Walgreen Co. posted modest revenue and profit gains for its fiscal 2010 second quarter but saw its same-store sales dip and its earnings fall short of Wall Street's projections.
The drug store chain said a weak flu season impacted sales in the front end and the pharmacy, although prescription sales rose in the quarter. Demand for discretionary items also remained weak, according to the retailer.
DEERFIELD, Ill. — Walgreen Co. posted modest revenue and profit gains for its fiscal 2010 second quarter but saw its same-store sales dip and its earnings fall short of Wall Street’s projections.
The drug store chain on Tuesday said sales for the quarter ended Feb. 28 edged up 3.1% to nearly $17 billion from about $16.5 billion a year earlier.
Overall comparable-store sales fell 0.2%, reflecting a 1.6% decrease in the front end and a 0.6% rise in prescription business.
According to Walgreens, front-end sales were impacted by continued weak demand for discretionary goods and by lower demand for cough, cold and flu-related products versus a year ago. Prescription sales rose 3.2%, with the number of prescriptions filled up 6% year over year, including a 0.9 percentage point gain due to more patients filling 90-day prescriptions. The company said it exceeded by 3.8 percentage points the industrywide prescription growth rate during the quarter, based on data from IMS Health.
Walgreens noted, however, that pharmacy sales were impacted by a weak flu season compared with a year ago. According to the Centers for Disease Control and Prevention (CDC), the company said, the percentage of physician visits by patients with flu-like symptoms fell from a record 7.7% in late October to 1.8% in late February, below the 3.5% of flu-related visits the previous February and 6% two years ago.
On the earnings side, net income for the fiscal 2010 second quarter totaled $669 million, or 68 cents per diluted share, up 4.6% from $640 million, or 65 cents per diluted share, a year earlier. That fell short of the average analyst estimate of 71 cents per share, according to Thomson Financial, which reported an earnings forecast ranging from a low of 64 cents per share to a high of 76 cents per share.
Walgreens said its second-quarter 2010 results include the impact of 2 cents per diluted share in restructuring and related costs associated with its Rewiring for Growth initiative. Cash flow from operations for the quarter reached $595 million.
"During the quarter we continued to make progress in executing our key strategies for growth," president and chief executive officer Greg Wasson said in a statement. "We generated significant cash flow, despite the impact of a sluggish economy and lower-than-anticipated sales of flu-related products."
Selling, general and administrative expense dollars in the second quarter climbed 5.1%, with SG&A restructuring costs related to Rewiring for Growth totaling $22 million compared with $82 million in the year-ago quarter.
Walgreens pointed out that total expense growth was offset by savings from Rewiring for Growth in store payroll and expense initiatives. Rewiring for Growth remains on track to deliver $1 billion in pretax cost savings beginning in fiscal 2011, the retailer said.
Gross profit margins increased 0.5 percentage points to 28.8 as a percent to sales. Helping overall margins were fewer front-end markdowns versus the year-ago quarter, a lower provision for LIFO and lower Rewiring for Growth expenses, while retail pharmacy margins were flat, according to the company.
"We made a strategic decision to buy less seasonal inventory, which led to fewer markdowns and helped strengthen our margins," Wasson explained. "We continue to have a relentless focus on cost reduction and cash flow, allowing us to make strategic investments and return $656 million in cash to shareholders in the first half of the fiscal year through a combination of share repurchases and dividends."
For the fiscal 2010 first half, total revenue climbed 6.1% to $33.4 billion from $31.4 billion a year earlier. Net earnings surged 10.5% to $1.16 billion, or $1.17 per diluted share, compared with $1.05 billion, or $1.06 per diluted share, a year ago. The company said first-half results include the impact of 5 cents per diluted share in restructuring and other costs associated with Rewiring for Growth.
"As much as the early flu season helped our first-quarter results, it hurt our second-quarter results," Wasson stated. "Overall, though, we’re pleased to report a sales increase of more than 6% and a double-digit earnings increase for the first half of the fiscal year."
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