Walgreen Co. reported a surge in earnings and robust sales gains for its fiscal 2014 first quarter.

Walgreens, first quarter, fiscal 2014, Greg Wasson, Alliance Boots, AmerisourceBergen, net income, adjusted net earnings, same-store sales, front end, customer traffic, basket size, pharmacy, prescription sales, prescriptions filled, prescription market share, Well Experience format, drug stores, drug chain, Balance Rewards, immunizations

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Walgreens starts off strong in new fiscal year

December 20th, 2013

DEERFIELD, Ill. – Walgreen Co. reported a surge in earnings and robust sales gains for its fiscal 2014 first quarter.

Walgreens said that it filled a record number of prescriptions during the fiscal 2014 first quarter.

Walgreens said Friday that for the first quarter ended Nov. 30., net income climbed to $695 million, or 72 cents per diluted share, from $413 million, or 43 cents per diluted share, a year earlier. Adjusted net earnings in the quarter totaled $688 million, or 72 cents per diluted share, up from $553 million, or 58 cents per diluted share, in the prior-year period.

The results were in line with analysts' average estimate of 72 cents per share, with projections ranging from a low of 64 cents to a high of 77 cents, according to Thomson Financial.

Walgreens noted that first-quarter adjusted earnings exclude the negative impact of 6 cents per diluted share in acquisition-related amortization, 4 cents per diluted share from the quarter's LIFO provision, 3 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 17 cents per diluted share in fair value adjustments and amortization from the company's warrants to buy AmerisourceBergen common stock.

In addition, Walgreens said it's looking at ways to optimize its assets and cost structure as shifts to operating on a global platform as a result of its option to acquire the remaining equity interest in Alliance Boots and its strategic partnership with AmerisourceBergen. Initiatives in the fiscal 2014 first quarter resulted in a 2 cents per diluted share negative impact, excluded from adjusted results.

GAAP and adjusted net earnings in the 2014 quarter include a positive impact of 7 cents per diluted share from a deferred tax adjustment resulting from a reduction to the U.K. corporate tax rate applicable to Alliance Boots, which was enacted in July, Walgreens said. Last year's adjusted first quarter results exclude the negative impact of 6 cents per diluted share in acquisition-related amortization, 4 cents per diluted share from the quarter's LIFO provision, 3 cents per diluted share in costs related to Hurricane Sandy, and 2 cents per diluted share in other acquisition-related costs.

Walgreens said Alliance Boots contributed 14 cents per diluted share to its first-quarter 2014 adjusted results, including 7 cents per diluted share attributable to the deferred tax adjustment. The company estimates that the accretion from Alliance Boots in the second quarter of fiscal 2014 will be an adjusted 7 cents to 8 cents per diluted share. The combined synergies for Walgreens and Alliance Boots in the first quarter were about $107 million.

"Given the continued soft economy, we were generally satisfied with our top-line growth, where we increased both traffic and sales for the quarter as well as our pharmacy market share," Greg Wasson, president and chief executive officer of Walgreens, said in a statement.

"However, the year-over-year negative impact related to generics, including the significant shift in the generic wave from a peak a year ago to a trough this quarter, as well as our strategic decision to make meaningful promotional investments in our daily living business, affected our margins for the quarter," Wasson noted. "That said, by continuing our strong focus on managing our expenses, we were able to continue growing gross profit dollars faster than costs during the quarter."

On the sales side, fiscal 2014 first-quarter revenue rose 5.9% to a record $18.3 billion from $17.3 billion a year earlier. Same-store sales increased 5.4%, reflecting gains of 2.4% in the front end and 7.2% in the pharmacy.

Customer traffic in comparable stores edged up 0.2% during the quarter, and basket size grew 2.2%. According to Walgreens, 70% of front-end sales in November were processed through its Balance Rewards loyalty program, which has 74 million active members.

Walgreens said overall prescription sales advanced 7.3% in the first quarter and accounted for 64.7% of total revenue, as the company filled a record 213 million prescriptions, up 5.8% year over year. Prescriptions filled in comparable stores rose 5.5%, and the drug chain noted that it exceeded by 2.9 percentage points the prescription growth rate of the rest of the industry during the same period, as reported by IMS Health.

Walgreens reported that as of Nov. 30, it grew its retail prescription market share 50 basis points from a year ago to 19.4%, also as reported by IMS Health on a 30-day adjusted basis.

Also in the first quarter, the drug chain administered 6.7 million immunizations, up 34% from 5 million in the year-ago period.

The company generated operating cash flow of $133 million in the first quarter, compared with $601 million in the year-ago period. The retailer attributed the decrease mainly to the timing of working capital changes related to its pharmaceutical supply transition to AmerisourceBergen.

"In the second quarter, we will be taking further steps to balance front-end sales and margin," Wasson stated. "In terms of pharmacy margin, we expect the effect of the trough in the generic wave to be similar to the first quarter, while moderating during the balance of the fiscal year. We also expect our results related to seasonal flu next quarter to reflect comparisons to the same period last year, which was one of the most active flu seasons in the last 15 years. We will continue our sharp focus on expense management as we address the challenging environment, and we expect to realize the synergies from our strategic partnership consistent with our previously stated goal."

During the first quarter, Walgreens opened or acquired 84 net new drug stores, compared with 128 a year earlier. The retailer said it opened or converted 87 stores to its Well Experience format, raising the number of locations with that concept to 600. 

As of Nov. 30, Walgreens operated 8,200 drug stores nationwide, 142 more than a year ago.