Walgreen 1Q earnings rise 5.5 percent

Drugstore chain Walgreen Co. used cost-cutting to help it overcome tougher economic conditions in its fiscal first quarter, reporting a modest 5.5 percent profit increase Friday that surpassed Wall Street's expectations.

The Deerfield, Ill.-based company also stepped up its already-rapid expansion pace, opening a record 169 new stores to rocket past the 6,000 mark.

Walgreen's earnings bump over the same quarter a year ago was notable in the face of challenges that have cut into the profits other pharmacy retailers.

Rival chain Rite Aid Corp. reported sharply wider third-quarter losses a day earlier, saying sales have been affected by a sluggish start to the cold and flu season and slower customer holiday shopping. Its shares touched a 52-week low and the drugstore chain lowered its 2008 profit outlook.

Walgreen shares jumped $2.55, or 7 percent, to $38.80 in afternoon trading Friday.

Goldman Sachs analyst John Heinbockel said in a note to investors that Walgreen's better-than-expected results "should give investors confidence that we have seen the trough in operating momentum." However, he added, profit growth is likely to remain sub-par for the next several quarters compared with its previous results.

Net earnings for the September-through-October period were $455.5 million, or 46 cents per share, up from $431.7 million, or 43 cents per share, in the same period a year earlier. That was 2 cents per share above the consensus estimate of analysts surveyed by Thomson Financial.

Revenue rose 10 percent to $14 billion from $12.7 billion, slightly below the $14.11 billion expected by analysts.

Comparable sales, or those from stores open more than a year, climbed 5.4 percent in the quarter, including a 4.6 increase in front-end, or non-pharmacy, sales and a 5.9 increase in prescription same-store sales.

Total prescription sales increased 11 percent, accounting for 66 percent of total sales.

Lower-priced generic drugs helped increase pharmacy gross profit margins, but that was offset by a shift toward the pharmacy business, which has lower margins than front-end products.

"We're seeing especially strong sales among our private-brand products as the economy softens and consumers search for more value," said President Gregory Wasson.

Walgreen said it lowered expenses by controlling store salaries and lowering advertising expenses. Selling, general and administrative expense costs increased by 9.5 percent over a year ago but rose at a slower pace than sales due to the company's aggressive cuts.

"The biggest SG&A expense line that we continue is payroll," CEO Jeffrey Rein said on a conference call. "That's where we have a concentrated effort."

The company said its single-digit earnings increase resulted came against a tough comparison with the 25 percent gain a year ago, which was attributable largely to the introductions of blockbuster generic versions of drugs Zocor and Zoloft and a surge of pharmacy patients after the introduction of the Medicare Part D drug benefit.

Rein said on a conference call that he expects Walgreen to face a continuing bottom-line challenge in the first half of the current fiscal year, with improvement in profit margins and sales likely in the second half.

"It's a tough economic environment," he said.

Walgreen's 169 store openings in the quarter — an average of nearly two a day — was up from 142 a year ago. Factoring in relocations and closings, the net increase in stores was 142.

The company said it plans to open 550 new stores during the current fiscal year, with a net increase of more than 475. It had a total of 6,139 stores in 49 states and Puerto Rico as of Nov. 30.

___

On the Net:

http://www.walgreens.com