Cost-Controls Drive Record Q3 Sales, Profits for Walgreen's

Tight cost controls and a boost in prescriptions led to record sales and earnings for Walgreens' third fiscal quarter and first nine months, the company said yesterday.

"In a challenging economy, we continued investing in our future with a relentless focus on cost control," said Walgreens chairman and c.e.o. Jeffrey A. Rein. "We posted solid results while going up against a nearly 20 percent earnings increase in the year-ago quarter and a more robust economic environment. At a time when Americans are searching for value and convenience, we're one of the retailers they're turning to."

Sales for the drug chain increased 9.6 percent to a record $15 billion for the third quarter and 10.2 percent to $44.4 billion for the first nine months. Comparable store sales were up 3.4 percent for the quarter, while front-end comparable drugstore sales rose 4.6 percent for the period.

For the most recently reported 52-week period, ending May 17, Walgreens said it increased its market share in 59 of its top 60 product categories compared to food, drug, and mass merchandise competitors, as measured by The Nielsen Company.

Net earnings for the quarter ended May 31 rose 2 percent to $572 million or 58 cents per share, compared to $561 million or 56 cents per share last year. Walgreens recorded a LIFO provision of $16.1 million in this year's quarter versus a credit of $3.5 million in last year's third quarter. Last year's quarter also included a $13.5 million credit from the resolution of a multiyear state tax matter.

Net earnings for the nine months increased 4.2 percent to $1.71 billion or $1.72 per share, versus last year's $1.64 billion or $1.63 per share. Last year's nine-month earnings also benefited from the lower LIFO rate and tax benefit.
Selling, general and administrative expense dollars in the current quarter grew 10 percent over the year-ago period.

Expense control was strong across the company, and included a decrease in the rate of store salary and expense growth as well as lower advertising expenses. "We've consistently proven our ability to control expenses during this fiscal year, while investing in areas that will position us for the long-term success of the company," said Rein. "At the same time, we continued to better serve our pharmacy patients, with store-level pharmacy satisfaction levels improving each month during the quarter compared to the year-ago period."

As a percent to sales, SG&A expenses - at 22.1 - were essentially flat compared to the year-ago quarter.

Prescription sales, which accounted for 65.5 percent of sales for the quarter, climbed 8.9 percent. Prescription sales in comparable stores rose 2.7 percent in the quarter, while the number of prescriptions filled in comparable stores increased 1.1 percent. That compares to a 0.9 percent decrease in U.S. retail prescription volume (excluding Walgreens) during the same period, according to IMS Health and Walgreens figures. (Prescription volume declined in part by the switch of Zyrtec to over-the-counter status and by a milder flu season.)
Walgreens continued investments in the long-term success of the company in the third quarter, with 138 new drugstore openings, 17 more than last year's third quarter. In the first nine months of the fiscal year, Walgreens opened a record 420 new drugstores, compared to 339 in the comparable period a year ago, with a net gain of 370 stores after relocations and closings. Walgreens is on track to exceed its goal of opening 550 new drugstores this year, with a net increase of more than 500.

"This is absolutely the right time to grow our drugstore business," said president Greg Wasson. "We're adding neighborhood locations for today's customer who is searching for value and struggling with high gas prices. These new stores also position us for the 78 million baby boomers who will be major health care consumers in the coming years and decades."

Walgreens will expand its drugstore base by approximately 9 percent in fiscal 2008 and said it's on track to meet its goal of operating more than 7,000 drugstores by 2010. In May, Walgreens announced plans to open its first stores in Alaska in 2009, giving the company a presence in all 50 states.

During the quarter, the company also announced the creation of its Walgreens Health and Wellness division, formed in part by the acquisitions of I-trax, Inc. and privately-held Whole Health Management, operators of worksite health centers. The division will allow large employers and health plans to provide care to employees and plan members at their worksites, and to dependents, retirees and the general public through the company's 172 Take Care Health Clinics that operate at Walgreens drugstores.

Earlier this month, Walgreens announced that its subsidiary, OptionCare Enterprises, Inc., will acquire CuraScript Infusion Pharmacy, Inc., a wholly-owned subsidiary of Express Scripts, Inc. The transaction, expected to close within 30 days, will expand Walgreens national coverage in home infusion services through CuraScript's 12 facilities in six states.

"Many drugs in the fast-growing specialty pharmacy industry require infusion therapy, and this acquisition brings our national home infusion network closer to patients," said Wasson. "Few providers will be able to match our level of personalized therapy and support."

As of May 31, Walgreens operated 6,727 locations in 49 states, the District of Columbia, and Puerto Rico, including 6,252 drugstores (554 more than a year ago), as well as worksite health centers, home care facilities and specialty, institutional and mail service pharmacies.
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