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DEERFIELD, Ill. — Fourth quarter net income surged more than 85% at Walgreen Co. as the company rebounded strongly from a year-ago quarter that was severely impacted by weak sales, costs related to its purchase of a stake in Alliance Boots GmbH and a big LIFO charge.
Despite the impressive finish to fiscal 2013, management declined to provide detailed guidance on the year ahead, although it reiterated its goals for fiscal 2016.
Aided by the strong fourth quarter, fiscal 2013’s bottom line climbed 15.2% to $2.45 billion, or $2.56 per diluted share, from $2.13 billion, or $2.42 per share, in 2012. Sales for the year ended August 31 edged up 0.8% to $72.22 billion from $71.63 billion.
Earnings for 2013 included a slew of special items: $241 million (all figures net of tax) of acquisition-related amortization; $124 million in tax add-back related to the Alliance Boots deal; $60 million in acquisition-related costs; a $151 million LIFO provision; $47 million in costs related to a settlement with the Drug Enforcement Administration; $8 million stemming from the transition to AmerisourceBergen Corp. as Walgreens’ prescription drug distributor; $24 million in Superstorm Sandy costs; as well as a $110 million gain on an increase in the fair market value of warrants to purchase AmerisourceBergen’s common stock and a $13 million gain on the sale of Walgreen Health Initiatives.
Fiscal 2012’s bottom line, meanwhile, was impacted by $82 million in transaction costs associated with Walgreens’ purchase of a 45% stake in Alliance Boots, $161 billion in acquisition-related amortization expense and a $195 million LIFO charge. Excluding those items in both years, adjusted net income advanced 16.3% to $2.98 billion, or $3.12 per share, from $2.57 billion, or $2.93 per share, in fiscal 2012.
Reported results for the fourth quarter skyrocketed 86.1% to $657 million, or 69 cents per diluted share, from $353 million, or 39 cents per share, a year ago. Earnings for the 2013 quarter included $59 million in acquisition-related amortization; $38 million in tax add-back; $7 million in acquisition-related costs; the aforementioned $8 million for the change to AmerisourceBergen; a $5 million LIFO credit; and a $62 million gain on an increase in the fair market value of warrants.
Results for the year-ago quarter reflected $70 million in Alliance Boots transaction costs; an $85 million LIFO charge; and $45 million in acquisition-related amortization costs.
Factoring out those items in both periods, adjusted net income leapt 26.9% to $702 million from $553 million. On a per share basis, adjusted fourth quarter earnings rose 15.9% to 73 cents, just past the average forecast of 72 cents per share among analysts polled by FactSet.
Sales gained 5.1% to $17.94 billion from $17.07 billion, short of the $17.96 billion targeted by analysts.
Comparable-store results benefited from comparison to a dismal performance in the fiscal 2012 quarter, when the since-settled Express Scripts Inc. dispute was taking a toll. Overall comp-store sales grew 4.6%, as a 6.4% jump in pharmacy was diluted by a 1.6% rise at the front end. Customer traffic decreased 1.9%, partially offsetting a 3.6% increase in average transaction.
A year ago Walgreens sustained an 8.7% drop in same-store sales, reflecting a 12.8% plunge at the pharmacy counter and a 1.3% dip at the front end. Script count, moreover, decreased 6.9% chainwide and 8% in comparable stores in the fiscal 2012 period.
In the most recent quarter, however, chainwide prescription sales increased 6.1% to account for 63.9% of total sales, with script count up 8.2%.
“We had a solid quarter across our entire business,” said president and chief executive officer Greg Wasson in a statement. “We saw improvement in our daily living business resulting from the investments we made and enhanced execution. We also saw continued strength in our pharmacy business as we increased our retail pharmacy market share for the fiscal year to 19.1%, and we continued to make great progress on controlling selling, general and administrative [SG&A] costs.”
Taking a closer look at fourth quarter operating results, gross margin expanded by 61 basis points to 28.93%. Walgreens booked a pretax LIFO credit of $8 million versus a $132 million charge a year ago. Excluding the LIFO item, FIFO gross margin fell 20 basis points to 28.89%.
“Significant change in LIFO was primarily driven by unusually high branded drug inflation in the year-ago quarter and lower-than-anticipated branded prescription drug level of inventory as we initiated our transition to AmerisourceBergen,” explained chief financial officer Wade Miquelon during a conference call with analysts.
SG&A expense, meanwhile, decreased 100 basis points to 23.89% of sales, as SG&A dollars inched up 0.9% to $4.29 billion. After further factoring in $124 million in pretax equity earnings in Alliance Boots, operating income soared 75.6% to $1.03 billion.
Excluding LIFO and various special items in both years, adjusted operating income escalated 31.6% to $1.10 billion from $838 million.
Gross margin for the 12 months expanded 84 basis points to 29.24%, but SG&A expense nearly kept pace, swelling 73 basis points to 24.29% of sales, as SG&A dollars rose 3.9% to $17.54 billion. Full-year operating profit was further bolstered by $344 million in equity earnings from Alliance Boots and a $20 million gain on the sale of a business, helping drive operating income up 13.7% to $3.94 billion.
While fourth quarter interest expense escalated 48.6% to $55 million, Walgreens also booked $43 million in other income to help boost pretax earnings 85.2% to $1.02 billion. Net interest expense for the year shot up 87.5% to $165 million, although $120 million in other income enabled Walgreens to book a 15.4% increase in pretax earnings to $3.90 billion.
During the course of fiscal 2013 Walgreens added a net of 186 new drug stores, including 76 acquired units. As of August 31, the company operated 8,116 drug stores. Including its work-site health and wellness centers, infusion and respiratory service facilities and specialty and mail pharmacies, the company ended the year with a total of 8,582 locations in 50 states, the District of Columbia, Puerto Rico and Guam, compared with 8,385 a year ago.
