Walgreens Quarterly Profit Declines

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Walgreens (WAG) announced Tuesday that its fiscal third-quarter profit fell to $463 million, or 47 cents a share, from $522 million, or 53 cents a share, a year earlier, even though sales grew 6.1% to $17.2 billion from $16.2 billion and the company filled a record 198 million prescriptions in the quarter. Walgreens also claimed it increased retail pharmacy market share by 19.7%.

But the third quarter 2010 results include the negative impact of 4 cents from the elimination of a tax benefit, 2cents from costs associated with the Duane Reade acquisition and 1 cent in restructuring costs. Excluding these items, earnings still came in below analysts' estimates of 57 cents a share, according to FactSet, but above sales estimates of $17.1 billion.

The important comparable-sales (sales in stores open at least a year) measure increased a low 0.7% in the quarter, with prescription sales in comparable stores up 1%. Gross profit margins improved slightly to 27.6% from 27.5%.

"We anticipated this would be a challenging quarter for several reasons, including the sluggish economy, prescription reimbursement pressure compounded by a slowdown in the rate of introduction of new generics, and a lower incidence of flu compared with the beginning of the H1N1 pandemic a year ago," said Walgreens President and CEO Greg Wasson, adding "there is more to be done."

The earnings release also mentioned Walgreens' multi-year agreement with CVS Caremark (CVS) from last week to continue participating in its pharmacy benefit management network. "We are very pleased with the outcome of this mutual, multi-year agreement that met our business objectives," said Kermit Crawford, executive VP of pharmacy.

Looking ahead, Walgreens anticipates generating $120 to $130 million in synergies from the acquisition of Duane Reade over the next three years, as well as a $500 million cost reduction this fiscal year and $1 billion in annual savings beginning in fiscal 2011 from its restructuring.

Walgreens said it expects organic store growth of between 4.5% and 5% in fiscal 2010 and between 2.5% and 3% annually beginning in 2011.

Shares fell over 4% in pre-market trading after the earnings announcement.
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