Walgreen 3Q profit rises on cost controls
Drugstore chain Walgreen Co. said Monday its fiscal third-quarter profit rose 2 percent as it focused on cost control and maintained a rapid expansion pace in a difficult retail environment.
Despite the modest gain, the results fell slightly short of Wall Street's expectations and Walgreen shares slipped back after initially climbing nearly 3 percent.
Overall, however, analysts said the Deerfield-based company's cost discipline and continued advances in a weak economy shows it has turned a corner after recent sluggishness.
"Though Walgreen faces near-term headwinds such as a tougher consumer environment and an industrywide slowdown in the number of prescriptions dispensed, we believe efforts to trim expense growth and build market share will enable it to regain its form as a double-digit earnings grower in the near future," Morningstar analyst Mitchell Corwin said in a research note.
Shares fell 37 cents to $34.70 Monday.
Earnings for the three months ended May 31 were $572.3 million, or 58 cents per share, up from $561.2 million, or 56 cents per share, a year earlier. That was a penny shy of the consensus estimate of analysts surveyed by Thomson Financial.
Revenue rose 10 percent to $15 billion from $13.7 billion.
Sales in stores open at least one year, a key retail metric known as same-store sales, rose 3.4 percent.
Walgreen said it lowered the rate of store salary and expense growth as well as advertising expenses. "We continue to successfully execute our strategies for growth while effectively managing costs," Chairman and CEO Jeffrey Rein said. "We had a tough comparison to a net earnings increase of nearly 20 percent in last year's third quarter, which was aided by blockbuster generic drug introductions."
Prescription sales rose 8.9 percent and accounted for nearly two-thirds of sales in the quarter. Same-store prescription sales, or those from stores open at least 13 months, climbed 2.7 percent and Walgreen said the number of prescriptions filled edged up 1.1 percent compared with a 0.9 percent decrease for the rest of the industry.
Rein said prescriptions are under pressure from a number of factors, including the switch of Zyrtec from prescription to over-the-counter status, fewer new drug introductions, safety concerns over newer medicine and the weaker economy.
"Despite these near-term challenges, nothing will slow the impact of nearly 80 million baby boomers moving into their peak prescription use years," he said on a conference call.
Walgreen is jockeying with CVS Caremark Corp. for top spot among drugstore chains.
"Overall the important thing was they really controlled expenses, and that's been one of the bigger issues that investors have had with this company over the past year," said Stephanie Hoff of Edward Jones.
The results are "a signal that this company's getting back on track after a couple of weaker quarters," the analyst said.
The company opened 138 drugstores in the quarter for a total of 6,252 drugstores as of May 31 in 49 states, the District of Columbia and Puerto Rico -- 554 more than a year ago. It has 6,727 locations in all, including worksite health centers, home care facilities and specialty, institutional and mail service pharmacies.
For the first nine months of its fiscal year, earnings were $1.71 billion, or $1.72 per share, up from $1.64 billion, or $1.63 per share, a year earlier. Revenue jumped 10 percent to $44.4 billion from $40.3 billion.