Drugstore operator Walgreen Co. (WAG) on Tuesday reported at 16 percent increase in earnings during the third quarter, boosted by a new strategic alliance, capturing a bigger market share in retail pharmacy sales and fewer shoppers spending more in each basket. However, the company cited soft front-end sales and a tough economy, as the quarterly results were shy of analyst predictions.
Revenue for the quarter ended May 31 was $18.31 billion, up 3.2 percent $17.75 billion in the year prior quarter. GAAP profit totaled $624 million, or 65 cents per share, versus $537 million, or 62 cents per share, in the third quarter last year. Adjusted earnings, which exclude a host of special items like LIFO provision, acquisition costs and legal expenses, were $812 million, or 85 cents per share, compared to $628 million, or 72 cents per share, in the year prior quarter.
Wall Street was expecting EPS of 91 cents on sales of $18.4 billion.
In March, Walgreen, the biggest drugstore chain in the U.S., and European drug powerhouse Alliance Boots GmbH partnered with AmerisourceBergen Corp. (ABC), one of North America’s largest drug wholesalers. Including a negative impact of 2 cents per share related to differences in international and GAAP reporting standards, Alliance Boots contributed 10 cents per share to Walgreen’s adjusted profits in the third quarter.
Walgreen’s retail market pharmacy shares increased from 18.4 percent to 19.2 percent year-over-year.
Prescription sales, which made up 63 percent of Q3 revenue, increased 3.4 percent. Same-store-prescription sales, those from stores open more than one year, increased 2.0 percent. Total prescriptions filled rose 8.7 percent and 7.1 percent in comparable stores. The larger increase in total prescriptions filled compared to revenue is the result of an influx of generic drugs hitting the market in the past year. Generics generally carry a higher margin, but deflate overall sales on a dollar basis.
Gross margin improved from 28.2 percent to 28.5 percent.
Traffic at comparable stores decreased by 3.9 percent, but basket sized increased by 4.4 percent while total same-store sales increased 1.4 percent.
“[We] produced another strong quarter of operating cash flow of $1.4 billion. That said, our front-end sales are still not up to our expectations, and while the economy remains challenging, increasing customer traffic and front-end sales are our near-term priorities with a focus on pricing and promotion and the leveraging of our Balance® Rewards program, which now has 75 million members,” said Greg Wasson, president and chief executive at Walgreens.
In the past year, shares of WAG have appreciated by 71 percent, including about 30 percent growth in 2013. With the earnings miss Tuesday, shares are looking to open lower by about 6 percent from Monday’s closing price with pre-market trading sending shares down near $45 each.