Walgreen profit takes rare dip
Shares of drugstore chain Walgreen Co. tumbled Monday after the usually solid retailer's fourth-quarter fell sharply short of expectations, causing its first earnings decrease in nearly a decade.
Walgreen, one of the nation's biggest drugstore chains, blamed its poor performance on higher expenses and lower reimbursements for popular generic medications. Meanwhile, executives warned its problems would likely persist.
"Many of the challenges we faced in this quarter will continue, including comparisons to last year's blockbuster generics," said Rick Hans, the company's director of finance.
Deerfield-based Walgreen said its expenses grew more than 11 percent to $12.8 billion because of increased advertising, store and staff costs.
But what was particularly vexing to Walgreen is growing use of simvastatin, a generic version of the popular cholesterol-lowering drug Zocor. Reimbursement rates from insurance plans have fallen since the generic medication came on the market last summer.
Reimbursement rates are typically highest when a generic drug first hits store shelves and gradually slide after six months as more companies manufacture the medicine and lower prices.
Walgreen said it filled nearly three times the number of simvastatin prescriptions during the fourth quarter as it did during the same period last year. But the company made virtually the same amount of money selling the drug.
That cut its profits on the medication by one-third.
"As we dispense more generic drugs, they slow our pharmacy sales increases because of their lower price," Hans said.
Walgreen shares fell $7.08, or 15 percent, to $40.16 in early afternoon trading Monday.
Overall, the company said its profit slipped nearly 4 percent, sliding from $396.5 million, or 40 cents per share, from $412.3 million, or 41 cents per share, a year ago.
Quarterly revenue for the three months ended Aug. 31 rose more than 10 percent to $13.4 billion from $12.2 billion. That was still far short of Wall Street forecasts.
Analysts surveyed by Thomson Financial expected earnings of 47 cents per share and revenue of $13.5 billion.
"Walgreens is typically a pretty dependable company," said Morningstar analyst Mitch Corwin. "So it comes as a surprise when not only they disappoint, but when they disappoint like this."
Goldman Sachs downgraded the company's stock, predicting at least two or three more quarters of underwhelming results.
Meanwhile, Bear Stearns analyst Robert Summers said the performance doesn't bode well for the drugstore industry either.
"While it is easy to downplay this miss as one bad quarter for a normally very predictable company, we believe the industry as a whole is heading into a very difficult period as the generic margin benefit begins to roll off dramatically," he wrote in a research note. "This is not quarter specific and is not company specific."
Shares of Walgreen competitors CVS Caremark Corp. and Rite Aid Corp. also slumped Monday.