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Walgreen fiscal 3Q profit falls 9 percent

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Drugstore operator Walgreen Co. said Monday its profit fell 9 percent in the fiscal third quarter as greater expenses, including those related to its reorganization efforts, offset rising sales.

Deerfield, Ill.-based Walgreen aims to cut its annual expenses by $1 billion starting in 2011, but cost-cutting initiatives have resulted in hefty restructuring costs. In the quarter ended May 31, the company earned $522 million, or 53 cents per share, down from $572 million, or 58 cents per share, a year ago.

That missed the average 56-cent estimate expected by analysts surveyed by Thomson Reuters. Gross margins declined 0.8 percentage points to 27.5 percent as the company offered more discounts, sold less profitable products and set aside more money for inventory accounting.

Revenue, however, grew 8 percent to $16.21 billion from $15.02 billion and topped Wall Street’s $16.16 billion forecast.

The company’s selling, general and administrative expenses rose 8 percent during the quarter, including 1 percentage point related to its savings plan, called “Rewiring for Growth.” Walgreen, the country’s second-largest pharmacy chain by locations, said the plan is on track to save $500 million in fiscal 2010. As part of that plan, Walgreen said in January it would eliminate 1,000 jobs, mostly in management.

Walgreen says cost-cutting and sales initiatives cost 6 cents per share, but resulted in savings of 6 cents per share during the period.

Walgreen CEO Gregory Wasson said the company had “solid results in a difficult economy while recording significant restructuring costs.” He said that Walgreen’s customers are using less credit and are spending closer to payday. He added that customers are looking harder for bargains, and Walgreen is targeting those customers with its savings club, store-brand merchandise and the Affordable Essentials discount program.

Sales of Walgreen brand products grew 12.8 percent in the third quarter, Wasson said during a conference call.

Walgreen filled 187 million prescriptions, helping bump up prescription revenue 8.2 percent during the quarter. Despite rising unemployment, Chief Financial Officer Wade Miquelon said prescription growth was better than it had been earlier this year.

While pharmacy sales improved, sales of nonpharmacy or front-end items like cosmetics, food and other merchandise, were hit by the recession. Sales of necessities like paper, cleaning supplies were the strongest in the third quarter, but sales of discretionary items were down.

Walgreen’s same-store sales, or revenue from locations open at least one year, rose 2.8 percent. That includes growth of 3.8 percent in the pharmacies, where Walgreen makes about two-thirds of its sales, and an increase of 0.9 percent at the front-end of the stores.

The company is testing a program called “Consumer Centric Retailing” that is designed to improve its front-end results by reducing the total number of products the company carries and better target consumer preferences. The program is being tested at 35 stores, and Walgreen said those stores are doing better than expected.

Thomas Weisel Partners LLC analyst Steven Halper noted the negative effect of Walgreen’s restructuring efforts on profit margins, but said the company reduced inventories substantially and generated “impressive” operating and free cash flow.

Walgreen has announced it will open fewer new stores in the coming years, slowing down to growth of 2.5 percent to 3 percent in fiscal 2011. During the third quarter, Walgreen opened or bought 162 stores, bringing it to a total of 6,857. It also has about 500 worksite health and wellness centers, along with specialty, institutional and mail-order pharmacies. The company opened 122 stores in the third quarter of 2008.

The fourth quarter is typically Walgreen’s busiest in terms of store openings because it wants the stores to be operational during the holiday shopping season. The company opened 199 stores in the fourth quarter of fiscal 2008, and expects a slightly lower number to open in the last quarter of fiscal 2009. That translates to growth of about 9 percent.

Walgreen shares slipped $1.79, or 5.7 percent, to close at $29.64 Monday.

SunTrust Robinson Humphrey analyst David Magee said Wall Street sentiment surged higher late last week ahead of the company’s earnings report, which, in turn, is likely responsible for the degree of pullback in the stock price Monday.

“We believe that with chain growth slowdown combined with the major cost initiatives and inventory rightsizing, Walgreen will be more profitable over the next two years,” he wrote in a note to investors.

© 2009 Associated Press. Displayed by permission. All rights reserved.

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