Walgreen profits climb 6 percent on cost cuts, consumers' bargain-hunting

Drugstore chain Walgreen Co. reported a better-than-expected 5.5 percent gain in first-quarter profits Friday, benefiting from cost cuts and sales of private-label products as consumers sought out low-price goods.

The fast-expanding company also said it opened a record 169 new stores in the quarter, giving it a total of 6,139 in 49 states and Puerto Rico as of Nov. 30.

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.

Shares jumped $2.56, or 7.1 percent, to $38.81 in morning trading Friday.

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.

Prescription sales increased 11 percent, accounting for 66 percent of sales in the quarter.

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."

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.

The company said its modest 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.

The economic woes are hitting some pharmacy retailers harder. 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 cough, cold and flu season and slower customer holiday shopping.

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.