Walgreen profit misses view and CVS stands by outlook

By Jessica Wohl

CHICAGO (Reuters) - Walgreen Co posted a smaller-than-expected quarterly profit and again cut its store opening plans, showing that after years of rapid growth, drugstores are being hit by the recession.

Rival CVS Caremark Corp also said it is seeing consumers cut back. CVS, which does not typically give monthly updates, said December sales would be weaker than the past two months, yet stood by its forecast.

Walgreen shares fell 5 percent, while CVS slipped 1.6 percent.

"CVS acknowledged there's been some recent pressures but on the whole they're doing OK," said SunTrust Robinson Humphrey analyst David Magee, who has "buy" ratings on both companies. "They've been outperforming Walgreens all year long."

Walgreen first scaled back its store opening plans in July. In October, it lost out to CVS in buying West Coast chain Longs Drug Stores, and its chief executive left abruptly.

"Walgreens was one of the most consistent growers in the S&P 500" until it posted an unexpected fourth-quarter profit decline just over a year ago, said Morningstar analyst Mitchell Corwin. "Since then things have gotten markedly worse."

In late October, Walgreen unveiled plans to cut costs even as it redesigns stores, adds more groceries to appeal to busy shoppers, and expands into new healthcare areas, such as clinics.

Such changes are pressuring profitability. Selling, general and administrative expenses rose 9.1 percent and gross profit margin fell 0.2 percentage points in the quarter.

Profit fell to $408 million, or 41 cents per share, in the first quarter ended November 30, from $456 million, or 46 cents per share, a year ago. Analysts on average were expecting earnings of 46 cents per share, according to Reuters Estimates.

Sales rose 6.6 percent to $14.9 billion. Sales at stores open at least a year increased just 1.7 percent after rising 5.4 percent a year earlier.

"The numbers weren't horrible viewed relative to most retail but they're certainly a lot less than we'd expect from Walgreens," Magee said.

SLOWING STORE GROWTH

Shares of Walgreen were down $1.35, or 5.2 percent, at $24.73 in midday trade, while CVS fell 1.7 percent to $26.50. Walgreen shares have fared better than those of other drugstore chains this year. Through Friday, Walgreen was down 31.5 percent, while CVS had fallen 32.2 percent and Rite Aid had plummeted 87.5 percent.

"If they can manage to do a better job controlling costs, and gain some traction in some of these secondary businesses, this stock could really work," Sarah Henry, retail analyst at MFC Global, said of Walgreen. She has "buy" ratings on both CVS and Walgreen and the firm owns shares of CVS.

On Monday, Walgreen said it would reduce its store openings to a rate of 4 percent to 4.5 percent in 2010 and 2.5 percent to 3 percent in 2011. In July it set plans to slow store openings to 5 percent by 2011.