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FAY's PHARMACY SALES LIKELY TO EXCEED $100 MIL. THIS YEAR; DRUG CHAIN WILL CONTINUE NORTHEAST EXPANSION IN COMING FISCAL YEAR, CEO PANASCI TELLS ANALYSTS

Executive Summary

The total pharmacy business in the Fay's drugstore chain could top the $100 mil. mark in the current fiscal year, according to remarks by company President Henry Panasci, Jr. before the New York Society of Security Analysts on Nov. 19. "Year to date, Fay's pharmacy sales have increased 35% following record increases of 28% during fiscal 1984 and 29% during 1985," Panasci stated. If that pace continues through the end of the current fiscal year, which ends Jan. 31, drug sales will increase by roughly $27 mil. over last year's $78 mil., easily surpassing the $100 mil. threshold. "We plan to continue our aggressive advertising and promotional efforts in the area of pharmacy in order to sustain the momentum established over the last three years," he added. Specifically, Panasci mentioned Fay's active exploration of Rx service opportunities with health maintenance organizations and independent practice associations. In addition, he noted that the chain has successfully enhanced its walk-in Rx business through the marketing of Rx services to nursing homes, small hospitals and rehabilitation centers. On Nov. 20, Fay's opened six new super drugstores -- two in the Buffalo, NY area, one near Albany, NY, one in Massachusetts and two in Pennsylvania -- bringing the company total to 139 super drugstores at an average size of 12,000 to 16,000 sq. ft. The Liverpool, NY-based chain also operates four "bantam" drugstores, small but profitable independents that the chain has acquired, as well as six Wheels auto parts stores and three Paper Cutter specialty stores. Chain Links Corporate Expansion, Increased Price Competition To Earnings Decline "With the store openings scheduled through the balance of the fiscal year, we will end the year with 154 stores in operation, having begun the year with 125 stores," Panasci stated. He said that the chain's expansion for fiscal 1987 "will be somewhat less aggressive," with the anticipated opening of 12 super drugstores, 10 Wheels stores and five Paper Cutter stores. Panasci explained that Fay's growth oriented drug business strategy is based on the uniqueness of the super discount drugstore format to the Northeast, the high proportion of the market controlled by independent drug store operators and the Northeast's growing elderly population. "In like manner," he continued, "with one exception, our Wheels operation faces a market not yet developed by chain competitors, creating a window of opportunity for Fay's expansion." The company reported that for the three months ended Oct. 31, sales increased 28.4% to $112.2 mil. over the third quarter a year ago, while net earnings plunged 84% from $1.8 mil. to $290,000. Revenues for the nine months increased 21.9% to $313.6 mil. from $257.3 mil. in the first three quarters of fiscal 1985. Net earnings for the period were down 75% to $1.4 mil. Fay's cited increased competition for the retail dollar and expansion as reasons for the earnings decline. Referring to the increased price competition that the company has faced in most of its markets, but especially in the Rochester, NY area, Panasci commented: "Though we have been able to maintain sales and customer traffic counts in all our markets, the effect upon our gross margin has been noticeable." He explained that the 2-1/2 percentage point loss in the chain's gross margin "was unaccompanied by sales increases needed to adequately lower our selling, general and administrative percentage to make up for the reduced margins, thus creating a squeeze on bottom line profits."
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