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Penney sells its Eckerd stores

SHARE Penney sells its Eckerd stores

DALLAS — CVS Corp. scrambled the top ranks of the drugstore industry by acquiring about half of J.C. Penney's Eckerd chain to push past Walgreen Co. in number of stores and challenge its rival in total revenue.

Penney announced Monday that it had sold Eckerd to CVS and Canada's Jean Coutu Group Inc. in two deals valued at $4.53 billion.

CVS of Woonsocket, R.I., will get about 1,260 Eckerd stores and support facilities in Texas, Florida and several southern states, as well as Eckerd's pharmacy benefits management and mail-order businesses, for $2.15 billion. It plans to rename the stores.

Jean Coutu will get 1,539 Eckerd stores in 13 Northeast and mid-Atlantic states and the chain's Florida headquarters for $2.38 billion in cash. Those stores will continue under the Eckerd name. Jean Coutu will become North America's fourth-largest drugstore chain by number of stores.

The sales ended months of speculation about the fate of Eckerd ever since Penney disclosed that it was selling the financially troubled chain.

The deals announced Monday will make CVS the biggest U.S. drugstore operator as measured by the number of stores, with more than 5,000, leapfrogging over industry leader Walgreen Co., which said it had 4,336 stores as of Feb. 29.

In terms of revenue, Walgreen could retain a slim lead. It had $35.1 billion in sales in the 12 months that ended Feb. 29, compared with $26.9 billion for CVS and $7 billion in annual sales for the Eckerd stores that CVS acquired.

Analysts questioned the quality of the Eckerd stores that CVS bought and said the new owner might face a bigger-than-expected chore in sprucing them up.

Shares of CVS jumped $2.57, or 7.4 percent, to close at $37.35, while Penney shares gained 7 cents to $34.90 on the New York Stock Exchange. Coutu shares gained 15 Canadian cents to 18.25 Canadian dollars on the Toronto exchange.

Penney chairman and chief executive Allen Questrom said selling Eckerd would allow Penney to reduce debt and focus entirely on its 1,020 department stores and catalog and Internet business, which has seen improving sales and financial results the past three years.

CVS chairman, president and chief executive Tom Ryan said the purchase fit his company's long-term strategy of expanding in the high-growth, Sunbelt markets. But he said the Eckerd stores were in worse shape than previous CVS acquisitions such as Revco, and he blamed poor store management.

"This is more of a turnaround situation, but we believe it's starting to stabilize," Ryan said.

Ryan said it would take 18 months to two years — and up to $350,000 per store in renovations — to lift the performance of Eckerd stores, starting in Florida. He said the Southern stores that CVS bought have seen a more dramatic drop in sales than the Northern outlets but had better locations.

The deal is subject to regulatory approval, but Penney expects it to close before the end of July.

CVS said the purchase would cost it 12 cents to 15 cents per share in earnings this year but provide a gain of 15 cents to 20 cents per share next year, and 25 cents to 30 cents per share in 2006.