Walgreen posts surprise drop in same-store sales

CHICAGO Wed Jan 6, 2010 4:06pm EST

A sign for a Walgreens store is seen in Belle Glade, Florida January 6, 2010. REUTERS/Carlos Barria

A sign for a Walgreens store is seen in Belle Glade, Florida January 6, 2010.

Credit: Reuters/Carlos Barria

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CHICAGO (Reuters) - Walgreen Co (WAG.N) said sales at its drugstores open for at least a year fell 0.3 percent in December instead of rising as Wall Street had expected, as fewer customers came in and spent less when they did shop.

The No. 1 U.S. drugstore chain attributed some of the sales decline to its decision to sell fewer holiday-themed items after seeing consumers cut back on discretionary purchases for months. Also, the incidence of flu was lower than a year ago, so consumers bought fewer items such as over-the-counter medications and tissues.

Same-store sales rose 1.8 percent at pharmacy counters, but fell 3.1 percent at the front end of the stores, where Walgreen sells general merchandise such as cosmetics and candy.

Analysts on average expected Walgreen's overall same-store sales to rise 2.3 percent, with increases of 3.3 percent in pharmacy and 0.6 percent in general merchandise, according to Thomson Reuters Data.

Walgreen shares fell 2.9 percent before regaining some ground to close about 0.8 percent lower.

"This is considered a wild gyration for them, and total sales were up 3.6 percent for the month," said Bill Smead, portfolio manager of the Smead Value Fund. "There's nothing here to interrupt a long-term investor from being attracted to it, and if the stock weakened enough due to this kind of thing, you could just look at it as a buying opportunity."

Seattle-based Smead Capital Management holds about 150,000 Walgreen shares, including shares in the Smead Value Fund.

LESS SPENDING ON SEASONAL ITEMS

Selling fewer seasonal items meant Walgreen had to resort to fewer discounts than in December 2008 to get holiday-themed goods off its shelves.

Walgreen spent 28 percent less on seasonal items for comparable stores, Chief Executive Officer Greg Wasson said in a statement. While that crimped holiday clearance sales, it also left the company in a better inventory position and with better gross margins than a year earlier, he said.

In comparable stores, customer traffic fell 0.8 percent, and the average sales per transaction fell 2.3 percent.

"They don't have to rebuild their business, all they've got to do is tinker a little bit to deal with whatever circumstances come along," Smead said.

December was the first time Walgreen's monthly same-store sales fell since February 2009, when they declined 1.9 percent. At that time, the company faced a tough comparison with a year earlier, when February had an additional day.

Walgreen also said that Genpact Ltd (G.N) will handle its accounting services under a 10-year deal. About 500 Walgreen employees will move to Genpact over the next four months and another 300 jobs could be affected later on.

Walgreen runs 7,149 stores and competes with smaller chains run by CVS Caremark Corp (CVS.N) and Rite Aid Corp (RAD.N).

CVS, which also runs a major pharmacy benefits management business, does not issue monthly sales tallies. On Monday, Rite Aid said its December same-store sales fell 1.8 percent, marking its seventh consecutive monthly drop.

(Reporting by Jessica Wohl; editing by Lisa Von Ahn, Dave Zimmerman and Andre Grenon)

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