--Results hurt by lower same-store sales and a change in the way the drugstore retailer recorded its Alliance Boots stake
--Profit missed Wall Street's expectations, sending shares lower with the broader market
--Gross margin improved, as pharmacies benefit from new introductions and high demand for generic drugs
(Updates with details from Walgreen's conference call and the latest stock quote.)
By John Kell
Walgreen Co.'s (WAG) fiscal first-quarter earnings fell 25% due to lower same-stores sales and a change in the way the drugstore chain recorded its investment in European pharmacy operator Alliance Boots, which masked margin improvement.
The latest results are the first to include Walgreen's 45% stake in Alliance Boots GmbH, an investment that cost the company roughly $6.7 billion. The deal makes Walgreen one of the largest purchasers of prescription drugs globally, scale the company contends could give it more leverage when negotiating rates.
The drugstore chain's first-quarter profit missed Wall Street's expectations, in part due to a change in the way Walgreen reported its investment in Alliance Boots. Walgreen's shares slid 3.2% to $36.35 in recent trading, falling with the broader market.
To address regulatory and audit needs, Walgreen adopted a one-quarter reporting lag that hurt profit by seven cents a share, compared to a three-cent benefit that had been previously targeted if the reporting change wasn't made.
The reporting change also led Walgreen to temper the earnings boost the Alliance Boots investment was expected to generate for the fiscal year. Still, Chief Executive Greg Wasson said the Alliance Boots deal was "on track to meet our first-year synergy targets."
During Walgreen's conference call, Chief Financial Officer Wade Miquelon told analysts the reporting lag was needed to meet complicated regulatory audit needs, even though it delays some visibility into the Alliance Boots business.
Walgreen only reported equity income from the transaction for August in the latest period ended Nov. 30. For the fiscal second-quarter report, Walgreen plans to report Alliance Boots income for the months of September to November.
Operationally, Walgreen's results benefited from a stronger margin, which jumped to 29.4% from 28.1%. Walgreen, like smaller peer Rite Aid Corp. (RAD), has been benefiting from new introductions and high demand for generic versions of drugs like Lipitor as non-name brands carry higher margins.
More broadly, Mr. Wasson touted the latest quarter as a turning point for Walgreen amid the return of some of pharmacy-benefits manager Express Scripts Holding Co. (ESRX) customers, which widely left the retailer's stores for most of 2012 after a contract dispute.
Walgreen's latest results included nearly a full quarter in which the drugstore chain could court customers that it lost after a contract dispute with Express Scripts. The rate dispute, which was resolved in September, caused millions of prescriptions to move to rival drugstores and has helped bolster prescription orders at rivals such as CVS Caremark Corp. (CVS) and Rite Aid. Walgreen, meanwhile, had seen its profit slide in recent quarters.
Some observers say Walgreen's easing monthly prescription-volume declines signal the company is winning back some lost clients. Prescriptions filled on a same-store basis fell 2.9% in November, far better than October's 5.6% drop and the declines posted earlier this year.
Walgreen, which has reported weaker monthly same-store sales throughout 2012, could soon begin to report improved results next year as comparisons ease considerably as of January, when the Express Scripts issue gets lapped.
For the quarter ended Nov. 30, Walgreen reported a profit of $413 million, or 43 cents a share, down from $554 million, or 63 cents a share, a year earlier. Excluding items such as acquisition and Hurricane Sandy-related costs, adjusted earnings fell to 58 cents a share from 71 cents.
Analysts polled by Thomson Reuters most recently forecast per-share earnings of 70 cents.
Walgreen's same-store sales dropped 8% during the quarter, including a 2% drop in the front-of-the-store sales while same-store pharmacy sales declined 11%. Total sales dropped 4.6% to $17.32 billion.
During the quarter, Walgreen administered more than five million flu shots, slightly exceeding last year's level, as the Centers for Disease Control is projecting the worst flu season in 10 years. The pace far exceeds the roughly 1.8 million shots Rite Aid has given out so far this season, though the smaller peer is on pace to achieve a lighter goal of two million flu shots.
Walgreen, meanwhile, is moving beyond flu shots to offer adult, child and travel vaccinations. Demand for those shots more than doubled last quarter.
The company is also hopeful the first-ever loyalty-card program, called Balance Reward, will generate traffic gains and increase order sizes. Walgreen has signed 45 million customers to the program since September, an effort the company launched to help improve sales and personalize offerings.
--Melodie Warner contributed to this article
Write to John Kell at [email protected]
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