Generic drug introductions and the continuing contract impasse with Express Scripts Inc. took a toll on comparable-store sales in June at Walgreen Co., which reported a double-digit decline for the month.

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Comp-store sales fall by double digits at Walgreens

July 5th, 2012

DEERFIELD, Ill. – Generic drug introductions and the continuing contract impasse with Express Scripts Inc. took a toll on comparable-store sales in June at Walgreen Co., which reported a double-digit decline for the month.

Walgreens said Thursday that overall same-store sales dropped 10% in June, compared with a 5.8% decrease in May. The drug chain noted that overall comp-store sales for June reflect negative impacts of 3.6 percentage points from new generic drugs and 1.4 percentage points from calendar day shifts (one extra Friday and Saturday and one fewer Wednesday and Thursday).

In the front end, same-store sale were down 1% in June. Customer traffic in comparable stores fell 2.3%, though basket size grew 1.3%.

Comparable pharmacy sales in June sank 15%. Walgreens said the pharmacy comp-store result includes negative impacts of 2.3 percentage points from calendar day shifts; 5.8 percentage points from generic drug introductions; 0.7 percentage point from the product mix of cough, cold and flu drugs; 10.7 percentage points from not being in Express Scripts pharmacy provider network.

Prescriptions filled at comparable stores decreased 11.9% in June, according to Walgreens. The prescriptions count during the month was negatively affected by calendar day shifts (2.3 percentage points), lower incidence of flu (0.3 percentage point) and no longer being part of the Express Scripts network (10.7 percentage points). Prescriptions processed by Express Scripts were 12.6 % of Walgreens' prescriptions in June 2011, the chain said.

Analyst Mark Miller of investment firm William Blair & Co. noted that the Walgreens' same-store sales decline was below expectations because the impact of new generics "was significantly higher in June." He also cited a sequentially weaker underlying pharmacy comp-store result and adverse calendar shifts.

"Generics subtracted 5.8% from the pharmacy comp in June, up from 3.9% in May, because of the rapid switch to generic Plavix (an anticoagulant)," Miller wrote in a research note Thursday. "While investors are aware of the building generic wave, we believe that forecasts did not adequately reflect the shift this month. Importantly, Walgreens typically experiences a large step-up in gross profits in the first six months after a patent expiration (and then a partial step-down after the exclusivity period, the opposite of CVS), so this is a favorable indicator for August-quarter profitability."

Walgreens' total revenue in June declined 6.8% to $5.63 billion from $6.04 billion a year earlier. Front-end sales inched up 0.5% year over year, while pharmacy sales in the month decreased 10.7%. Pharmacy sales accounted for 62.9% of overall June sales.

Walgreens reported that calendar year-to-date sales came in at $35.04 billion, down 3% from $36.11 billion in the prior-year period. Sales for the first 10 months of fiscal 2012 dipped 0.1% to $60.19 billion from $60.25 billion in fiscal 2011.

The retailer said that in June it opened 16 drug stores, including one relocation, and acquired four stores and closed one. As of June 30, the chain had 7,907 drug stores, 174 more than a year ago, including 45 stores acquired over the last 12 months.

On Thursday, Walgreens also announced a $438 million deal to acquire USA Drug, which operates 144 stores under various banners mainly in the Mid-South region. And about two weeks ago, Walgreens unveiled a $6.7 billion agreement to buy a 45% stake in Alliance Boots, a global pharmaceutical, health and beauty retailer and wholesaler. Under the deal, Walgreens has the option to acquire the rest of Alliance Boots in about three years.

*Editor's Note: Article updated with analyst comment.