Walgreen 1Q profit falls 10 percent on store costs

NEW YORK — Drugstore operator Walgreen Co. said Monday its profit fell 10 percent in its fiscal first quarter, short of Wall Street expectations, because of costs opening more than 200 new stores.

The company said it plans to slow the opening of new stores to save $500 million in response to the recession.

The Deerfield, Ill., company said earned $408 million, or 41 cents per share, in the three months ended Nov. 30. That total fell short of analyst expectations, and compares with $456 million, or 46 cents per share, a year ago. Revenue grew 7 percent to $14.95 billion.

Analysts expected 46 cents per share and $15.08 billion in revenue, according to Thomson Reuters.

Walgreen said its selling and general expenses grew 9 percent in the quarter as it opened 212 new stores, and profit margins dipped due to greater expense provisions.

Sales at its older stores grew 1.7 percent, with prescription revenue in older stores growing 2.6 percent. Front-end revenue, or sales of nonprescription products, was flat compared with last year, showing some resilience in a down economy.

The company said prescriptions filled grew 3.7 percent during the quarter, while industry data has showed falling prescriptions for its rivals. In total, 66 percent of Walgreen's revenue came from prescription sales.

At stores open at least one year, prescriptions filled were roughly flat with last year. However, more customers filled 90-day prescriptions instead of 30-day orders, leading to adjusted growth of 1.5 percent.

Walgreen said membership in its Prescription Savings Club grew more than 40 percent from the fourth quarter, and more than 30 percent of club members are new customers. The savings club allows members to buy a 90-day supply of many common generic drugs for $12.

The program was created in late 2007 but was relaunched over the summer, and Walgreen said it has been much more aggressive in running promotions and advertising since that time.

The company also says flu shot demand is up "dramatically" this year, with more than 1.1 million vaccinations dispensed in the current flu season, compared with 440,000 in all of 2007.

In fiscal 2010, Walgreen said it will slow its organic store openings to a rate of 4.5 to 5 percent, with growth of 2.5 percent to 3 percent in fiscal 2011. In July the company said it would slow the pace of store openings down to 5 percent in 2011, from 8 percent. The reductions are expected to save the company a total of $1 billion in annual spending.

President and Chief Operating Officer Gregory Wasson said the cuts are a response to the U.S. recession. Walgreen currently operates 6,630 drugstores in 49 states. It plans to increase its store count by 475 in fiscal 2009, which ends in August.

In a client note, Thomas Weisel Partners analyst Steven Halper said the company opened a record number of stores during a recession, and said he is "somewhat concerned" Walgreen isn't reducing its expansion plans by a larger amount. He said results should start improving around the end of 2010, but until then, the gap between Walgreen's expense growth and revenue growth will probably get bigger.

Wasson said the company expects to name a new chief executive in early 2009. Former CEO Jeffrey Rein resigned on Oct. 10, two days after Walgreen withdrew a buyout offer for California-based rival Longs Drugs Stores Corp. Wasson said the company is looking at candidates from its own ranks as well as searching outside the company.

Walgreen shares fell $1.10, or 4.2 percent, to close at $24.98 Monday.

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