Cost controls yield modest gains for Walgreens in second quarter

DEERFIELD, Ill. Efforts by Walgreens to control its burgeoning operating expenses bore fruit in the second quarter of fiscal 2008, with sales and earnings again at record levels.

Net earnings for the quarter ended Feb. 29 were up 5.2 percent over the same period last year, to $686 million. Besides improved expense controls, Walgreens also benefited from one extra sales day in February because of leap year.

Net income for the first half of fiscal ‘08 rose 5.3 percent to $1.14 billion.

Sales increased 10.5 percent to a record $15.4 billion for the second quarter and 10.4 percent to $29.4 billion for the first half. Total sales in comparable stores were up 4.7 percent in the quarter—modest by Walgreens’ standards but nevertheless respectable in a difficult sales climate—while front-end comp-store sales rose 4.0 percent in the quarter.

For the 52-week period ending Dec. 29, 2007, Walgreens said it increased its market share in 58 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 62.8 percent of sales in the quarter, climbed 11.1 percent, with same-store script sales up 5.2 percent in the quarter. More significant, perhaps, is the rise in number of prescriptions filled in comparable stores, which increased 3.6 percent.

“That compares to a 2.3 percent increase in total U.S. retail prescription volume during the same period, according to IMS Health,” Walgreens noted in a statement.

Reaction from investment analysts to the most recent results was muted but generally positive. “As expected, Walgreen delivered a modest [second-quarter earnings-per-share] beat largely due to watered-down expectations,” noted retail analyst John Heinbockel of Goldman Sachs. “The absolute performance was tepid as a result of ongoing difficult gross profit comparisons.”

Nevertheless, skittish Wall Street investors, hammered by an unrelenting stretch of bad news on the economic and retail fronts in recent weeks, welcomed the company’s second-quarter results, driving Walgreens’ stock price ahead by roughly $2 a share in intra-day trading Monday. They were cheered not only by signs of strength in pharmacy and front-end demand, but also, perhaps, by Walgreens’ announcement today that it had won an exclusive contract to provide specialty pharmacy services to?Prime Therapeutics, which covers 20 million patients across the 10 Blue Cross Blue Shield plans [see accompanying story].

The deal for Prime comes on the heels of another positive development for the chain: the deal to buy two in-store clinic providers, I-trax, Inc. and Whole Health Management. Together with 146 Take Care Health Clinics, Walgreens said it will manage more than 500 retail clinics and health centers when the transactions close. In turn, that will allow large-company employees, health plan members and their dependents “to seamlessly access quality, affordable and convenient health care at work or near their homes,” the company noted.

“These worksite health centers also will enhance our relationships with employers and health plans,” added president and chief operating officer Greg Wasson. “We’ll work with any health care plan to offer the best overall pharmacy care for its members, which closely aligns us with the objectives of employers.”

Walgreens chairman and chief executive officer Jeff Rein attributed much of the second-quarter gain to cost-control efforts. “Our employees across the country did a great job of controlling costs to counter tough comparisons faced with the year-ago quarter,” Rein said. “While sales softened in this challenging economy, we continue to execute and deliver.”

Selling, general and administrative expense dollars in the current quarter increased 11 percent over the year-ago period, which Walgreens reported was slower than the 14.3 percent increase in last year’s quarter. “The improvement primarily resulted from a decrease in the rate of store salary growth, as well as lower legal and insurance expenses,” the company noted today. “Partially offsetting these improvements were higher non-payroll store level expenses.”

As of Feb. 29, Walgreens operated 6,237 stores in 49 states and Puerto Rico.