Net earnings slipped at Walgreen Co. in its fiscal 2012 first quarter as the drug chain cited its contract impasse with Express Scripts Inc., a slow cough/cold and flu season, and a tough year-over-year comparison as impacting results.


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Earnings at Walgreens tail off in first quarter

December 21st, 2011

DEERFIELD, Ill. – Net earnings slipped at Walgreen Co. in its fiscal 2012 first quarter as the drug chain cited its contract impasse with Express Scripts Inc., a slow cough/cold and flu season, and a tough year-over-year comparison as impacting results.

Walgreens said Wednesday that for the first quarter ended Nov. 30, net income came in at $554 million, or 63 cents per diluted share, from $580 million, or 62 cents per diluted share, a year earlier.

The pharmacy chain's earnings per share (EPS) fell short of the average analyst estimate of 67 cents, according to Thomson Financial, and was at the low end of analyst projections, which ranged from 63 cents to 70 cents.

EPS in the quarter was negatively impacted versus a year ago by 1 cent from the delay in the cough/cold and flu season, Walgreens said, adding that its decision to exit the Express Scripts pharmacy provider network starting Jan. 1 cost 1 cent per diluted share in comparable pharmacy sales and 1 cent per diluted share in related expenses.

Total gross profit dollars in the first quarter rose 3.2% to $159 million, while gross profit margins dipped 0.4 percentage point to 28.1 as a percentage of sales. Walgreens attributed the decline to retail pharmacy margins, which saw a reduction in reimbursement rates, although front-end margins remained steady. The company said it expects an increase in gross profit growth from generic drug introductions, including generic Lipitor, during the second half of the fiscal year.

On the revenue side, first-quarter sales climbed 4.7% to nearly $18.2 billion from about $17.3 billion a year earlier. Same-store sales were up 2.5%, reflecting gains of 2.4% in the front end and 2.6% in the pharmacy.

Customer traffic in comparable stores was down 0.2% for the first quarter, and basket size increased 2.6%, the retailer reported.

Walgreens said it filled a record 208 million prescriptions in the quarter, an increase of 2.5% versus the prior-year period. Prescriptions filled in comparable stores gained 1.8%. The company noted that it exceeded by 2.3 percentage points the prescription growth rate of the rest of the industry during the same period, as reported by IMS Health. Walgreens added that as of Nov. 30, the chain increased its retail prescription market share 40 basis points from a year earlier to 19.9%, as reported by IMS Health on a 30-day adjusted basis.

"The first quarter was expected to be a very challenging one for gross profit dollar growth as we faced comparisons with strong gross profit performances in the first quarter of the two previous years," Walgreens president and chief executive officer Greg Wasson said in a statement. "Despite that, we're pleased with important aspects of our business, including our record sales of $18.2 billion, the first-quarter record number of prescriptions filled, the continued profitable growth of our front-end business, and delivering on our commitment to return cash to our shareholders."

Walgreens said that with the rollout of its Customer-Centric Retailing (CCR) initiative chainwide, it has put up better front-end same-store sales increases than its largest competitors. Last week, Rite Aid Corp. reported flat comparable-store sales in the front end for its fiscal 2012 third quarter ended Nov. 26, and earlier this month the chain said front-end comp-store sales decreased 0.6% for November. Walgreens posted a 2.7% gain in same-store sales in the front end for November. CVS Caremark Corp., which doesn't report monthly sales, said front-end comp-store store sales rose 2% for its third quarter ended Sept. 30.

"We believe CCR has been a significant factor in driving strong front-end sales increases while maintaining front-end gross profit margins compared with the year-ago quarter," Wasson stated. "We feel very confident in our key front-end strategies such as beauty, fresh food and private brand to drive sales in the upcoming quarters."

Meanwhile, flu shots administered at pharmacies and clinics this flu season through Nov. 30 totaled 5 million, compared with 5.6 million a year ago. "This year's cough/cold and flu season has seen less activity than a year ago," noted Wasson. "According to the Centers for Disease Control and Prevention, flu season peaks in January and February 70% of the time. Therefore, we still anticipate demand this winter for flu-related products."

During the first quarter, Walgreens opened or acquired 71 new drug stores (a net gain of 51 after relocations and closings) in the quarter versus 121 new stores (or a net gain of 89) a year earlier. The chain said that as of Nov. 30, it operated 7,812 drug stores, including 139 hospital on-site pharmacies.

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