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FAY's GROWS Rx BUSINESS 33% IN FISCAL 1986 TO $104 MIL.; EXPANDED PHARMACY SERVICES INCLUDE MAIL ORDER Rx BUSINESS, MORE NURSING HOME CUSTOMERS

Executive Summary

Fay's Rx drug business grew 33% in fiscal 1986 to $104 mil. -- representing over 23% of total corporate sales, the Liverpool, NY-based drug chain said in its recently released annual report. In a year of decreased profitability, Fay's noted that the performance of its pharmacy operations was a "cause for optimism in fiscal 1986." The chain added that "comparable store Rx sales increased 18%." Fay's said it plans to "continue aggressive advertising and promotion of [its] pharmacy services in order to sustain the momentum that has been established." Fay's has taken several approaches to "branching out" its pharmacy operations from its traditional in-store service. In fiscal 1986, Fay's added 18 new customers to its nursing home pharmacy service, giving the chain a total of 61 nursing home customers at the end of the year. Fay's also started up a mail order Rx business during the year called Postscript. Fay's noted that it also provides pharmacy services "to prescription drug plans maintained by labor unions, health maintenance organizations and corporations." Plus, Fay's maintains an on-site pharmacy at a convalescent home in Syracuse, N.Y. At the end of the fiscal year, Fay's had 139 super drug stores in operation, four bantam drug stores, seven Wheels auto parts stores, and four Paper Cutter stores. Fay's opened or acquired 19 super drug stores, including eight Genovese stores in Connecticut and western Massachusetts, during fiscal 1986, and added one bantam drug store and nine specialty retail stores. Fay's said it will slow down its expansion program in the current fiscal year, adding only 12 super drug stores and 12 specialty retail stores. Fay's explained that the "scaled back opening schedule" will provide the company "an opportunity to assimilate the growth and diversification that has taken place over the last three years." The chain has added 62 units in the past three years, including over 50 drug stores. In the annual report, Fay's highlighted its expansion in the Springfield, Mass./Hartford, Conn. market via the purchase of the eight Genovese stores last summer. The acquisition gives Fay's "the opportunity to expand [its] super drug store operations into this promising new market with an established base of Rx customers in place," the annual report notes. "Further penetration of the Hartford and Springfield markets will be given priority in fiscal 1987," the report adds. Fay's will finance its expansion with a working capital position of $59 mil. -- obtained primarily through a $35 mil. debenture offering completed in May 1985. As a result of the offering, Fay's improved its working capital ratio (current assets to current liabilities) from 1.81 at the end of fiscal 1985 to 2.56 at the end of fiscal 1986, while increasing long term debt to $50.2 mil. at the end of the fiscal year. Although FY 1986 sales increased 21% to $455.1 mil., Fay's reported a 68% drop in net income to $2.8 mil. Citing competitive pressures on its upstate New York drug store business and a general decline in consumer demand, Fay's said it lowered prices and increased promotion costs to hold onto market share. "Although the company maintained market share," the annual report notes, "the desired result of significantly increased sales to offset the reduction in gross margins did not materialize due to a continued lackluster demand for general merchandise." In Fay's key Rochester, N.Y. market, price competition "was especially severe," the annual report observed. In that market, where the chain operates approximately 15 super stores, "everyday prices were reduced on over 8,000 items." Fay's outlined in the annual report its strategy for improving the profit picture in FY 1987 by: restoring "historical gross profit levels in all major markets to such extent as is consistent with the competitive retail environment"; reducing the emphasis placed on twice weekly newspaper advertising while putting more emphasis on circular and broadsheet promotions and radio and television advertising; improving inventory turnover by elimination of slow moving product lines and increasing the number of items distributed in less than case quantities; increasing consumer surveying to provide up-to-date information of consumer trends and to identify operational weaknesses and strengths; and implementing cost containment programs "relative to all aspects of operations not effecting customer service or store appearance."

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