Longs' recovery initiatives pique interest on Wall Street

Drug Store News,  April 29, 2002  by Doug Desjardins

• E-mail
• Print
• Link

WALNUT CREEK, Calif. -- Two months after launching a series of new initiatives and the resignation of its president and chief executive officer, Longs Drugs Stores' shares have become a hot commodity on Wall Street. Longs' stock price has risen more than 20 percent in the past seven weeks, starting at $25 March 1 and closing at $31.05 April 19.

In early April, it hit a 52-week high of $31.40. The 52-week low for Longs is $19.90.

The sudden surge is surprising, given that Longs' recent sales have been average and that competition from supermarkets and other drug store chains is on the rise. Industry analysts attribute the price hike to several factors, including recent shakeups in the management ranks, the new turnaround plan and, perhaps, the result of speculation by some stock traders that a larger retailer might be waiting in the wings to buy Longs. Longs executives have stated they believe the company has a solid future as a stand-alone entity.

Analyst Dave Rodgers said interest could have been piqued by the turnaround measures Longs' board of directors approved in late February. The measures included a $60 million upgrade to its supply chain program and new initiatives to improve front-end and pharmacy sales.

"I think that, for the first time in a while, the board looked at the issues and articulated a strategy that outlined how they were going to improve the business," said Rodgers, an analyst with McDonald Investments in Cleveland. "In the past, they generally over-promised and under-delivered."

He said the new focus could have inspired confidence in otherwise wary investors. "People may be thinking that this is a new beginning for the company," he added.

This was the impression conveyed Feb. 27 when former Longs president and chief executive officer Steve Roath resigned. Roath, who had been with the company for 38 years, said he was stepping aside to make room for a successor who could see the company through its long-term turnaround initiatives. That same day, Longs' board announced several major changes. In addition to approving the turnaround measures, it appointed board member Harold Somerset as interim president and chief executive officer and announced the board itself would be changing to include more members from outside the company.

"The restructuring of the board and the turnaround measures showed the company is serious about improving," said Franklin Morton, research director for Ariel Capital Management, Longs' largest outside shareholder. "It showed a commitment to returning the company to profitability."

While Morton said Ariel's investment in Longs is based on the belief that the chain has a "good spot in the market and a good strategy," other investors may be looking at a different angle. Morton conceded that some investors expect Longs will be bought by a larger chain in the near future.

"Consolidation has been the big story in retail the past 10 years and drug stores are no different," said Morton. There's a chance that Longs could end up as part of a larger entity down the road. There are a few large chains with national aspirations looking to get established on the West Coast."

Longs' executives have downplayed talk of a possible merger. Somerset told Drug Store News in March that "we're convinced Longs has an independent future." Longs declined to comment on the chain's recent stock market rally. In a prepared statement, director of investor relations Tim Mehren said the company "does not comment on the performance of our own stock."

The 436-store chain recently reported that its same-store sales for March increased 6.9 percent on total sales of $422.8 million. This improvement, particularly the 6.2 percent increase in front-end sales, was due in part to the Easter holiday falling in March this year instead of April.

[Graph omitted]

COPYRIGHT 2002 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.
COPYRIGHT 2008 Gale, Cengage Learning