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Walgreen 2Q profit down 7 percent on restructuring

Drugstore operator Walgreen Co.'s profit fell 7 percent in the fiscal second quarter because of restructuring costs as cash-strapped shoppers cut discretionary purchases even as retail prescriptions grew.
/ Source: The Associated Press

Drugstore operator Walgreen Co.'s profit fell 7 percent in the fiscal second quarter because of restructuring costs as cash-strapped shoppers cut discretionary purchases even as retail prescriptions grew.

The stronger-than-expected report Monday sent Walgreen shares climbing $2.51, or 10.3 percent, to $28.60 in heavy trading during the afternoon.

The Deerfield, Ill., company says it earned $640 million, or 65 cents per share. That compares with $686 million, or 69 cents per share, a year ago. That includes restructuring expenses of $93 million, or 6 cents per share. Sales grew 7 percent, to $16.48 billion from $15.39 billion.

Thomson Reuters says analysts expected earnings of 66 cents per share and sales of $16.42 billion. In Monday trading, shares advanced $2.29, or 9.4 percent, to $26.58.

The news also boosted shares of Walgreen's competitors: CVS Caremark Corp. stock gained $1.67, or 6.3 percent, to 28.36, and Rite Aid Corp. rose 4 cents, or 10.5 percent, to 42 cents.

Walgreen said it is already seeing savings from the cost-cutting plan. The moves saved the company 2 cents per share in the quarter.

In January, Walgreen said it would cut 1,000 jobs to reduce overhead, part of a plan to save the company $1 billion per year by 2011 by reducing costs, slowing store openings, and eliminating jobs. The plan is expected to cost $300 million to $400 million in fiscal 2009 and 2010, but lead to $500 million in savings in fiscal 2010 and $1 billion the following year.

Selling, general and administrative expenses grew 8 percent, partly because of expenses related to the cost-cutting plan.

Chief Executive Gregory Wasson said the economy was affecting sales. In a conference call, he said sales rose for nondiscretionary items like skin care and beauty products, but sales of less essential items fell. Adjusting for calendar shifts, he said customer traffic was about the same as it was a year ago.

The company posted greater sales of basic items, including paper goods, diapers, toiletries, shampoo, conditioner, skin care, cosmetics, toothpaste, and mouthwash. Many of those items are included in Walgreen's Affordable Essentials discount promotion. Sales of optional items like candy, electronics, hardware and toys were down.

Wasson became Walgreen's CEO in January.

The company said prescriptions grew 7.8 percent for the quarter, and 63 percent of its revenue came from filling prescriptions. Walgreen said total prescriptions increased 4 percent in the quarter ended Feb. 28. That compares with a 1 percent decrease for the rest of the drugstore industry, the company said.

Walgreen said its same-store sales rose 1.3 percent because prescription sales rose. The company said same-store prescription revenue grew 2.9 percent, and nonpharmacy, or front-end sales, fell 1.2 percent.

Same-store sales, or sales at stores open at least a year, are considered a key measurement of retailer health because they evaluate results at established stores rather than newly opened ones. The year-ago quarter included a leap day, which boosted sales.

Walgreen filled more prescriptions, in part, due to a heavily promoted program called the Prescription Savings Club, which offers discounts on 90-day supplies of many common generic drugs in return for a membership fee. The company said the club had 1.7 million members at the end of the quarter, up from 1.4 million at the end of the first quarter. The company says about 30 percent of Prescription Savings Club members are new customers.

Walgreen said it opened or bought 57 stores during the quarter, and closed or moved 9 others. The company said it is taking advantage of the weak economy by making acquisitions: in February, Walgreen bought 12 Rite Aid stores location in San Francisco and eastern Idaho, and last week, it acquired 32 New Jersey-based Drug Fair stores.

Thomas Weisel Partners analyst Steven Halper said Walgreen posted a good quarter during a difficult economic period, and showcased strong expense control. Following the Rite Aid and Drug Fair acquisitions, he noted that Walgreen appears to be open to making similar moves in the future.

"Walgreen is well positioned to benefit from weaker competitors and continued industry consolidation, in our view," he said.