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Eckerd buyers report progress

Published Aug. 4, 2005|Updated Aug. 25, 2005

A year after Eckerd Corp. was sold in pieces, the two drugstore chains trying to revive the remains continue to define the job as a work in progress.

CVS Corp., which bought 1,200 Eckerd stores in Florida and Texas, and the Canadian Jean Coutu Group, which bought 1,500 in 15 states, said the turnaround would take two years or more.

At the halfway mark, both chains on Wednesday reported significant progress, but have a long way to go.

"It's been a year of transformation," said Francois Coutu, president and chief executive of the Montreal chain that bears his father's name. "You don't turn the Titanic around overnight."

CVS, which completed renovation of 1,000 Eckerds into CVS stores by July 31, closed about 160 stores at the get-go. On Wednesday, Coutu, which is operating its stores under the Eckerd name, closed the first batch of stores it deemed hopeless. The 78 unprofitable locations are scattered from Georgia to New York.

CVS converted all 660 Eckerds in Florida first. Now the company is turning the promotional effort to the Texas conversions, which were just completed.

"We're off to a great start, but we see the turnaround as an opportunity that we said from the start would be a multiyear effort," said Dave Rickard, chief financial officer of Woonsocket, R.I.,-based CVS. "We're right about where we planned to be."

In their earnings reports, both chains only dropped big hints at how significantly the performance of the acquired Eckerd stores has improved. CVS said the average Eckerd did $5.1-million a year in business before CVS bought them compared to the CVS average of $6.4-million. Now, the former Eckerd stores' performance has been increased to about $6-million per store. The Eckerd stores sales productivity of $600 a square foot, however, trails the $800 a square foot of the rest of the CVS chain.

Coutu said sales of nonpharmacy items continue to be flat in Eckerd stores and the growth of prescription counts "recently" shifted from "negative to positive."

Beyond store appearance, expanded hours and more staffing, both chains are applying the same fixes. They are adding more high-profit cosmetics, over-the-counter drugs and health and beauty products after cutting Eckerd's reliance on seasonal items and promotional deals. They also increased the higher-profit-margin generic prescription business to 53 percent of the pharmacy, up from 49 percent under Eckerd.

They are attacking Eckerd's traditional Achilles heel, the chain's inventory controls, which contributed to the highest inventory loss rate among the big drugstore chains. That meant customers found stores were out of stock on key items. Losses to paperwork errors, employee theft and shoplifters exceeded 3 percent of sales, which cost Eckerd hundreds of millions of dollars in lost profit. Coutu and CVS said they have reduced the inventory loss rate by almost a full-percentage point. Combined, that translates to about $150-million in profit.

After eliminating 1,273 jobs at Eckerd's headquarter campus in Largo, Coutu said its last 40 employees there switched the computer systems to the company's U.S. headquarters in Rhode Island last week. CVS exercised an option to continue renting space there for its mail order pharmacy. Coutu has listed the headquarters complex for sale.

"We've talked with a couple of interested parties, but we have nothing solid enough to report," Coutu said.

CVS reported that earnings rose 18 percent to $276-million, or 33 cents a share, up from $235-million, or 28 cents a share, in the second quarter, which ended July 2. Revenues increased 31 percent to $9.1-billion. CVS shares closed Wednesday at $30.77, down 48 cents. Coutu said earnings rose 40 percent to $46-million, or 18 cents a share, up from $33-million, or 14 cents a share. The chain's revenues, however, more than tripled to $2.8-billion thanks to the Eckerd purchase and its long-term debt rose tenfold. Coutu's stock closed at $19.50 in Canadian dollars, up $1.24.

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