Citing the impact of various items, including a reporting change for its partnership with Alliance Boots, Walgreen Co. saw net income sink for its fiscal 2013 first quarter, coming in well below Wall Street's forecast.

Walgreens, first quarter, fiscal 2013, Greg Wasson, Alliance Boots, earnings, net income, same-store sales, comparable-store sales, Express Scripts, USA Drug, front end, generics, prescriptions filled, comparable stores, pharmacy, drug chain, drug stores, Russell Redman

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First-quarter earnings drop at Walgreens

December 21st, 2012

DEERFIELD, Ill. – Citing the impact of various items, including a reporting change for its partnership with Alliance Boots, Walgreen Co. saw net income sink for its fiscal 2013 first quarter, coming in well below Wall Street's forecast.

Walgreens said Friday that for the first quarter ended Nov. 30., adjusted net earnings dropped to $553 million, or 58 cents per diluted share, from $619 million, or 71 cents per diluted share, a year earlier.

Analysts, on average, had estimated the drug chain's first-quarter earnings per share (EPS) at 70 cents, with projections running from a low of 63 cents to a high of 77 cents, according to Thomson Financial.

Walgreens noted that the 2013 adjusted first quarter results exclude negative impacts of 6 cents per diluted share from acquisition-related amortization costs, 4 cents per diluted share from the quarter's LIFO provision, 3 cents per diluted share in costs related to Hurricane Sandy, and 2 cents per diluted share from its acquisition of USA Drug and related store closures.

On a GAAP basis, first-quarter net income totaled $413 million, or 43 cents per diluted share, compared with $554 million, or 63 cents per diluted share, in the prior-year period.

"During a quarter that included a number of nonoperational items, as well as the ongoing Express Scripts impact, we saw the underlying performance of our business strengthen with improved gross profit margins and an upswing in comparable prescriptions filled in the quarter," Walgreens president and chief executive officer Greg Wasson said in a statement. "We also were pleased with the business performance of our strategic partner, Alliance Boots, and are on track to meet our first-year synergy targets with them.

"As I have said before, Walgreens and Alliance Boots both perform well in historically tough economic climates, and together we now are better-positioned for growth," Wasson stated.

Walgreens announced Friday that it's reporting results from the Alliance Boots investment on a one-quarter lag instead of a one-month lag, as previously disclosed, to align the audit requirements and better address regulatory and audit considerations. The move impacts the quarterly and fiscal year timing in which the equity income and part of the synergies of the partnership are reported, Walgreens said, but not the underlying equity income and synergies expected in the first 12 months since the completion of its initial 45% investment in Alliance Boots.

According to Walgreens, although the investment results from August 2012 are included in its fiscal 2013 first-quarter results, the first quarter fully reflects the incremental shares and interest expense related to the transaction, resulting in dilution of 7 cents to adjusted EPS in the first quarter, compared with an estimated accretion of 3 cents to adjusted EPS had the company used the previously announced one-month lag period.

"Walgreens' fiscal first-quarter adjusted cash EPS of 58 cents, down from 71 cents in the year-ago period, were 12 cents below the [analyst] consensus mean of 70 cents. Roughly 10 cents of the shortfall is attributable to a change in the reporting lag for Alliance Boots," William Blair & Co. analyst Mark Miller wrote in a research note Friday on Walgreens' first-quarter results.

"FIFO gross margin increased 130 basis points year to year as a percentage of sales, above our projection for a 90-basis-point increase," Miller said in his report. "The strong increase is primarily attributable to higher penetration of new generics, and front-end margins were 'firm' as private brands increased two percentage points in the sales mix. We believe the gross margin upside suggests that reimbursement, including the re-entry in Express Scripts' broadest network, remains stable."

Walgreens said it previously estimated its accretion from the Alliance Boots stake for fiscal 2013 at 23 cents to 27 cents per diluted share. Because of a one-quarter rather than a one-month reporting lag period, the company estimates the accretion over the last three quarters of fiscal 2013 to be an adjusted 25 cents to 29 cents per diluted share, and an adjusted 18 cents to 22 cents for the full fiscal year. 

"Despite the reporting lag, management anticipates Alliance Boots investment will contribute 25 cents to 29 cents over the next three fiscal quarters, which appears to be an upward revision in expectations," Miller stated.

Miller also pointed to an uptick in selling, general and administrative costs in the quarter for Walgreens. "SG&A expenses rose 4.6% year-to-year, versus our estimate of essentially flat expenses," he wrote. "Management highlighted several expense growth factors that were distinct from prior periods: 0.9% from Hurricane Sandy, 0.6% from USA Drug acquisition, and 0.3% from Alliance Boots transaction and synergy costs."

On the revenue side, Walgreens said sales in the first quarter declined 4.6% year over year to $17.3 billion from $18.2 billion. Brand-to-generic prescription drug conversions negatively impacted sales by $883 million, or 4.9 percentage points, the retailer noted.

Same-store sales in the quarter fell 8%. Comparable-store sales dipped 2% in the front end. Customer traffic in comparable stores was down 4.2%, but basket size grew 2.2%.

In the pharmacy, prescription sales decreased 7.2% and represented 63.8% of sales in the first quarter. Same-store pharmacy sales dropped 11.3%.

Walgreens said it filled 201 million prescriptions in the 2013 first quarter, down 3.2% from a year earlier. Prescriptions filled in comparable stores decreased 4.8% in the quarter, an improvement of 3.2 percentage points from the 8% decrease in the 2012 fourth quarter. The company attributed the improvement mainly to its return to the Express Scripts pharmacy network on Sept. 15. 

"In many respects, this quarter was a turning point with the increasing pace of return of Express Scripts customers to our pharmacies, as well as the enthusiastic customer response to our Balance Rewards program, with more than 45 million sign-ups since the program launched," Wasson stated. "In addition, we saw strong demand for flu shots and other immunizations, which has continued into the month of December. Given these factors, we are confident in our strategy and ability to execute going into the new year."

In the first quarter, Walgreens opened or acquired 218 new drug stores, compared with 71 a year ago. As of Nov. 30, the chain operated 8,058 drug stores and hospital on-site pharmacies nationwide.