Walgreen Co. cited a weak cold and flu season and its impasse with pharmacy benefit manager Express Scripts Inc. in reporting declined earnings and prescription sales for its fiscal 2012 second quarter.

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Walgreens sees earnings decrease in 2Q

March 27th, 2012

DEERFIELD, Ill. – Walgreen Co. cited a weak cold and flu season and its impasse with pharmacy benefit manager Express Scripts Inc. in reporting declined earnings and prescription sales for its fiscal 2012 second quarter.

Walgreens said Tuesday that for the second quarter ended Feb. 29, which includes the extra day from leap year, net income came in at $683 million, or 78 cents per diluted share, down from $739 million, or 80 cents per diluted share, a year earlier.

The fiscal 2012 quarter earnings were in line with the average analyst estimate of 77 cents per share, according to Thomson Financial. Analysts' forecast ranged from a low of 72 cents to a high of 80 cents per share.

Walgreens said its earnings got a lift from the leap year day but were negatively impacted by 3 cents per diluted share from the mild cough, cold and flu season and by 7 cents per diluted share from the drug chain no longer being part of the Express Scripts pharmacy provider network as of Jan. 1.

On the revenue side, 2012 second-quarter sales edged up 0.8% year over year to $18.7 billion, while same-store sales fell 1.5%.

Prescription sales, which accounted for 61% of revenue in the quarter, declined 1.7%, and same-store pharmacy sales were down 3.9%. Walgreens said it filled 196 million prescriptions in the quarter, down 4.2% from a year earlier. Prescriptions filled in comparable stores dropped 4.9% in the quarter.

In the front end, comp-store sales rose 2.1% in the second quarter.

"We continue making significant progress on our 'Well at Walgreens' strategy to become America's first choice for health and daily living, as indicated by our record sales and strong front-end performance," Walgreens president and chief executive officer Greg Wasson said in a statement. "As we enter the upcoming pharmacy benefit manager selling season, which appears to be an unusually active one, we feel confident as more PBMs, health plans and others approach Walgreens about developing member services and benefits that can be offered to clients."

During the second quarter, customer traffic in comparable stores was up 0.7% and basket size grew 1.4%. However, Walgreens said that with the mildest start to the flu season in 29 years, according to the Centers for Disease Control and Prevention, flu shots administered at pharmacies and clinics this flu season through Feb. 29 totaled 5.5 million, down from 6.2 million a year ago.

"The front end of our stores continued to perform strongly and attract customers for their health and daily living needs," Wasson noted. "Our balanced promotional approach during the Christmas and holiday seasons led to profitable sales growth, and our convenience and neighborhood locations proved valuable during a midweek holiday such as this year's Valentine's Day, which was strong. As we expected, the convenience and customer-focused selection of our front-end health and daily living products and services led to higher comparable-store front-end sales in the quarter, despite reduced pharmacy volume." 

Walgreens reported that selling, general and administrative expenses climbed 4% in the second quarter to $167 million, including 0.8 percentage point for operating and integration costs for drugstore.com, acquired in June 2011, and store payroll and investments in strategic corporate projects.

"We invested in store-level staffing in the second quarter to help our pharmacy customers under Express Scripts plans sign up for our Prescription Savings Club, change to a different Medicare prescription drug plan that includes Walgreens in the network, or find other ways to continue using our pharmacies," according to Wasson. "Those efforts resulted in a record 700,000 new PSC enrollments during our sign-up promotion in January. As we previously stated, much of our cost-reduction effort will be weighted toward the second half of this fiscal year. At the same time, we are investing in profitable growth of both our pharmacy and front-end business, as well as delivering on our commitment to return cash to our shareholders."

Also in the second quarter, Walgreens acquired prescription files and inventory from 100 chain and independent pharmacies, including from more than 30 Kmart pharmacies.

For the first half of fiscal 2012, Walgreens' sales increased 2.7% to $36.8 billion. Net earnings in the half totaled $1.24 billion, or $1.41 per diluted share, down from $1.32 billion, or $1.42 per diluted share, in the prior-year period. Walgreens said first-half 2012 net income reflects negative impacts of 9 cents per diluted share from no longer being part of the Express Scripts network and 1 cent per diluted share from drugstore.com operations and integration costs.

As of Feb. 29, Walgreens operated 7,841 drug stores, 151 more than a year ago. 

"As our momentum increases with more of our new 'Well Experience' pilot stores, expanded health and daily living offerings, and more health care solutions for employers, health plans and other payers," Wasson added, "we are pleased with the response to these initiatives from customers, patients, communities, health care providers and stakeholders — and excited about the future."