Walgreen profit jumps; September sales strong

Tue Oct 1, 2013 12:06pm EDT

A Walgreens truck unloads at a store in Westminster, Colorado October 30, 2008. REUTERS/Rick Wilking

A Walgreens truck unloads at a store in Westminster, Colorado October 30, 2008.

Credit: Reuters/Rick Wilking

(Reuters) - Walgreen Co (WAG.N) reported a much higher quarterly profit on Tuesday as it filled more prescriptions and enticed shoppers with offers and updated stores, and it said sales trends kept improving in September.

Shares of Walgreen, the largest U.S. drugstore operator, were up 4.4 percent at $56.17 on the New York Stock Exchange after rising as high as $56.69.

Walgreen's sales at stores open at least a year rose 4.6 percent in the fourth quarter ended on August 31. There was "further improvement" in same-store sales and traffic in September, Chief Executive Officer Greg Wasson said on a conference call.

Walgreen has been overhauling itself over the past couple of years. It lost millions of customers in 2012 when it was unable to fill prescriptions for Express Scripts Holding Co (ESRX.O) patients during a now-resolved contract dispute with the pharmacy benefits manager.

The company is drawing those customers and others with special discounts and its year-old Balance Rewards loyalty program, as well as redesigned and new stores. Walgreen also acquired a 45 percent stake in Alliance Boots Holdings Ltd ABN.UL, which runs Europe's largest pharmacy chain, in 2012 and has the option to buy the rest in about two years.

Walgreen said the work it was doing with Alliance Boots, such as combining the chains' drug purchases and selling the European company's products in its stores, had led to $154 million in revenue and savings in the first year of their partnership. That is slightly higher than the $125 million to $150 million in so-called synergies that Walgreen had forecast.

As expected, Alliance Boots contributed 8 cents per diluted share to fourth-quarter earnings before special items.

"The Alliance Boots deal is looking just increasingly better than what people were looking for," said Tony Scherrer, director of research and co-portfolio manager at Smead Capital Management, which holds roughly 617,574 shares of Walgreen. "We wouldn't be surprised at all to see them ... own 100 percent of it sooner rather than later."

Despite the short-term cost, plans such as promoting loyalty cards and offers in circulars to woo shoppers are the right move for Walgreen for the long term, Scherrer said.

Walgreen is the fourth-largest holding for Smead, which has about $650 million in assets under management.

SLIGHT PROFIT BEAT

Walgreen's fourth-quarter net income increased to $657 million, or 69 cents per share, from $353 million, or 39 cents per share, a year earlier. Excluding acquisition-related costs and other special items, earnings were 73 cents per share, beating the analysts' average estimate by 1 cent, according to Thomson Reuters I/B/E/S.

Higher sales of generic drugs weighed on revenue but boosted margins. These medicines sell for less than branded ones but are more profitable for drugstore chains.

Sales rose 5.1 percent to $17.94 billion, just below the $17.95 billion preliminary figure Walgreen gave on September 5.

Gross margins rose to 28.9 percent from 28.3 percent a year earlier as the company filled 8.2 percent more prescriptions.

Walgreen said it had filled a record 821 million prescriptions in fiscal 2013, bringing its share of the retail prescription market up 0.4 percentage point to 19.1 percent.

Earlier this year, Walgreen and Alliance Boots signed a 10-year deal with distributor AmerisourceBergen Corp (ABC.N), which started daily deliveries of branded drugs to Walgreen stores in September. Generic drugs should soon follow.

Walgreen and Rite Aid Corp (RAD.N), the third-largest U.S. drugstore operator, plan to report September sales on Thursday. The No. 2 company in the industry, CVS Caremark Corp (CVS.N), no longer releases monthly sales reports.

(Reporting by Siddharth Cavale in Bangalore and Jessica Wohl in Chicago; Editing by Kirti Pandey and Lisa Von Ahn)

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