Walgreen Co. topped analysts' earnings forecast for its fiscal 2011 third quarter and saw robust gains in overall revenue and same-store sales.

Walgreens, third quarter, fiscal 2011, revenue, net earnings, same-store sales, comparable-store sales, Greg Wasson, EPS, earnings per share, Rewiring for Growth, Russell Redman, comp-store sales, drug store, pharmacy, front end, prescriptions filled, Mark Miller, William Blair & Co.

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Third-quarter earnings, sales rise at Walgreens

June 21st, 2011

DEERFIELD, Ill. – Walgreen Co. topped analysts' earnings forecast for its fiscal 2011 third quarter and saw robust gains in overall revenue and same-store sales.

The drug store chain said Tuesday that net earnings for the third quarter ended May 31 came in at $603 million, or 65 cents per diluted share, compared with $463 million, or 47 cents per diluted share, a year earlier.

Analysts' consensus estimate was for earnings per share (EPS) of 63 cents in the 2011 quarter, with projections ranging from a low of 56 cents to a high of 66 cents, according to Thomson Financial.

Walgreens noted that fiscal 2011 third-quarter results include the impact of 1 cent per diluted share in restructuring and related costs related to its Rewiring for Growth initiative. In the year-ago quarter, results included the negative impact of 4 cents per diluted share from the elimination of the tax benefit for the Medicare Part D subsidy for retiree benefits (stemming from the health care reform law), 2 cents per diluted share from costs associated with the Duane Reade acquisition and 1 cent per diluted share in costs related to Rewiring for Growth, the company added.

"We are pleased with our very solid performance in the third quarter as we were able to meet our financial goal of double-digit growth in earnings per share," Greg Wasson, president and chief executive officer of Walgreens, said in a statement. "Our business strategies resulted in strong quarterly sales and increased cash flow. As fuel prices remain high, further stretching household budgets, we serve as a convenient destination for health and daily living."

On the revenue side, 2011 third-quarter sales rose 6.8% year over year to a record $18.4 billion, according to Walgreens. Comparable-store sales increased 4.1%, including a 3.9% comp-store gain in the front end. Customer traffic in comparable stores increased 1.7 percent for the third quarter, while basket size increased 2.2 percent.

Prescription sales, meanwhile, climbed 6.4%, with same-store sales in the pharmacy up 4.1%. Walgreens said it filled 210 million prescriptions in the third quarter, a gain of 5.8% versus a year ago, while prescriptions filled in comparable stores rose 4.6%. The company noted that it exceeded by 3.5 percentage points the prescription growth rate of the rest of the industry during the same period, as reported by IMS Health, and that during the third quarter the drug chain grew its retail prescription market share to 20.1%.

"Our comparable-store sales this quarter demonstrated our business was resilient in an ongoing tough economy," Wasson stated. "We saw healthy increases across our consumables, cough/cold, pain/sleep, personal care and beauty categories, along with continued strength in our private brand products as we delivered the combination of assortment, accessibility and value relevant to our customers."

In reporting third-quarter results, Walgreens also announced that contract renewal talks with pharmacy benefit manager Express Scripts Inc. have been unsuccessful and that it plans to exit the PBM's drug store network starting next year.

Mark Miller, an analyst at William Blair & Co., said the news of the dispute with Express Scripts "overshadows another good quarter" by Walgreens.

"Fiscal third-quarter EPS of 65 cents, up 27% versus operating EPS of 51 cents, exceeded our 64 cents estimate and the 63 cents consensus forecast," he wrote in an analysis of Walgreens' third-quarter performance. "We view the bottom-line results as solid and of respectable quality, as a favorable tax state settlement was largely offset by a higher-than-expected LIFO reserve expense."

Miller also noted, "The comp-sales performance was driven by balanced growth in the
pharmacy (4.1% comp growth) and the front of the store (3.9%)."

During the third quarter, Walgreens opened or acquired 41 new drug stores (a net gain of 25 after relocations and closings) versus 361 (including 258 Duane Reade drugstores, for a net gain of 342) in the prior-year quarter. As of May 31, Walgreens had 7,715 drug stores nationwide, including 131 medical facility pharmacies.

Walgreens said it expects organic store growth of between 2.5% to 3% for fiscal 2011.