Walgreen profit disappoints, still keen on Longs

CHICAGO Mon Sep 29, 2008 1:00pm EDT

A Walgreens store is seen in Golden, Colorado, June 25, 2007. REUTERS/Rick Wilking

A Walgreens store is seen in Golden, Colorado, June 25, 2007.

Credit: Reuters/Rick Wilking

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CHICAGO (Reuters) - Walgreen Co (WAG.N) posted a smaller-than-expected quarterly profit on Monday, dragged down by lower-margin businesses like in-home medical services and an effort to lure consumers with discounted products that backfired.

Walgreen's CEO also said the drugstore operator was committed to its unsolicited bid for Longs Drug Stores Corp, which has already accepted an offer from rival CVS Caremark Corp (CVS.N).

Shares of Walgreen, which has more drug stores than any other U.S. chain, fell more than 5 percent to their lowest level since October 2003.

Walgreen offered discounts on some items to draw people into the store, but while shoppers came in and bought the items that were on sale, they did not buy as many full-priced items as usual, the company said.

That misfire cut earnings by 1 to 2 cents per share, Chief Financial Officer Wade Miquelon said during a conference call.

Gross margin decreased four-tenths of a percent to 27.6 as a percent to sales. Margins were hurt by non-retail operations, such as Walgreen's expanding specialty pharmacy business, which carry lower margins than its mainstay drugstores.

"The biggest surprise to me was the gross margin falling," said Edward Jones analyst Stephanie Hoff, who has a "buy" rating on the shares. "The earnings quality was low during a quarter that everybody, I think, thought was going to be a little bit stronger."

Net profit rose nearly 12 percent to $443 million, or 45 cents per share, in the quarter that ended August 31, from $396.5 million, or 40 cents a share a year ago.

The reported quarter's profit included a $79 million benefit tied to a vacation accrual adjustment, Walgreen said.

On a comparable basis, Walgreen's profit excluding the adjustment came to 40 cents per share, below the average analysts' view of 45 cents, according to Reuters Estimates.

Sales rose 8.8 percent to $14.6 billion, in line with analysts' forecasts.

Sales at stores open at least a year rose 2.6 percent. The company said prescription sales rose 7.9 percent and made up 66 percent of sales in the quarter.

TOUGH TIMES

Walgreen said it filled 0.6 percent more prescriptions in stores open at least a year than it did in the year-earlier quarter. It said overall U.S. retail prescription volume fell 1.9 percent in the same period, excluding Walgreen.

"Tough times are forcing people to make tough choices -- delaying doctor visits and prescription use," Walgreen Chief Executive Jeffrey Rein said.

During a conference call, Rein said adding a loyalty card for customers -- something rival CVS Caremark Corp (CVS.N) has had for years -- is "under consideration."

He also said Walgreen remains committed to its takeover bid for Longs, which it has sought to wrest from a merger agreement with rival CVS. Longs has rebuffed Walgreen's advances, citing potential regulatory hurdles that could delay a deal by up to a year.

Walgreen has said it may go directly to shareholders with its $75-per-share offer if Longs refuses to negotiate. The CVS deal values Longs at $71.50 per share and has been rejected by several of the company's largest shareholders.

Shares of Walgreen were down $1.87 to $30.86 Monday after dropping to as low as $30.80 earlier in the day. Through Friday, the shares had fallen nearly 9.3 percent since it announced its offer for Longs on September 12.

"I think there's an overhang here related to the uncertainty and what they may end up ultimately paying" for Longs, Hoff said. She said she would rather the company focus on its current business model, including more service-based products such as clinics, which should pay off over the long term.

Walgreen said it expects to open 495 net new stores in fiscal 2009. It operated 6,443 stores as of August 31.

The company, which does not give financial forecasts, said it would outline its plans in more detail at a meeting with analysts on October 30.

(Additional reporting by Aarthi Sivaraman in New York, editing by Dave Zimmerman, Brad Dorfman)

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