Walgreen net rises on cost-cutting, extra day

By Brad Dorfman

NEW YORK (Reuters) - Walgreen Co (WAG.N), one of the largest U.S. drugstore chains, posted higher-than-expected quarterly profit on Monday, helped by cost-cutting and an extra day in the quarter because of leap year.

Walgreen also announced a deal with a pharmacy benefits management company, Prime Therapeutics, that expands its business as a provider of specialty pharmacy services.

General merchandise sales improved toward the end of the quarter, boosted by strong Valentine's Day business, after weaker-than-expected Christmas results, Walgreen Chief Executive Jeffrey Rein said during a conference call with analysts.

But the company, whose shares were up 5.5 percent, warned that the industry is becoming more aggressive with margin-sapping promotions to get consumers into stores as the U.S. economy slows.

"They may be able to hold their (sales) comps at a decent level, but it is hurting their margins," said Mitchell Corwin, analyst at Morningstar.

There are also reports of customers trying to stretch prescriptions by splitting pills in half or taking a medicine every other day instead of daily, Rein said.

Walgreen said profit in the fiscal second quarter ended February 29 was $685.9 million, or 69 cents a share, up from $651.9 million, or 65 cents a share, a year earlier.

Analysts' average forecast was 67 cents a share, according to Reuters Estimates.

Sales rose 10.5 percent to $15.4 billion. Sales at stores open at least a year rose 4.7 percent, with prescription same-store sales up 5.2 percent. Same-store sales of general merchandise, also known as front-end merchandise, were up 4 percent.

After seeing salary costs rise more than expected last summer, Walgreen has been trying to keep labor costs under control by making sure stores are following the labor budget and by taking a closer look at what hours a store should be open, the company said.

Also on Monday, it said it had agreed to be the exclusive specialty pharmacy provider to Prime Therapeutics. The contract will make Walgreen the specialty pharmacy provider for more than 20 million people, the company said. It declined to give the expected value of the contract.

Walgreen has been expanding beyond its traditional drugstore business and last week created a health and wellness division to manage health centers and pharmacies at company work sites.

Analysts said the deal with Prime Therapeutics may be a sign that Walgreen's decision not to buy a pharmacy benefits manager of its own, like rival CVS Caremark Corp (CVS.N), is working.

"It's a big validation of their strategy ... of being a non-PBM player, just a (neutral) provider," said Andrew Wolf, analyst at BB&T Capital Markets.

Also last week, Walgreen announced plans to acquire I-trax Inc DMX.A, which runs health and fitness centers.