Walgreen 2Q profit grows 5 percent on better prescription sales

CHAMPAIGN, Ill. -- Walgreen Co.'s shares rose sharply today after the company said second-quarter profits rose 5 percent with improved cost controls offsetting sluggish holiday sales.

Walgreen reported earnings of $685.9 million, or 69 cents per share, compared with $651.9 million, or 65 cents per share, a year ago.

Sales rose 11 percent to $15.39 billion, from $13.93 billion. Same-store sales gained 4.7 percent. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores.

Analysts polled by Thomson Financial expected profits of 67 cents per share on revenue of $15.43 billion.

Shares of Walgreen rose more than 5 percent, or $1.91 to $38.69 early Monday.

"While sales softened in this challenging economy, we continue to execute and deliver," Walgreen Chairman and CEO Jeffrey A. Rein said in a news release.

Holiday sales dampened by a sluggish U.S. economy were compounded by the recall of children's cold medicines because of possible side effects.

Walgreen has also been expanding rapidly, opening a record 290 stores during the first half of its fiscal year.

Walgreen opened 121 new stores in the quarter and had a net gain of 240 stores after relocations and closings in the first half of the year. The company had 6,237 stores nationwide at the end of February.

Deerfield-based Walgreen says it is on track to open 550 new drugstores this year, with a net increase of more than 475.

"Given all the pressures that they're currently facing, I thought the performance was pretty solid in the quarter," Morningstar analyst Mitchell Corwin said.

The company said it slowed operating expense growth to 11 percent, from more than 21 percent a year earlier.

Part of the reduction was achieved by adjusting store hours.

"We're really looking at every store's opening hours, looking at the competition and what makes sense for the stores," President Greg Wasson said.

Prescription sales, which accounted for just under two-thirds of Walgreen's sale in the quarter, grew 11 percent, the company said. The number of prescriptions filled increased 3.6 percent, better than the 2.3 percent rate across the industry, according to figures from IMS Health, a pharmaceutical industry data provider.

Rein said the sour economy has manifested itself in the spending habits of customers.

"We have had many reports of people breaking their pills in half right now," he said, "or taking their medication every other day.

"Right now they are being very careful on the type of products they buy," Rein said.

Goldman Sachs analyst John Heinbockel said nonprescription sales are also being hurt by the weak economy and promotional spending to bring customers in costs money.

In a teleconference with analysts, Walgreen executives also said the company had just reached a deal to sell specialty pharmacy services -- drugs and consultation for patients with illnesses such as cancer and arthritis -- to health insurance-plan provider Prime Therapeutics. The St. Paul, Minn.-based company manages health plans for 20 million people.