Walgreen Reports 33rd Consecutive Year of Record Earnings, Sales
DEERFIELD, Ill., Oct. 1, 2007 – Walgreens today announced its 33rd consecutive year of record earnings and sales. The company also reported a decline in fourth quarter earnings due in part to lower reimbursements on some popular generic drugs and higher expenses.
   Fiscal year net earnings increased 16.6 percent to $2.04 billion versus last year’s $1.75 billion. Net earnings per share for fiscal 2007 increased 18.0 percent to $2.03 per share (diluted) versus $1.72 per share (diluted) the previous year.   Net earnings for the fourth quarter declined 3.8 percent to $397 million or 40 cents per share (diluted) versus last year’s $412 million or 41 cents per share (diluted).
   The LIFO index increased in the fourth quarter because of higher than expected inflation among pharmacy inventories. As a result, while overall inflation was lower in 2007 than in 2006, the LIFO provision was $32.0 million this quarter versus $26.1 million in the year-ago period.
   “This quarter was negatively impacted by lower generic drug reimbursements, combined with higher salary and store expenses, and higher advertising costs,†said Chairman Jeffrey A. Rein. “Our expenses weren’t in line with the level of reimbursements we were receiving. Managing both expenses and lower reimbursements on some generic drugs is my top priority. We’re going to fix this, and at the same time continue our aggressive growth plan.â€
   Generics such as simvastatin (the generic version of Zocor) saw a significant reduction in gross profit dollars during the fourth quarter. Retail pharmacies typically see the highest gross profit dollars in the first few months after a generic prescription drug becomes available, and simvastatin entered the market in late June 2006.
   “In the case of some blockbuster generic drugs, it’s difficult to grow profit dollars after their first few months of availability,†said President Greg Wasson. “As this quarter shows, pharmacy gross profit margins on some drugs can increase on a percentage basis even while the gross profit dollars they produce fall.â€
   The company saw this play out to a significant factor in the fourth quarter. For example, Walgreens filled nearly three times as many prescriptions for simvastatin in this year’s fourth quarter compared to the year-ago quarter, yet the company’s gross profit dollars from the drug were virtually the same this year as they were a year ago.
   Sales rose 10.3 percent to $13.4 billion in the fourth quarter and 13.4 percent to $53.8 billion for the year. Total sales in comparable drugstores (those open more than a year) were up 6.3 percent for the quarter and 8.1 percent for the year, while front-end comparable drugstore sales rose 6.1 percent in the quarter and 5.8 percent for the year.
   For the 52-week period ending Aug. 11, Walgreens increased its market share in 59 of its top 60 product categories compared to food, drug and mass merchandise competitors, as measured by A.C. Nielsen.
   Prescription sales, which accounted for 65.0 percent of total sales in fiscal 2007, climbed 10.5 percent in the fourth quarter and 14.7 percent for the year. Prescription sales in comparable drugstores rose 6.5 percent in the quarter and 9.5 percent for the year, while the number of prescriptions filled in comparable drugstores rose 4.0 percent in the quarter and 5.7 percent for the year. “In the fourth quarter, we faced a tough comparison to the surge of Medicare Part D prescriptions we saw in 2006, the first year of that program,†said Wasson.
   Overall, Walgreens filled 583 million prescriptions in fiscal 2007, an increase of 10.0 percent from the previous year. Walgreens now fills nearly 17 percent of all retail prescriptions in the country.
   Gross profit margins increased 34 basis points versus the year-ago quarter to 27.98 as a percent to sales, including the LIFO provision previously mentioned. Pharmacy margins increased, but some of that benefit was offset by an overall shift toward the pharmacy business, which carries lower margins than front-end merchandise. Margins on the front end also increased as a result of a shift in mix toward higher margin items.
   Fourth quarter selling, occupancy and administration expenses increased 103 basis points from the previous year, from 22.45 to 23.48 as a percent to sales, primarily due to increases in salaries and store expenses, and advertising costs. The impact of new, lower-cost generic drugs, which slowed pharmacy sales growth by 5.0 percentage points and total sales growth by 3.1 percentage points in the quarter, continued to affect expense ratios.
   The company benefited from a lower tax rate in this year’s fourth quarter of 35.0 percent compared to 36.7 percent in the year-ago quarter, primarily the result of a lower effective state tax rate.
   Including acquisitions, Walgreens expansion program resulted in a record net gain of 536 new stores in fiscal 2007. As of Aug. 31, the company operated 5,997 stores in 48 states and Puerto Rico versus 5,461 a year ago, and anticipates opening 550 new stores in fiscal 2008, with a net increase of more than 475 stores after relocations and closings. Walgreens is on track to exceed its goal of operating 7,000 stores in 2010.
   “We have a three-part strategy for growth, and the first part is to continue what we do best – grow stores,†said Wasson. “We’re committed to organic store growth, yet at the same time we’re more open to acquisitions when the right opportunity arises.
   “The second part of our growth strategy is expanding into adjacent sectors of pharmacy and health care service. For example, in August we acquired Option Care, Inc., a national specialty pharmacy and home infusion services provider. This move makes us the fourth-largest specialty pharmacy provider in the country and the largest home infusion provider.
   “The final part of our growth strategy is using our existing store space to drive customer traffic through new services like printer cartridge refills and convenient care clinics. We have more than 65 clinics open today, and by the end of calendar 2008 our goal is to have more than 400.â€
   Take Care Health Systems, the wholly-owned subsidiary of Walgreens that manages the clinics, is opening clinics in nine new markets this fall, including Cincinnati, Cleveland, Houston, Las Vegas, Miami, Nashville, Tenn., Orlando, Fla., Tampa, Fla. and Tucson, Ariz. Combined with expansion in existing markets, up to 100 new Take Care Health Clinics will open this fall.
   Walgreens estimates more than $2 billion in capital investments for fiscal 2008. This reflects expenditures for new stores, technology and a new distribution center in Connecticut scheduled to open in fiscal 2009.
   For additional information on the quarter’s results, investors can listen to a recorded Webcast on Walgreens Investor Relations Web site at: http://investor.walgreens.com [1].
Links:
[1] http://investor.walgreens.com/