Despite an uptick in sales, Walgreen Co. saw its fiscal 2010 third-quarter earnings drop due in part to special charges and the loss of a key tax benefit.

The earnings result fell short of analysts' forecast. But Walgreens noted that sales were up in the pharmacy and front end and that it increased its pharmacy market share. "We anticipated this would be a challenging quarter," CEO Greg Wasson stated.

DEERFIELD, Ill. — Despite an uptick in sales, Walgreen Co. saw its fiscal 2010 third-quarter earnings drop due in part to special charges and the loss of a key tax benefit.

The drug store chain said Tuesday that net earnings for the quarter ended May 31 totaled $463 million, or 47 cents per diluted share, compared with $522 million, or 53 cents per diluted share, a year earlier.

For Walgreens’ 2010 third quarter, Thomson Financial reported an average analyst estimate of 57 cents per share. Analyst projections ranged from a low of 51 cents per share to a high of 60 cents per share.

Walgreens noted that third-quarter earnings reflect a negative impact of 4 cents per diluted share from the elimination of the tax benefit for the Medicare Part D subsidy for retiree benefits, which resulted from the enactment of the Patient Protection and Affordable Care Act. The after-tax income tax charge totaled $43 million, the company said.

Also in the third quarter, Walgreens reported a negative impact of 2 cents per diluted share from costs associated with the Duane Reade acquisition and 1 cent per diluted share in restructuring and restructuring-related costs associated with the company’s Rewiring for Growth initiative. The year-ago quarter included restructuring costs of 6 cents per diluted share in restructuring costs.

Meanwhile, 2010 third-quarter sales increased 6.1% to $17.2 billion from $16.2 billion a year earlier. Same-store sales edged up 0.7%, reflecting a 0.1% gain in the front end and a 1% increase in the pharmacy. Duane Reade stores aren’t included in same-store results.

Walgreens said front-end sales were impacted by continued weak demand for discretionary goods and lower demand for flu-related products versus the year-ago quarter.

Prescription sales rose 5.7%, and the number of comparable prescriptions filled increased 2.5% year over year, including 1.3 percentage points due to more patients filling 90-day prescriptions, according to Walgreens. The company said it exceeded by 3.8 percentage points the industrywide prescription growth rate (excluding itself) during the same period as reported by IMS Health. As of May 31, Walgreens increased its retail pharmacy market share 60 basis points from a year ago to 19.7%.

"We anticipated this would be a challenging quarter for several reasons, including the sluggish economy, prescription reimbursement pressure compounded by a slowdown in the rate of introduction of new generics, and a lower incidence of flu compared with the beginning of the H1N1 pandemic a year ago," Walgreens president and chief executive officer Greg Wasson said in a statement. "While we saw a number of positive signs in the quarter and reached several important milestones, we also realize there is more to be done.

"During the quarter, we achieved record sales, a record number of prescriptions filled, continued growth in our retail pharmacy market share, and continued generation of strong cash flow," Wasson continued. "We also are seeing an improvement in our Customer-Centric Retailing (CCR) stores and an expansion of opportunities for our new Pharmacy, Health and Wellness Solutions. At the same time, we are directly addressing the reimbursement pressures we are seeing and following through on the cost control initiatives associated with Rewiring for Growth."

In the third quarter, Walgreens opened 94 drug stores and acquired 258 Duane Reade drug stores and nine other drug stores, for a net gain of 342 stores after relocations and closings. As of May 31, Walgreens operated 7,522 drug stores nationwide.