intangible assets have increased to 169 percent as of 2008 from 2007. There is great uncertainty with the benefits that can be obtained from intangible assets, therefore the impact of these assets are questionable and one may wonder if having more intangible assets is necessarily a good thing. Total assets have grown in number and size since 2007. Now, let’s move on to the liabilities and shareholders’ equity portion. Analysis shows growth in most items, with some having a dramatic increase over the years. Firstly, the main object for concerns from this point on is short-term and long-term debt has risen by 100 percent since 2007. Their proportions have risen to 3% and 10% respectively. This adds concern to the company capability to pay off their current debt
20
and long-term debt. A company can be doing well in terms of revenue and net income, but if they do not have the ability to pay off all their current debt, they will eventually go bankrupt. However, since total current assets are greater than total current liabilities, there should not be much of a problem there. A particular point of interest to investors is the 24% percent increase in retained earning from 2007 until 2008. This equates to a relative size of 30% 3 0% to total assets or total liabilities and shareholder’s equity. The size of Capital Stock has only 1 percent increase from 2007. This is a good indication that Shoppers Drug Mart will not require much financing; it is becoming profitable enough to fund its own capital expenditures. (Refer to Appendix G for horizontal and vertical analysis calculations)
21
Analysis of the presentation of particular assets accounts
With the ratios calculated calculated and a thorough thorough analysis of the Financial Statements, Statements, a final step has to be done don e in order to make an informed decision whether or not to invest in SDM. This section section will explain particular particular assets accounts, accounting accounting policies policies used and the impact of these on the Financial Statements. As noted earlier, this year, SDM Total Assets went from $5.6 billion to $6.4 billion. This is due to an increase in its Current Assets, especially its accounts receivable and inventory. However, there was a reduction in prepaid expenses and deposits account (please refer to p16.) SDM prepar prepares es its consoli consolidat dated ed Financ Financial ial Statem Statement entss accord according ing to Canadi Canadian an General Generally ly Accept Accepted ed Account Accounting ing Princi Principle ples. s. GAAP GAAP requir requires es manage management ment to make make estimates and assumptions that affect the amounts reported (assets, liabilities, disclosures) at the the date date of the the Fina Financ ncia iall Stat Statem ement entss and the the repo report rted ed amou amount ntss of reve revenu nues es and and expense expensess during during the period period45. Theref Therefore ore,, this this means means that that estima estimates tes,, judgme judgments nts and assumptions based on historical data, current trends and other factors that management believ believed ed to be import important ant during during the time time they they prepar prepared ed the financ financial ial statem statement ent are reported. Thus, if the actual result differs from the estimate, such difference is considered as materi material. al. Estima Estimates tes are used used for invent inventory ory provis provision ions, s, income income and other other taxes, taxes, goodwill, other intangible assets and long-lived assets for impairment46. Furthermore, the company “recognizes revenue at the time goods are sold, net of returns.47” Cash & Accounts Receivable The company generates their cash and receivables from sale and services of assisted-l assisted-living iving devices, medical equipment, equipment, home care product and durable durable mobility mobility equipment to institutional and retail customers. Cash & Accounts Receivable grew $85 million during 2008. This is significantly a good improvement for SDM Drug Mart Company.
45
Shoppers Drug Mart – 2008 Annual Report, p.55 Idem 47 Idem 46
22
Inventory Shoppers Drug Mart’s inventory is valued at the lower of cost and estimated net realizable value. The company uses FIFO (First-in, First-out) method to count their inventory. “All direct expenditures and costs incurred in order to bring the merchandise (inventory) to its present location and condition are considered into cost. 48” Rebates and other considerations from a vendor are considered as a reduction of cost of inventory. When looking at the Balance Sheet, one can see Inventory increased by $198 million. Notably, this indicates the increase and expansion in sale activities during the year. As for the notion of shrinkage, it is estimated as a percentage of sales for the period from the date of the last physical inventory count to the balance sheet date. This estimate is based on past experience and recent physical count of inventory. Property and equipment SDM’s capital asset includes Building, Equipment & Fixture, Computer software & Equipment, Equipment, and leasehold leasehold improvement. improvement. Property and equipment equipment are recorded recorded at cost including including capitalized capitalized interest interest49. “The “The inte intere rest st is capi capita tali lize zed d on prope propert rtie iess held held for for development and those under development50.” The company has been amortizing their capital asset by using the straight-line method over the estimated useful life. Table III – Useful life of particular Assets51
Buildings 20 years Equipment and fixtures 3 to 10 years Computer software and equipment 2 to 10 years Leasehold improvements Lesser of term of the lease and useful life Shoppers Drug Mart reviews their long-lived assets for impairment annually. The annual report of 2008 showed that Property and equipment increased by $316 million or 28%. This indicates that SDM invested mostly in Property and Equipment as part of their capital asset. This will lead to an increase in cash flow in the future years of operation under the Cash Flow statement. statement. This is a good sign of growth and thus expansion of the business. In 2008, 2008, the total cost cost of Proper Property ty and Equipm Equipment ent was $2,243,249 $2,243,249,000 ,000 and Accum Accumul ulat ated ed Amor Amorti tiza zati tion on was was $80 $801, 1,114 114,0 ,000 00 as repo report rted ed in the the Balan Balance ce Sheet Sheet.. 48
Shoppers Drug Mart – 2008 Annual Report, p.56 Idem 50 Idem 51 Idem 49
23
Amortization expense was $190,322,000. This indicates that the company has been using up to 36% of their capital asset in the business operation. Deferred Cost In 2008, Deferred Cost was credited by $47,213,000. This showed a net increase of 43% compared to the balance in 2007. These costs are associated with opening a new store and relocating relocating an old one. These costs are recognized, recognized, deferred deferred and amortized amortized into COGS and other operating expenses exp enses on a straight-line basis over 3 years52. Goodwill and other intangible assets The company recorded Goodwill at the fair value of the underlying net asset, including intangible asset at the acquisition date. Goodwill is not amortized but is tested for impairment. If there is impairment, the excess of the carrying amount over the fair value of the asset would be charged to earnings53. Intangible assets (including prescription files, developed technology, customer relationships and other) are amortized by using straight line basis over the estimated useful lives. Similar to goodwill, if there is impairment, it is treated the same way. Table IV – Useful life of Intangible Assets54
Prescription files 7 to 12 years Developed technology 3 years Customer relationships 5-25 years Other Indefinite Referring to the Balance Sheet, Goodwill and intangible asset increased by $222 million in 2008 compared to 2007. As well, the total amortization of capital asset and other intangible asset was $205 millions in 2008 compared to $172 million in 2007. The net increase is $33 million or 19.3%.
52
Idem Idem 54 Ibid p.57 53
24
Changes in accounting Policy – Accounting standards implemented in 2008 Capital disclosure The Canadian Institute of Chartered Accountants issued a accounting standard (Section 1535) that requires require both quantitative and qualitative information to be disclosed in order for users of the Financial Statements be able to evaluate the entity’s objective, policies, and processes for managing the capital asset55. Shoppers Drug Mart applied the new standard at the beginning of the fiscal year, and its implementation did not have any impact on the company’s result of operation or financial position. Inventory “CICA handbook section3031”:
The CICA has also issued a new standard (Section 3031) which requires Shoppers Drug Mart to determine the cost of inventory and subsequent recognition of inventory as an expense, as well as requiring additional associated disclosures56. To adjust the change, the company has to make a retrospective adjustment and restatement of prior periods. Also, the new standard allows for the reversal of any write-down previous recognized. This may affect the balance sheet; however, it is not a big deal since SDM has been using the lower of cost inventory and the net realizable value of their inventory. Reconciling the retrospective from December 29 2007 to January 03 2009, there was no significant write-down since the net realizable value of inventory being lower than cost and no inventory write-down recognized in previous year were reversed. However, with the restatement, there was an increase in COGS and other operating expenses which lead to a decrease in operating income and net earnings. This also led to a reduction of opening retained earnings and inventory for 2007.
Future accounting standards Goodwill and other Intangible Asset In February 2008, the CICA issued another accounting standard concerning these assets assets (Secti (Section on 306 3064). 4). This This new standa standard rd replac replaces es the existi existing ng guidanc guidancee on these these part partic icul ular ar asse assets ts (incl (includ udin ing g rese resear arch ch and and devel develop opme ment nt cost costs) s).. Th Thee new new stand standar ard d eliminates the practice of deferring costs that do not meet the definition and recognition 55 56
Ibid p.37 Idem
25
criteria of assets. It is effective for interim and annual Financial Statements for fiscal years beginning on or after October 1, 200857. SDM will apply this policy retrospectively at the beginning of the 2009 fiscal year and will restate prior periods. As for intangible assets recognized prior to 2009 that no longer meet the new requirements, they will be removed from the Balance Sheet. Therefore, the balance of deferred costs at the end of 2008 will be charged to operating retained earnings58.
Accounting issues Cash account Although Although the cash account is fairly reported and straightf straightforwar orward, d, there are some issues that need special attention. Shoppers Drug Mart’s Balance Sheet under Current Asset should have applied a separate disclosure for cash account. For example, cash to cash equivalents, short-term investments, and restricted cash59.
Accounts receivable Account Accountss receiv receivabl ablee should should be disclo disclosed sed differ different ently ly:: note note receiv receivabl ablee or loan loan receivable. Plus, if they have an allowance for doubtful account, it should report below Accounts receivable and report the full amount of the uncollectible amount60.
Inventory cost The company should apply the Gross profit method of estimating inventory. That way, it is easy to determine the ending inventory =Estimated COGS – Actual cost of good available for sale61.
57
Ibid p.38 Idem 59 Kieso, Weygandt et al. Intermediate Accounting Volume 1, 8 th Canadian version, John Wiley & Sons, 2007, p. 386 60 Idem 61 Idem p.608 58
26
Property and Equipment It is difficult for users to read the notes to Financial Statements for Property and Equipment since the company recorded all items together in one account: “Property and Equipment” includes Building, Equipment & Fixture, Computer software & Equipment, and leasehold improvement. The company should disclose each item separately because each capital asset has a different different useful life and their method of valuation. valuation. Furthermore, Furthermore, with the company opening many new stores, the notion of cost inclusions have to be dealt with. These cost inclusions are added to the value of a fixed asset if it is probable that future economic benefit will be incurred and that the cost of the item can be measured reliably.
Transition to International Financing Reporting Standards As we all know, in January 2006 the Accounting Standards Board announced that all publicly accountable enterprises will be required to report under IFRS for years beginning on or after January 1, 2011. Canadian GAAP will be converged to IFRS. As for SDM, it is assessing whether it will apply the new accounting standard at the beginning of its 2011 fiscal year or elect to early adopt the new accounting standards at the beginning of its 2010 fiscal year in order to minimize the amount of restatement when the company adopts the International Financial Reporting Standard (IFRS)62.
62
Shoppers Drug Mart – 2008 Annual Report p.62
27
CONCLUSION AND RECOMMENDATIONS
After describing the company’s main activities, stock market, nature of risk and competitors it faces, it is possible to see that SDM is a diverse company selling not only pres prescr crip ipti tion on and and OTC OTC medi medica cati tions ons but also also many many every everyda dayy-us usee produ product cts. s. It also also manufactures its own brand product: LifeBrand® which consistently exceeds customers’ expectations. The company also introduced Nativa® its own organic food line. When looking at its stock market performance, there were no major fluctuations despite the bad economic situation. Of course, the stock price was affected, but not as much as many othe otherr comp compan anie ies. s. As for for the the compe competi tito tors rs,, Jean Jean Coutu Coutu Grou Group p serv served ed as a basi basiss of comparison. With the help of ratio analysis, one can see that SDM performed better compared to Jean Coutu. In fact, SDM achieved sales of more than $9.4 billion with a net earning of $565,212,000. As for Jean Coutu, it suffered a loss of $269,200,000. Overall, the profitability ratios were in favor for SDM, as well as liquidity and solvency ratios. If simply deciding whether or not to invest in SDM based on a ratio analysis, the answer would be yes. In order to reinforce the decision that SDM is a worthwhile decision, a common size and trend analysis was helpful. Analysis of SDM Income Statement has indicated growth in most areas.. There was an increase in sales revenue and net income of 111% and 115%, from 2007 respectively. This indicates an increase in prosperity. Also, Income has grown in size from 5.78% to 6% of total sales revenue. All this translates into a stable or higher rate of return for investors and shareholders. This has also allowed the company to have steady funds to expand their company to keep up their competitiveness. The company’s overall expenses have decreased slightly, meaning it is effectively managing cost. This means the company has become more productive and efficient over the years. If thes thesee tren trends ds conti continue nue,, SDM SDM will will incr increa ease se prof profit it and and prov provid idee inve invest stor orss a grea greatt opportunity opportunity to increase increase their wealth. wealth. When looking at the company’s Balance Sheet, its Assets have increased with its Accounts Receivable remaining constant. Despite the fact that the company’s long term liability has went up, its current assets account is bigger, meaning that it can pay off its debt. Of course, the reason why its long term liability went up is due to opening of many stores. There was also a 24% increase in retained earnings
28
with an increase of only 1% in size of Capital stock. This is a good sign because it means SDM will not require much financing; it is becoming profitable enough to fund its own capital expenditures. As for the way particular asset accounts was disclosed, it followed Canadian GAAP. Of course, the way Property and Equipment, Cash, Accounts Receivable were writte written n makes makes it slight slightly ly diffi difficul cultt to underst understand and.. Overal Overalll any change changess in policy policy are corrected retrospectively according to GAAP. With the convergence to IFRS in 2011, the company is debating whether to implement it in 2010 or wait until 2011 to do so. Of course, integrating it sooner will prevent the company to have to do major changes when 2011 arrives. As the financial analysis was useful to determine SDM was worthwhile to invest in, demographics can also be helpful. As we all know, our population is aging, with Baby Boomers closely becoming senior citizens, many of them need prescription and OTC medications. In fact, the percentage of senior citizen 65 and older will go from 13% to 18% in 2020. Of course, the effects of an aging population impact the pharmaceutical industry63. This increases the demand of these products and puts SDM at an advantage, being Canada’s largest and only nationwide drugstore chain with the largest market share by sales.
Graph IV – Canada’s 2005 Population pyramid64
63
Fortin, Pierre. The Baby Boomers Tab. CBC News In depth. July 17,2006. Website last accessed on November 23rd 09. http://www.cbc.ca/news/background/canada2020/essay-fortin.html 64 Nation Master – Canada’s 2005 Population P opulation pyramid. Website last accessed on November 28 th 09.
29
Therefore, with all this said, investing in Shoppers Drug Mart seems worthwhile. However, as a good investor, it is always suggested to have a diversified portfolio. In fact, diversification is a risk management technique in finance related to hedging. It mixes a variety of investments within a portfolio. This spreads out investments to reduce risks because the fluctuation of a single security has less impact on a diverse portfolio compared to one that is not. By diversifying, one minimizes the risk from any one investment. Therefore, if a large sum of money was inherited, having part of its portfolio in SDM’s shares would be wise.
30
Appendix A Shoppers Drug Mart flow chart65
65
Wikiinvest – Shoppers Drug Mart http://www.wikinvest.com/stock/Shoppers_Drug_Mart_Corp_(TSE:SC)
31
Appendix B
Table I – Distribution of selected merchandise group sales by trade group sectors, Canada 1998 and 2005 Pharmacies and personal care stores
Food stores and All other general merchandise trade groups combined stores
Commo dity 1998 to 2 1998 to 2 groups 1998 2005 1998 2005 1998 005 005 $ millions
%2
Health and 13,5 20,4 6.1 personal 24 20 care products Drugs3 Drugs3
9,91 15,3 6.5 0 94
Personal 2,76 3,97 care 5.3 0 products 6 4
$ millions
%2
2005
Total, all trade groups
1998 to 2 1998 005
$ millions
%2
2005
1998 to 20 05
$ millions
5,15 9,993 9.9 2
412
402
-0.4
19,08 30,81 7.1 7 5
1,86 4,620 13.8 5
21
15
-4.6
11,79 20,03 7.9 7 0
3,22 5,142 6.9 5
246
299
2.8
6,236 9,411 6.1
145
88
-6.9
1,054 1,375 3.9
Eyewear 848 5
1,05 3.2 6
61
Tobacco products 362 and supplies
212
3,82 5,706 5.9 3
1,874 2,705 5.4
6,059 8,623 5.2
All other goods 3,08 3,36 1.2 6 0 and services
75,8 99,30 3.9 11 5
142,0 210,9 5.8 08 96
220,9 313,6 5.7 06 61
16,9 23,9 5.1 73 92
84,7 115,0 4.5 85 04
144,2 214,1 5.8 94 03
246,0 353,0 5.3 52 99
Total
-7.3
231
20.8
%2
1. In Quebec only, sales from pharmacies located in food and general merchandise stores are reported in the pharmacies trade group. 2. Compounded annual growth rate. 3. Includes prescription and over-the-counter drugs, vitamins and other health supplements. 4. Includes health and beauty products (non-electric). (non-electric). 5. Includes prescription and non-prescription. non-prescription. Source : Statistics Canada, Retail Commodity Quarterly Survey.
32
Appendix C
Comparative table of SDM’s competitors66 Competitive Shoppers Jean CVS Operating Drug Coutu Walgreen Rite Caremark [42] Metrics Mart Group Inc Aid[44] [41] Company Corporation (FY2008) Corp[1] (PJC.A)[38] Market Cap 9.36 2.31 52.97 33.44 1.38 ($Billions USD) Total Revenue 9.42 2.13 86.47 59.03 26.29 ($Billions USD) Gross Margin
66
26.36
51.26
7.27% 11.50%
Net Income 0.57 ($Billions USD) Net Profit 6.00% Margin Drugstores 1,149 Open Prescriptions 83.0 Filled (millions) •
MedcoHealth Solutions [45]
9.11%
20.91%
28.19%
26.76% 1.10
(1.19)
3.34
2.16
(2.91)
(50.31%)
3.82%
3.65%
(11.08%) 2.15%
353
6,300
6,443
4,901
63.3
633.0
617.0
300.0
N/A (mailorder) 480.2
Note: SDM and Jean Coutu Group Inc.’s financial data are given in CAD, whereas all other companies are in USD. For purposes of comparison, all data are translated to USD using the average CAD/USD exchange rate for 2008 (0.9434 CAD/USD).
Idem
33
Appendix D Ratio Analysis Shoppers Drug Mart 2008
2007
2006
2005
Jean Coutu 2008
Profitability Profitability Tests
9,422,911,00 0 882,502,00 0 9.365492256
8,478,382,00 0 786,274,00 0 9.273868528
565,212,00 0 882,502,00 0
490,441,00 0 790,016,00 0
422,491,00 0 683,526,00 0
364,494,00 0 599,245,00 0
64.05
62.08
61.81
60.83
(251,400,00 0) 1,507,600,00 0 (16.68 )
478,989,00 0 882,502,00 0 54.28
565,058,00 0 790,016,00 0 71.52
569,816,00 0 683,526,00 0 83.36
450,575,00 0 599,245,00 0 75.19
146,400,00 0 1,507,600,00 0 9.71
478,989,00 0 565,212,00 0 0.84745016 Liberal
565,058,00 0 490,441,00 0 1.152142663 Conservative
569,816,00 0 422,491,00 0 1.348705653 Conservative
450,575,00 0 364,494,00 0 1.236165753 Conservative
146,400,00 0 (251,400,00 0) -0.582338902 Conservative
565,212,00 0 6,020,641,50 0 0.093 9
490,441,00 0 5,286,526,50 0 0.092 8
422,491,00 0 4,652,198,50 0 0.090 8
364,494,00 0 4,246,394,50 0 0.085 8
(251,400,00 0) 2,143,000,00 0 (0.117 3)
Total A turnover ratio
9,422,911,00 0 6,020,641,50 0 1.57
8,478,382,00 0 5,286,526,50 0 1.60
7,786,436,00 0 4,652,198,50 0 1.67
7,151,115,00 0 4,246,394,50 0 1.68
1,507,600,00 0 2,143,000,00 0 0.70
Net Income Avr Shareholders' equity
565,212,00 0 1,747,189,50 0
490,441,00 0 1,392,707,00 0
422,491,00 0 1,083,644,00 0
Return on Equity
32.35
35.21
38.99
882,502,00 0
790,016,00 0
683,526,00 0
Sales Gross Profit Gross Profit Margin
Net Income Net Sales Net Profit Margin
C/F from Op. activities Net Sales Cash Flow Margin
C/F from Op. activities Net Income Quality of Income Policy used
Net Income Average Total Assets Return on Assets
Sales or Op Revenues Average Total Assets
Net Sales
1,507,600,00 0 155,000,00 0 10.28124171
(251,400,00 0) 1,750,800,00 0 (14.36 ) 599,245,00 0
1,507,600,00 0
34
Avr Net Fixed Asset Fixed Asset turnover
1,284,324,00 0 0.69
1,017,120,50 0 0.78
828,284,00 0 0.83
683,088,50 0 0.88
1,370,500,00 0 1.10
2,384,464,00 0 1,843,860,00 0 1.29
2,150,137,00 0 2,158,320,00 0 1.00
1,821,423,00 0 1,577,784,00 0 1.15
1,564,911,00 0 1,392,501,00 0 1.12
327,800,00 0 266,600,00 0 1.23
882,502,00 0 410,391,00 0 2.15
790,016,00 0 340,042,50 0 2.32
1,507,600,00 0 165,050,00 0 9.13
410,391,00 0 24,503,89 6 16.75
340,042,50 0 21,680,34 0 15.68
165,050,00 0 3,729,31 5 44.26
8,335,038,00 0 1,644,426,00 0 5.07
7,520,033,00 0 1,458,861,50 0 5.15
6,958,361,00 0 1,294,336,50 0 5.38
6,430,933,00 0 1,176,137,00 0 5.47
1,370,000,00 0 146,350,00 0 9.36
8,335,038,00 0 1,004,525,00 0 8.30
7,520,033,00 0 916,911,50 0 8.20
6,958,361,00 0 770,511,50 0 9.03
6,430,933,00 0 694,507,50 0 9.26
1,370,000,00 0 230,400,00 0 5.95
883,323,00 0 63,952,00 0
793,148,00 0 52,873,00 0
683,526,00 0 49,872,00 0
599,245,00 0 48,649,00 0
13.81
15.00
13.71
12.32
(242,500,00 0) 5,100,00 0 (47.55 )
0.28
465,200,00 0 1,484,100,00 0 0.31
Liquidity Ratio
Current Asset Current Liability Current Ratio
Net Sales Avr Net trade A/R Receivable Turnover
Avr trade A/R [Credit sales/365] Avr collection period
COGS Avr Inventory Inventory Turnover
COGS Avr A/P A/P Turnover Solvency Ratios
NI+Int Exp+ I tax exp Interest exp Times in Interest earned
Total Liability Total SE Debt to Equity (given)
0.40
0.34
0.24
Market tests
35
Current Mk P per share Earnings per share P/E ratio
48.05 $
2.60 18.48
53.26 $
7.42 $ (0.98) -7.57
2.27 23.46
Supplemental Supplemental ratio
Financial leverage
6,020,641,50 0 3,267,561,50 0 1.84
C/F from op activities Cash paid for property …
2,064,438,00 0 1,454,380,00 0
Average Total Asset Avr SE
Capital Acquisition
5,286,526,50 0 2,910,500,50 0 1.82
4,652,198,50 0 2,555,231,00 0 1.82
4,246,394,50 0 2,236,283,00 0 1.90
2,143,000,00 0 1,750,800,00 0 1.22
1.42
36
Appendix E Comparison of Assets Assets
Shoppers Drug Mart % of total Asset 2007
2008
% of total Asset
Current 36,567,00 Cash
0
0.5 7
448,476,0 A/R
00
9
00 0
0
Other intangible assets
00
Other Assets
0
Total Assets
00
Decrease
47,213,00
00 0.7
2,427,239,0
37.8
97,813,00
1.5
6,419,306,0
100.0
20.04
Increase
0.59
Increase
39.94
Decrease
1.03
Increase
5,621,977,0 00
100.00
Jean Coutu Group % of total Asset 2007
2008
Decrease
57,930,00 0
0
38.25
2,245,441,0 00
2
Decrease
32,966,00 0
1
2.40
1,126,513,0 00
4
Increase
2,150,137,0
22.4 7
1.24 134,692,0
00
5
00
Assets
0
37.1
1,442,135,0 Deferred costs Goodwil l
27.49 69,952,00
1.0 0
00
Increase
-
0
2,384,464,0 Property and Equipment
00 1.3
64,054,00 0
6.62 1,545,599,0
4
0
Increase
0.1
83,279,00 Future Income taxes Prepaid expenses and deposits
00
6
0.49 372,306,0
27.1
8,835,00 Income tax receivable
0 6.9
1,743,253,0 Inventory
27,588,00
% of total Asset
Current 40,700,00 Cash and cash equivalents
167,500,0
A/R
00
Income tax receivable
0
Inventory
00
Prepaid expenses
0
8.5 9
400,00
0.0 7.9 0.2
1,143,200,0 00
Capital Assets Goodwil l
00
58.6
329,300,0
16.8
35,300,00 0
5.91
Increase
0.33
Decrease
68.38
Decrease
13.67
Increase
0.86
Increase
319,400,0 00
1.8 1
Same
1,597,800,0 00
9
0.02 7,600,00
0
5
Increase
138,000,0 00
7
6.96 400,00
0
4 5,200,00
1.74 162,600,0
00
2 154,700,0
Investments
0
20,000,00 0
37
113,700,0 Other Assets
00
Total Assets
00
5.8 3
1,949,300,0
A/R Total Assets %
Inventory Total Assets %
0
0
0
2,336,700,0 00
2007 372,306,00
6,419,306,00
2.15
100.0 0
2008 448,476,00
50,200,00 0
100.00
2006 307,779,00 0
5,621,977,00 0
2005 256,504,00 0
4,929,014,00 0
4,375,383,00 0
6.99
6.62
6.24
5.86
1,743,253,00
1,545,599,00
1,372,124,00
1,216,549,00
0
0 6,419,306,00
0
0 5,621,977,00
0 27.16
0 4,929,014,00
0 27.49
4,375,383,00 0
27.84
27.80
38
Increase
Appendix F Further disclosures 67
Property and Equipment In thousands of dollars 2008 Cost
$30,049
Accumulated Amortization -
$30,049
66,851
-
66,851
45,946 138,603 1,063,824
27,115 532,376
45,946 111,488 531,448
897,976
241,623
656,353
$2,243,249
$801,114
$1,442,135
Deferred costs68 In thousands of dollars 2008
Cost
Net Book Value
Store opening costs
$113,683
Accumulated Amortization $66,470
Prop Proper erti ties es held held for for development Properties under development Land Buildings Equipm Equipment ent,, fixtur fixtures, es, comp comput uter er soft softwa ware re and equipment Leasehold improvements
Net Book Value
$47,213
Goodwill69: 2008 2007 Opening balance $2,245,441 $2,122,162 Goodwill acquired 181,798 123,279 Ending balance $2,427,239 $2,245,441 There were no write-downs of goodwill due to impairment this fiscal year (2008). Other Intangible Assets70: In thousands of dollars 2008 Cost
Prescription files Developed technology Customer relationships Other
$91,599 1,912 29,600
Accumulated Amortization $20,924 1,062 3,512
Net Book Value
$70,675 850 26,088
200 $123,311
$25,498
200 $97,813
67
Shoppers Drug Mart Corporation – 2008 Financial Report, p.65 Idem 69 Idem 70 Idem 68
39
Appendix G
Horizontal and Vertical Analysis Horizontal
2008
2007
Sales Operating expenses Cost of goods sold and other operating expenses Amortization Operating income Interest expense Income before income taxes Income taxes Curre nt Futur e
111%
100%
111%
100%
119%
100%
112%
100%
121%
100%
112%
100%
102%
100%
12%
100%
104%
100%
Net income
115%
100%
Vertica l
2008
2007
100%
100%
88.46%
88.70%
2.18%
2.03%
9.37%
9.27%
0.68%
0.62%
8.69%
8.65%
2.70%
2.95%
Sales Operating expenses Cost of goods sold and other operating expenses Amortization Operating income Interest expense Income before income taxes Income taxes Curre
40
nt Futur e Net income
Horizontal
6.00%
5.78%
2008
2007
133%
100%
120%
100%
113%
100%
100%
0%
119%
100%
48%
100%
111%
100%
128%
100%
143%
100%
108%
100%
169%
100%
227%
100%
114%
100%
107%
100%
63%
100%
Assets Curren t Cash Accounts receivable Inventory Income taxes recoverable Future income taxes Prepaid expenses and deposits Property and equipment Deferred costs Goodwi ll Other intangible assets Other assets Total assets Liabilities Curren t Bank indebtedness Commercial paper
41
Short-term debt
100%
0%
Accounts payable and accrued liabilities
103%
100%
0%
100%
135%
100%
0%
100%
85%
100%
100%
0%
124%
100%
156%
100%
117%
100%
105%
100%
101%
100%
107%
100%
124%
100%
124%
100%
112%
100%
Total liabilities and shareholders' equity
114%
100%
Vertica l
2008
2007
1%
0%
7%
7%
27%
27%
0%
0%
1%
1%
Income taxes payable Dividends payable Current portion of long-term debt Long term debt Other long-term liabilities liabilities Future income taxes Associate interest Shareholders' equity Share capital Contributed surplus Accumulated Accumulated other comprehensive income Retained earnings
Assets Curren t Cash Accounts receivable Inventory Income taxes recoverable Future income taxes
42
Prepaid expenses and deposits Property and equipment Deferred costs Goodwi ll Other intangible assets Other assets Total assets Liabilities Curren t Bank indebtedness Commercial paper Short-term debt Accounts payable and accrued liabilities Income taxes payable Dividends payable Current portion of long-term debt Long term debt Other long-term liabilities liabilities Future income taxes Associate interest Shareholders' equity Share capital Contributed surplus
1%
2%
37%
38%
22%
20%
1%
1%
38%
40%
2%
1%
0%
0%
100%
100%
4%
4%
5%
10%
3%
0%
16%
18%
0%
1%
1%
1%
0%
5%
29%
38%
10%
0%
5%
4%
1%
1%
44%
43%
2%
2%
24%
27%
0%
0%
30%
28%
Accumulated Accumulated other comprehensive income Retained earnings
43
Total liabilities and shareholders' equity
30%
28%
54%
55%
100%
100%
44
Bibliography
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(TSE:SC)
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45
