Walgreen fiscal 1Q profit sinks nearly 26 pct

December 21, 2012 - 7:33 PM

Earns Walgreens

In this Wednesday, Oct. 17, 2012 photo, people pass the Walgreens store in New York's Times Square. Walgreen Co.'s fiscal first-quarter earnings sank nearly 26 percent as the nation's largest drugstore chain filled fewer prescriptions and absorbed costs tied to acquisitions and Superstorm Sandy. The Deerfield, Ill., company's performance fell short of Wall Street expectations, and the stock slipped Friday, Dec. 21, 2012, before markets opened. (AP Photo/Richard Drew)

Walgreen's fiscal first-quarter earnings sank nearly 26 percent as costs tied to a couple big deals and Superstorm Sandy helped put a bigger-than-expected dent in the drugstore chain's performance.

CEO Greg Wasson told analysts he saw the quarter as a "turning point" for the Deerfield, Ill., company, which has been working to recapture customers it lost during a contract dispute with Express Scripts Holding Co. But investors didn't buy that message at least initially, as the stock fell deeper than broader market declines in Friday trading.

Walgreen Co. spent $4 billion in cash earlier this year to buy a stake in Alliance Boots, a Swiss company that runs the largest drugstore chain in the United Kingdom. It also spent $438 million on a drugstore chain focused on the mid-South under the USA Drug, Super D Drug and Med-X names.

Costs tied to those deals totaled $23 million in the quarter, and Walgreen said it only counted a small portion of the gains it received from Alliance Boots. It is reporting those gains a quarter after they occur to address audit and regulatory requirements.

The storm system that swept up the East Coast in late October also cost $24 million in the quarter, as it forced Walgreen to temporarily close hundreds of stores.

Overall, Walgreen earned $413 million, or 43 cents per share, in the three months that ended Nov. 30. That compares with net income of $554 million, or 63 cents per share, a year ago. Walgreen said earlier this month revenue fell nearly 5 percent to $17.34 billion.

Excluding one-time costs, adjusted earnings were 58 cents per share.

Analysts forecast, on average, earnings of 70 cents per share, according to FactSet.

Shares dropped 3.3 percent, or $1.24, to close at $36.31 Friday, while the Standard & Poor's 500 index fell 1 percent.

Walgreen runs more than 8,000 drugstores in all 50 states as the nation's largest drugstore chain. The company's revenue has slumped through 2012 after it started the year stuck in a contract squabble with Express Scripts, for which it fills prescriptions.

The companies had let a contract between them expire last December, and their new agreement didn't start until September. The split meant many Express Scripts customers migrated to new drugstores for their prescriptions.

Walgreen is trying to bring those customers back, but competitors like CVS Caremark Corp. and Rite Aid Corp. are pushing aggressively to keep them.

Walgreen said prescriptions filled at stores open at least a year fell nearly 5 percent in the quarter, a smaller decrease than the 8 percent drop it reported in the previous quarter. The drugstore chain saw that improvement as a sign that customers are returning.

"We think we can redeem significant portion of these customers over time," Wasson said.

Walgreen said prescription revenue from stores open at least a year fell 11.3 percent, while revenue from the front end, or rest of the store, dropped 2 percent. Revenue from stores open at least a year is considered a key indicator of retailer health because it excludes stores that recently opened or closed.

Generic drugs have squeezed revenue for Walgreen and other drugstores this year because they are cheaper than brand-name drugs. But they help profitability because they come with a wider margin between the cost for the pharmacy to purchase the drugs and the reimbursement it receives.

Walgreen launched a customer loyalty program called Balance Rewards during the quarter. It allows shoppers to gain points at both Walgreen and Duane Reade stores and for online purchases that translate into cash rewards they can then use at the stores.

Walgreen executives said the program will encourage customers to visit their stores more frequently and to buy more.

"We now have a new kind of currency in place that will help drive our front-end business," Wasson said.