NEW YORK — The J.C. Penney Co. Inc. has finally cut loose the Eckerd albatross.
On Monday, the Plano, Tex.-based department store retailer said it had reached agreements with Canadian pharmacy specialist The Jean Coutu Group Inc. and CVS Corp. to sell its beleaguered Eckerd drugstore operations for $4.53 billion in cash.
For Jean Coutu, the deal makes for a dramatic expansion of its U.S. presence, a desire the company made known in December 2003 when it said it was interested in acquiring Eckerd.
Under terms of the deal, Coutu picked up 1,539 Eckerd drugstores and support facilities in 13 Northeast and mid-Atlantic states as well as Eckerd’s Florida headquarters, for $2.38 billion. According to Coutu, once the agreement is completed, the company will become the fourth-largest drugstore chain in North America, with 2,196 stores. Currently, the company’s U.S. presence is relegated to its 330-store Brooks nameplate, located in seven Northeast states.
For Woonsocket, R.I.-based CVS, the deal makes the company the new king of the mountain. CVS will acquire 1,260 Eckerd stores (located primarily in the southern U.S.), Eckerd’s $1 billion mail order and pharmacy benefits management business and three distribution centers for a total price tag of $2.15 billion.
All told, the company will operate more than 5,000 stores in 36 states with combined revenues of $33 billion, making it the largest pharmacy retailer in America. According to a statement from the company, CVS will now be able to fill approximately 13 percent of the nation’s prescriptions.
Allen Questrom, Penney’s chairman and chief executive officer, said in a statement that the “sale will allow J.C. Penney to focus entirely on our core department store and catalogue-Internet business.” Questrom went on to say that the company’s board of directors intends to use the anticipated $3.5 billion aftertax cash proceeds from the sale “for an appropriate mix of both common stock repurchases and debt retirements.”
Smith Barney retail analyst Deborah Weinswig said in a report that the benefits of the deal may not be realized until next year. “In our view, 2004 will be a ‘hybrid’ year where the benefits [for J.C. Penney] of the divestiture will be somewhat muddied by the execution of the transaction,” said Weinswig.
Most recently, the troubled Eckerd’s drugstore business had pushed Penney to a loss of more than $1 billion in the fourth quarter. However, taking Eckerd out of the picture, profits shot up by 45.4 percent to more than a quarter-billion dollars on sales growth of 6.2 percent. Same-store sales, a key measure of a retailer’s health, gained 3.2 percent — the third year of growth.
With Eckerd dragging Penney’s down, however, the company reported a stunning loss of $3.42 a share.
Wall Street was quick to see through that ugly bottom line. Investors got a good look at life without Eckerd and liked what they saw. The company’s stock has since reached a new 52-week high of $35.01 in midday trading.
Reaction in the market was mixed.
“This is going to be interesting. But I don’t see it changing the landscape dramatically. However, it is an opportunity to get these stores better,” said Alan Levin, chairman and chief executive of Happy Harry’s, a 72-store family-owned chain in Newark, Del. “There are four biggies now [drugstore chains] and there are still four biggies. It is just a different four.” Levin said CVS and Brooks have similar retailing strategies.
With CVS now operating some 5,000 doors, added Levin, “I guess they will be in a position to demand more from vendors. The same is the case of Brooks [Jean Coutu]. They went from 330 to 1,800. They will also be in a position to have more leverage.”
Vince Colonna, vice president of sales and marketing for Puig Fragrance division said, “Both CVS and Brooks are terrific. CVS is well run and has a history from Revco of absorbing chains efficiently. Brooks, with industry veteran David Morocco [vice president], will also do a good job integrating the stores.”
Colonna went on to point out that Coutu will reap further benefits from previous Eckerd acquisitions such as Fay’s and Genovese. “I won’t be surprised if we see some stores closed or sold off to other chains where there is duplication. CVS has done a great job in cosmetics, including adding beauty advisers in 1,000 stores. And I have faith in the management team at Brooks that they’ll do a top-notch job with the stores they acquired.”
Sources said historically, Eckerd was a powerhouse in health and beauty, but dwindling traffic had hurt some front-end businesses. Particularly in its home base of Florida, Wal-Mart and Walgreens have come on strong and taken market share.
“It may be a good acquisition from a pharmacy standpoint, but not from total store,” commented one beauty supplier, who asked not to be named. He said compared with retailers like Wal-Mart, chain drugstore companies in general have maintained “a way of doing business that is somewhat old-fashioned.” He was doubtful on how ably a company like Brooks, which some say is undermanned, can revive the business in slower stores.
— With contributions from Laura Klepacki and Faye Brookman