Walgreen profit weaker than expected

By Ben Klayman

DETROIT (BestGrowthStock) – Walgreen Co (WAG.N: ), the biggest U.S. drugstore chain, posted a lower-than-expected quarterly profit as sales of nonprescription items disappointed, sending its shares down 6.1 percent.

Sales at stores open at least a year, excluding its acquisition of Duane Reade, rose 0.7 percent overall, but inched up just 0.1 percent for general, or front-end, merchandise like milk, aspirin, toothpaste and cosmetics, due to weak discretionary spending and lower demand for flu-related products.

“It’s the front-end discretionary sales that really bring in the earnings,” said Tim Ghriskey, chief investment officer of Solaris Asset Management, which does not currently own Walgreen shares. “This is a company that hasn’t been executing of late.”

Sales of prescriptions, which accounted for 65.4 percent of the total, rose 5.7 percent, and their same-store sales increased 1 percent.

Walgreen ended a high-stakes standoff with CVS Caremark Corp (CVS.N: ) last week over reimbursements for drug prescriptions that analysts said had pressured its margins. Company officials declined to discuss details of the agreement on Tuesday.

Net income fell 11 percent to $463 million, or 47 cents a share, in its fiscal third quarter that ended May 31, from $522 million, or 53 cents a share, a year earlier.

Excluding a charge of 4 cents a share from the elimination of a tax benefit related to Medicare, it earned 51 cents a share, 6 cents below what analysts polled by Thomson Reuters I/B/E/S had expected. It was the second quarter in a row that results missed expectations.

Walgreen’s quarter also included charges of 2 cents for Walgreen’s recent Duane Reade acquisition and 1 cent for restructuring.

Sales rose 6.1 percent to $17.2 billion, above the $17.14 billion analysts had forecast. Same-store sales in May slipped 0.2 percent, instead of the increase analysts had expected, due to the introduction of lower-priced, new generic drugs.

“We anticipated that this would be a challenging quarter for several reasons,” Walgreen Chief Executive Greg Wasson said on a conference call, citing a weak economy, prescription reimbursement pressure compounded by a slowdown in the rate of introduction of new generics, and a lower incidence of flu.

“Consumers are just pulling back their spending in total,” he added.

Wasson, however, also pointed to such positive signs as the record sales and number of prescriptions filled as well as growth in the company’s retail pharmacy market share.

Morningstar analyst Matthew Coffina said the company’s same-store sales have been weak for several months and the story is really about operating margin, which shrank to 4.8 percent in the quarter compared with 5.2 percent last year.

“Investors are really looking to see some of these initiatives actually pay off in some way,” he said, pointing to a lack of progress in the store remodeling program’s impact showing up in sales.

Walgreen will have remodeled 2,000 of a possible 5,500 stores by year end under a program called “Customer Centric Retailing,” with the rest targeted for 2011, said Wasson, who added he is happy with the progress made.

The company, with about 7,500 total stores, has cut the time it takes to covert stores under the program by about 20 percent since its start, he added.

Walgreen said it expected to report organic store growth of 4.5 percent to 5 percent for fiscal 2010 and 2.5 percent to 3 percent annually beginning in 2011.

The company said its integration of Duane Reade was on track. It expects to generate $120 million to $130 million in cost savings from the acquisition over the next three years.

Shares of Walgreen were down 6.1 percent at $28.31 in afternoon trading on the New York Stock Exchange, approaching a 12-month intraday low of $27.89 seen in July last year.

Since the end of last year, Walgreen shares have fallen almost 23 percent, compared with declines of 33 percent and 1.6 percent for Rite Aid Corp (RAD.N: ) and CVS, respectively, in the same period.

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(Reporting by Ben Klayman in Detroit; Editing by Derek Caney, Lisa Von Ahn and Tim Dobbyn)

Walgreen profit weaker than expected