September 28, 2012 / 12:31 PM / in 5 years

UPDATE 2-Walgreen quarterly profit down, hurt by Express Scripts

* Earnings before special items fall to 63 cents a share from 66 cents year ago

* Sales fall 5 percent to $17.07 billion

* Prescription same-store sales down 12.8 percent

* Shares dip after hitting year high

By Jessica Wohl

Sept 28 (Reuters) - Walgreen Co posted a lower quarterly profit on Friday as customers went elsewhere while the largest U.S. drugstore chain did not fill prescriptions for those on Express Scripts Holding Co pharmacy benefit plans.

Walgreen said the year was challenging, due largely to its now-resolved contract dispute with Express Scripts as well as stressed consumers cutting back on everyday purchases.

Walgreen gave some indications that its new loyalty card had attracted a strong following and that some customers on Express Scripts plans were returning. As usual, though, it did not give detailed forecasts for the near future.

The company has undergone major changes that have made it more difficult for analysts and investors to predict its results.

This month, Walgreen resumed filling Express Scripts prescriptions after making preparations in June 2011 to walk away from its contract with the pharmacy benefits provider. This past June, the company announced plans to buy a major stake in European drugstore and beauty products company Alliance Boots . It also introduced the customer loyalty card this month.

“So many things that have happened in the last year,” said Barclays analyst Meredith Adler, who has a “neutral” rating on the stock. “The (quarterly) numbers themselves were pretty confusing, and everybody has to decide for themselves what things are truly one-time.”

Walgreen said its profit had fallen to 63 cents per share, excluding acquisition- and inventory-related charges, in the fourth quarter ended on Aug. 31 from 66 cents a year earlier.

Based on her calculations, Adler said Walgreen had earned 55 cents per share, excluding a large inventory accounting charge and adjusting for a low tax rate.

Shares of Walgreen were down 0.5 percent at $36.41 in morning trading after touching a 52-week high of $36.90. Through Thursday, the stock had fallen 19 percent since the company said it had planned to stop filling Express Scripts prescriptions.

Not being part of the Express Scripts pharmacy provider network cost Walgreen 6 cents per share in the fourth quarter and 21 cents for the full fiscal year, which the retailer said matched its expectations.


Walgreen’s fourth-quarter earnings fell to $353 million, or 39 cents per share, from $792 million, or 87 cents per share, a year earlier.

Walgreen and Express Scripts did not agree on a new contract in 2011. As a result, Walgreen could not fill Express prescriptions from Jan. 1, 2012, until the companies resolved their issues and a new contract kicked in on Sept. 15.

Some investors think the battle with Express Scripts will be worth it in the long haul.

“We felt it was critical that they stood their ground there, and we think that they got a settlement that was on good enough terms to make their forward business with Express Scripts profitable,” said Bill Smead, whose Smead Value Fund held 61,477 Walgreen shares at the end of June.

For the first eight and a half months of the year, patients on Express Scripts plans had to find other places to get their medicine. Walgreen lost customers and revenue to other chains such as CVS Caremark Corp and Rite Aid Corp.

Walgreen, which runs 7,930 U.S. drugstores and hundreds of health clinics, said fourth-quarter sales had fallen 5 percent to $17.07 billion.

At stores open at least a year, sales fell 8.7 percent, with traffic in comparable stores down 3.2 percent. Same-store prescription sales plunged 12.8 percent, and general merchandise sales declined 1.3 percent.

Now that Walgreen has patched things up with Express Scripts, the pharmacy is trying to woo those patients back with $25 gift cards and the loyalty program.

Still, not all of those people will return. For example Tricare, which provides medical benefits for U.S. military members and their families, is keeping Walgreen out of its pharmacy network. That contract represented about 18 percent of the prescriptions Walgreen used to process for Express Scripts.

Walgreen is also in its early days as a 45 percent owner of Alliance Boots, a deal that trimmed earnings during the quarter as it completed its initial investment in August.

The deal, Walgreen’s first international push, gives the U.S. company the option to buy the rest of Alliance Boots in about three years.

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