Walgreen profit drops almost 26%

Superstorm Sandy, big buyouts hurt first-quarter results

A customer enters a Walgreen Co. store in Chicago earlier this year. The company reported that overall it earned $413 million in the three months that ended Nov. 30.
A customer enters a Walgreen Co. store in Chicago earlier this year. The company reported that overall it earned $413 million in the three months that ended Nov. 30.

— Walgreen’s fiscal first quarter earnings sank nearly 26 percent as costs tied to a couple of big deals and superstorm Sandy helped put a bigger-than-expected dent in the drugstore chain’s performance.

Chief Executive Officer Greg Wasson told analysts he saw the quarter as a “turning point” for the Deerfield, Ill., company, which has been working to recapture customers it lost during a contract dispute with Express Scripts Holding Co. But investors didn’t buy that message, at least initially, as the stock fell deeper than broader market declines in Friday trading.

“It will take time and aggressive discounts to win customers back,” Deborah Weinswig, an analyst at Citigroup Inc. in New York, wrote in a note Friday. She said lower-than-expected recapture of Express Scripts prescriptions will hurt Walgreen’s same-store sales.

Walgreen Co. spent $4 billion in cash earlier this year to buy a stake in Alliance Boots, a Swiss company that runs the largest drugstore chain in the United Kingdom. It also spent $438 million on a drugstore chain focused on the mid-South under the USA Drug, Super D Drug and Med-X names.

Costs tied to those deals totaled $23 million in the quarter, and Walgreen said it only counted a small portion of the gains it received from Alliance Boots. It is reporting those gains a quarter after they occur to address audit and regulatory requirements.

The storm that swept up the East Coast in late October also cost $24 million in the quarter, as it forced Walgreen to temporarily close hundreds of stores.

Overall, Walgreen earned $413 million, or 43 cents per share, in the three months that ended Nov. 30. That compares with net income of $554 million, or 63 cents per share, a year ago. Walgreen said earlier this month that revenue fell nearly 5 percent to $17.34 billion.

Excluding one-time costs, adjusted earnings were 58 cents per share.

Analysts forecast, on average, earnings of 70 cents per share, according to FactSet.

Shares dropped $1.24, or 3.3 percent, to close at $36.31.

Walgreen runs more than 8,000 drugstores in all 50 states as the nation’s largest drugstore chain. The company’s revenue has slumped through 2012 after it started the year stuck in a contract squabble with Express Scripts, for which it fills prescriptions.

Walgreen is trying to draw as many of these customers back to its store as it can, but competitors such as CVS Caremark Corp. and Rite Aid Corp. are trying to keep that new business.

Generic drugs also have pinched revenue for Walgreen and other drugstores this year.

Generic equivalents to brand-name drugs hurt revenue because they are cheaper, but they help profitability because they come with a wider margin between the cost for the pharmacy to purchase the drugs and the reimbursement it receives.

Information for this article was contributed by Chris Burritt of Bloomberg News.

Business, Pages 27 on 12/22/2012

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