Penney to Buy Northeast Drugstore Chain

J.C. Penney Co., in one of its first moves to fight competition by expanding through acquisitions, said Tuesday that it will buy the 272-store Fay’s Inc. drugstore chain in the Northeast for $285 million in stock.

Penney, whose sales and earnings have been sagging for more than a year, has made no secret of its intention to improve results by seeking to buy other companies. Expanding the drugstore business is a smart move, some analysts said, because it will make the department store operator a stronger competitor in a profitable, consolidating industry.

“Penney wants to grow, and this is an important acquisition for them because it strengthens their drugstore operations and gives them an important expansion in the Northeast,” said Walter Loeb, a retail consultant and head of Loeb Associates.

The purchase, which was expected, would boost Penney’s number of drugstores through its Thrifty Drug Inc. subsidiary to 926, making it the eighth-largest drugstore operator in the U.S. It would also increase its drugstore sales to $3 billion, or about 15% of sales, from $1.85 billion, or about 10% of sales, in fiscal 1996.

Shares of Liverpool, N.Y.-based Fay’s rose 37.5 cents to $12.25; Penney shares fell $1.375 to $51.625. Both trade on the New York Stock Exchange.

Fay’s shareholders would receive $12.75 in Penney stock tax-free for each share of Fay’s they hold. Penney said the acquisition should add to its per-share operating profit next year.

Plano, Texas-based Penney said it will keep the Fay’s name on the company’s New York stores. Stores in Pennsylvania, Vermont and New Hampshire would become Thrifty Drug stores.

It was disclosed in February that Penney had made a $6.82-billion offer to buy rival Dayton Hudson Corp., which the operator of the Target, Mervyn’s and other chains rejected.

The Fay transaction, subject to the approval of Fay’s stockholders and regulators, is expected to close by year-end.