Walgreen Co. turned in sales and net income gains for its fiscal 2013 third quarter, including improved pharmacy business, but fell short of Wall Street's consensus earnings forecast.


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Walgreens sees stronger pharmacy results in 3Q

June 25th, 2013

DEERFIELD, Ill. – Walgreen Co. turned in sales and net income gains for its fiscal 2013 third quarter, including improved pharmacy business, but fell short of Wall Street's consensus earnings forecast.

Walgreens said Tuesday that for the third quarter ended May 31, adjusted net earnings rose to $812 million, or 85 cents per diluted share, from $628 million, or 72 cents per diluted share, a year earlier. 

Analysts, on average, had projected earnings of 91 cents per share for the quarter, with estimates ranging from a low of 85 cents to a high of 97 cents, according to Thomson Financial. As of early trading Tuesday morning, Walgreens' share price was down $3.12, or 6.5%, to $44.93.

The adjusted third-quarter results, Walgreens said, exclude the negative impacts of 8 cents per diluted share from the quarter's LIFO provision, 5 cents per diluted share in acquisition-related amortization, 5 cents per diluted share from a legal settlement with the Drug Enforcement Administration, 5 cents per diluted share in Alliance Boots-related tax and 2 cents per diluted share in other acquisition-related costs. Also excluded is the positive impact of 5 cents per diluted share in fair value adjustments and amortization related to the company's warrants to buy AmerisourceBergen common stock.

Walgreens entered a strategic partnership with Alliance Boots last June, forming a joint venture company in late October. In March, Walgreens and Alliance Boots entered a partnership with AmerisourceBergen.

For the third quarter, Walgreens' GAAP net earnings came in at $624 million, or 65 cents per diluted share, up from $537 million, or 62 cents per diluted share, in the year-ago period.

Third-quarter sales rose 3.2% to $18.3 billion from nearly $17.8 billion. Same-store sales edged up 1.4%, reflecting gains of 0.4% in the front end and 2% in the pharmacy.

Walgreens said customer traffic in comparable stores fell 3.9% and basket size grew 4.4% in the quarter.

Prescription sales were up 3.4% and accounted for 63.1% of revenue in the quarter, Walgreens reported. The drug chain said it filled 209 million prescriptions in the quarter, an increase of 8.7% over a year earlier. Prescriptions filled in comparable stores rose 7.1%.

Total gross profit dollars climbed 4.1% to $208 million year over year, with gross profit margins rising 30 basis points versus the year-ago quarter to 28.5% of sales. Walgreens said the growth in margins stemmed mainly from an increase in the dispensing of generic drugs, which have lower prices but higher profit margins, and from a positive contribution from the front end. The LIFO provision was $120 million in the third quarter, compared with $60 million in the year-ago quarter, primarily driven by prescription drug inflation.

Walgreens reported operating and free cash flow of $1.4 billion and $1.1 billion, respectively, in the third quarter.

"This quarter we continued to see a strengthening in our pharmacy performance as we maintained strong margins and increased our retail pharmacy market share from 18.4% to 19.2% year over year," Walgreens president and chief executive officer Greg Wasson said in a statement. "This, in combination with our focus on cost control and the contribution from Alliance Boots and related synergies, resulted in adjusted earnings per diluted share growth of 18.1% in the quarter. We also produced another strong quarter of operating cash flow of $1.4 billion.

"That said," Wasson added, "our front-end sales are still not up to our expectations, and while the economy remains challenging, increasing customer traffic and front-end sales are our near-term priorities with a focus on pricing and promotion and the leveraging of our Balance Rewards program, which now has 75 million members."

Walgreens said its joint synergy program with Alliance Boots is on track to provide combined first-year synergies of $125 million to $150 million, compared with the previous target of $100 million to $150 million.

Alliance Boots contributed 10 cents per diluted share to Walgreens' third-quarter adjusted results, including a negative impact of 2 cents per diluted share due to reconciliation of International Financial Reporting Standards (IFRS) with GAAP. Walgreens said Alliance Boots is expected to contribute 8 cents per diluted share to fourth-quarter adjusted results, including a negative impact of 1 cent per diluted share from weakening in the British pound between February and May.

Walgreens said it opened or acquired 39 new drug stores in the third quarter, compared with 52 a year earlier. As of May 31, Walgreens operated 8,097 drug stores, 207 more than a year ago. 

For the first nine months of fiscal 2013, Walgreens' sales dipped 0.5% to about $54.3 billion from nearly $54.6 billion. Adjusted net earnings for the period rose to $2.28 billion, or $2.39 per diluted share, from $2.01 billion, or $2.31 per share, a year earlier. GAAP net income was $1.79 billion, or $1.88 per diluted share, up from $1.77 billion, or $2.03 per diluted share, in the prior-year period.

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