--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 john.kell@dowjones.com
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