Walgreen 4th-Quarter Profit up 25 pct.

Posted 26 September 2006 @ 03:56 pm EET     Print     Reprint     E-Mail     Comments

CHICAGO (AP) - Walgreen Co. posted 25 percent fourth-quarter earnings growth to cap its biggest-ever expansion year, but its stock tumbled on continuing investor concern about fallout for drugstore chains from Wal-Mart's plan to sell discounted generic drugs.

The profit gain was fueled by an 18 percent increase in prescription drug sales from a year earlier and a 16 percent jump in total revenue.While the resulting $412.3 million in earnings was on target with Wall Street's expectations, the stock fell sharply for the second time in three trading days as industry experts speculated about the potential for trouble ahead because of the Wal-Mart plan.

Shares in Walgreen declined $2.43, or 5.2 percent, to close at $44.47 on the New York Stock Exchange — down 11 percent since Wal-Mart's announcement last Thursday. Morningstar analyst Mitchell Corwin called Walgreen's quarter superb but said "the Wal-Mart cloud is hanging over the company right now."

Wal-Mart announced last week that it plans to sell 291 generic drugs for $4 per 30-day supply, with plans to start a pilot program in Florida that could expand to the rest of the country in 2007. On average, generic drugs cost between $10 and $30 for a 30-day prescription.

"Given Wal-Mart's history, when the company decides to attack an industry I think you have to pay attention," Corwin said. "But that said, right now the program is quite small and covers a limited part of the country. Longer-term, if they expand it to cover more generics and roll it out nationwide, it could be a risk."

Rick Hans, Walgreen's director of finance, said the company had concluded based on an initial review that the Wal-Mart program "won't significantly affect our business." He said nearly 95 percent of Walgreen's pharmacy patients have prescription insurance coverage, meaning they're responsible for a small co-pay that averages only $5.30 for the drugs Wal-Mart will sell for $4.

"Over the years, our convenience, locations and services have proven to be bigger factors for our patients than a few dollars in price difference," he said in a statement on the company's Web site.

Standard and Poor's drugstore industry analyst Joseph Agnese agreed that consumers aren't likely to switch to Wal-Mart from Walgreen or another large drugstore chain store for that small a price difference."Walgreen is very well-positioned for next year," he said. "The increased convenience of the stores and the rollout of the in-store health clinics are going to be big positives."

Earnings for the June-through-August quarter amounted to 41 cents per share, up from $329 million, or 32 cents per share, a year ago. That matched the consensus estimate of analysts surveyed by Thomson Financial.The year-earlier quarter included $54.7 million in pretax costs related to Hurricane Katrina, while the recent quarter includes $7.3 million in pretax litigation gains.

Revenue grew 16 percent to $12.17 billion from $10.49 billion, or slightly better than analysts' estimate of $12 billion. Same-store sales, or sales at stores open at least one year, rose 9.7 percent in the quarter.Walgreen had a net increase of 476 new stores in fiscal 2006 — adding a new store on average every 18 hours during the biggest store expansion year in company history. The company currently operates 5,461 stores in 47 states and Puerto Rico.

CEO and President Jeff Rein said the expansion leaves the company on track to reach its goal of 7,000 stores by 2010 and said acquisitions are possible."We remain committed to organic store growth while carefully considering unique acquisition opportunities that are a solid fit with our store base and culture," he said.

Full-year earnings increased to $1.75 billion, or $1.72 per share, from $1.56 billion, or $1.52 per share, in the prior year. Sales for the full year rose to $47.41 billion from $42.2 billion in fiscal 2005.