Walgreens discloses record first-quarter fiscal 2010 results

Walgreens (NYSE: WAG)(NASDAQ: WAG):

“We approach the coming year confident in our strategies and cautious about the economy”

• First quarter sales up 9.5 percent to record $16.4 billion
• Cash flow from operations for the quarter more than triples to $1.2 billion
• More than 17,000 Walgreens and Take Care Clinic immunizers administer 5.4 million flu shots, up from 1.2 million last year

Walgreens (NYSE: WAG)(NASDAQ: WAG) today announced record earnings and sales for the first quarter of fiscal year 2010.

Net earnings for the quarter ended Nov. 30 were $489 million, a 19.6 percent increase from $408 million in the same quarter a year ago. Earnings per share were 49 cents per diluted share, a 19.5 percent increase from 41 cents per diluted share a year ago. First quarter 2010 results include the impact of 3 cents per diluted share in restructuring and related costs associated with the company’s Rewiring for Growth initiative.

Cash flow from operations for the quarter more than tripled over last year’s quarter to $1.2 billion, driven by improved working capital and drugstore performance.

“We’re extremely pleased to report solid, double-digit earnings growth,” said Walgreens President and CEO Greg Wasson. “We remain confident we can continue to generate strong cash flow, which provides us the financial strength and flexibility to continue investments in our core strategies while returning cash to shareholders.”

First quarter sales increased 9.5 percent from the prior-year quarter to $16.4 billion. Total sales in comparable stores (those open at least a year) increased 4.9 percent in the quarter, while front-end comparable store sales increased 2.7 percent.

Prescription sales, which accounted for 66.2 percent of sales in the quarter, climbed 10.0 percent, while prescription sales in comparable stores increased 6.1 percent. The company’s number of prescriptions filled increased 12.0 percent over last year’s first quarter, including a benefit of 0.7 percentage points due to more patients filling 90-day prescriptions. The company exceeded by 5.5 percentage points the industry-wide prescription growth rate, excluding Walgreens, during the same period as reported by IMS Health.

An early flu season and a well-executed flu shot campaign that launched Sept. 1, a month earlier than last year, lifted front-end and pharmacy sales in September, October and, to a lesser extent, November.

“Consumer concerns over high unemployment and the challenging economy were a drag on holiday sales at the end of November, and we’ve seen a similar pattern through mid-December,” said Wasson. “Like every Christmas season, our performance is driven by the final days, which makes this an important week. The calendar works in our favor this year, with Christmas falling on a Friday. That means the convenience of our more than 7,100 stores makes us an ideal destination for last-minute shopping needs.”

Selling, general and administrative expense dollars in the first quarter grew 7.4 percent over the year-ago period. SG&A restructuring costs related to Rewiring for Growth were $14 million both in this quarter and the year-ago quarter. Total Rewiring for Growth restructuring and related costs this quarter, including SKU discontinuation, were $42 million.

Total expense growth was partially offset by savings from Rewiring for Growth, primarily in store payroll expenses. Rewiring for Growth remains on track to deliver $1 billion in pre-tax cost savings beginning in fiscal 2011.

Gross profit margins decreased 0.1 percentage points versus the year-ago quarter to 27.7 as a percent to sales. Negatively impacting margins were front-end product mix, non-retail businesses and Customer Centric Retailing (CCR) markdowns. Helping overall margins were an increase in pharmacy margins due to the impact of generic drug sales and flu shots, and a LIFO provision of $34 million this year versus $43 million last year.

Other first quarter highlights

During the quarter, Walgreens continued to focus on its three core strategies – to leverage the best store network in America, enhance the customer experience and drive cost reductions and productivity gains.

In September, the company launched its largest flu shot campaign in history, administering more than 5 million shots by the end of November compared with 1.2 million in the entire previous flu season. The program attracted many new patients to Walgreens pharmacies, as two-thirds of flu shot recipients hadn’t filled a prescription at Walgreens in the last six months.

“Our seasonal flu shot program was one of the best-executed initiatives in my 30 years at Walgreens,” said Wasson. “We see big opportunities to deliver preventive services including pharmacist-delivered immunizations and vaccinations as we continue to expand our capabilities in this area. It’s a great illustration of the accessibility of our pharmacists on the front lines of health care.”

The company opened or acquired 172 new drugstores (a net gain of 150 after relocations and closings) in the quarter compared with 212 (or a net gain of 187) in the year ago quarter. Walgreens expects organic store growth of between 4.5 and 5 percent in fiscal 2010 and between 2.5 and 3 percent annually beginning in 2011.

In October, Walgreens announced the acquisition of certain assets from 12 Eaton Apothecary pharmacies in the Boston area. The transaction, expected to close in January, is an example of the company’s market share growth opportunities through targeted acquisitions.

Walgreens completed the rollout of its CCR format in 400 stores in Texas during the quarter. Customer response to the initiative, designed to improve the overall shopping experience and increase both the number of customer visits and basket size, has been positive.

The company is adding its new beer and wine selection to most stores and now has nearly 1,600 stores with the products. Expanding this category to most stores is another step toward making Walgreens a destination retailer.

Walgreens also launched its new brand campaign, “Walgreens. There’s A Way” in September, followed by the re-launch of Walgreens.com with a variety of new healthy living and product resources, and simplified shopping tools and services.

As part of its $2 billion stock repurchase program announced in October, Walgreens bought back $150 million in company stock during the quarter.