UPDATE 2-Walgreen sees bigger benefit from Alliance Boots tie-up

Tue Mar 25, 2014 10:51am EDT

(Adds analyst comment, details from conference call, share activity)

By Phil Wahba

March 25 (Reuters) - Walgreen Co reported lower-than-expected quarterly profit on Tuesday but said it expected a bigger boost this year from its partnership with European retailer Alliance Boots Holdings Ltd than it first forecast.

Walgreen, the operator of the largest U.S. drugstore chain, also said it was closing 76 stores in the next six months, most of them near another Walgreens store. That will add $40 million to $50 million a year in profit beginning next fiscal year.

Shares rose 4.2 percent to $67 in morning trading.

Walgreen bought 45 percent of Alliance Boots, which runs Europe's largest pharmacy chain, in 2012, with an option to buy the rest in 2015.

The U.S. company said combining the chains' drug purchases and selling the European company's products in its stores would lead to so-called synergies of between $375 and $425 million in this second year of their partnership, $25 million more than its earlier projection.

Walgreen is also winning new customers with special discounts and its year-and-a-half old Balance Rewards loyalty program, which now has 80 million active members.

"We look for Walgreen's base business to improve, particularly as the company's customer loyalty program continues to gain traction," Edward Jones analyst Judson Clark wrote in a research note.

MARGIN PRESSURE

For the quarter ended Feb. 28, Walgreen reported a lower-than-expected quarterly profit as a slowdown in the introduction of higher-profit generic medicines and a milder flu season cut into its gross profit margin.

The operator of the largest U.S. drugstore chain said its profit also come under pressure from price cuts implemented to compete with rivals during a tough holiday season for retailers.

Net income slipped to $754 million, or 78 cents per share, in the quarter, from $756 million, or 79 cents per share, a year earlier. Excluding one-time costs, Walgreen had a profit of 91 cents a share, two cents below Wall Street estimates, according to Thomson Reuters I/B/E/S.

The company's gross profit margin fell 1.3 percentage points to 28.8 percent of sales.

Chief Executive Greg Wasson said pressure from fewer new generic drugs would ease in the second half of its fiscal year.

Sales rose 5.1 percent to $19.61 billion. Walgreen's sales at stores open at least a year rose 4.3 percent in the quarter, led by gains in prescription sales, which generate almost two-thirds of company revenue.

Comparable sales of general merchandise rose a more modest 2 percent, hurt by fewer shoppers coming into Walgreen's drugstores. (Reporting by Phil Wahba in New York; Editing by Lisa Von Ahn and Nick Zieminski)

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