Walgreens posts strong earnings gains as divisions push through renewal plan

DEERFIELD, Ill. Walgreens stock was up nearly 9% in early trading Tuesday morning after the company posted solid earnings results and steadily improving sales trends in its 1,800 renovated stores.

The 7,561-store drug chain drove its fourth-quarter net income up 7.9%, compared with the same period a year ago, to $470 million for the period ended Aug. 31. For the full fiscal year, net profits rose 4.2% to $2.1 billion.

Sales for the fourth period were up 7.4% to a record $16.9 billion for the fourth quarter and 6.4% to a record $67.4 billion for the year, Walgreens reported this morning. Same-store sales rose a modest but respectable 1.5% over prior-year levels in the final quarter, with prescription sales climbing 6.5% overall and 1.6% on a comp-store basis. More tellingly, the company filled 3.3% more scripts in the fourth quarter versus the same period last year, with 90-day prescriptions accounting for 1.2% of those unit gains.

“The company exceeded by 3.0 percentage points the industrywide prescription growth rate, excluding Walgreens, during the same period as reported by IMS Health,” Walgreens noted.

“Fiscal 2010 was highlighted by accelerating execution on our core strategies and an ability to leverage our financial flexibility to capture growth opportunities, including our acquisition of Duane Reade,” said Walgreens president and CEO Greg Wasson. “We remain confident in our ability to drive earnings growth, increase our return on invested capital and generate strong cash flow."

“Our use of cash has been, and will continue to be, guided by a capital policy that commits us to maintaining a strong balance sheet and financial flexibility; reinvesting in core strategies and related strategic activities; and returning surplus cash to shareholders in the form of dividends and share repurchases,” Wasson added.

Walgreens’ CEO credited “strong operating performance across our 7,500-store network and expense control companywide” for the double-digit jump in per-share earnings in the fourth quarter. “We were able to once again generate increased cash flow from operations for the quarter; and for the year, we returned a record amount of cash to shareholders in the form of share repurchases and an increase in our dividend for the 35th consecutive year,” he said.

This month, Walgreens completed a $2 billion share repurchase program announced in October 2009, “well ahead of the program’s expiration date of Dec. 31, 2013,” the company reported.

In a conference call this morning with Wall Street analysts, Wasson and other Walgreens executives were in a buoyant mood over the solid gains, and expressed optimism that the company was on the right track with its Customer Centric Retailing initiative. CCR, Wasson said, has led to a major revamp of store merchandising, presentation and decor, as well as a significant reduction in SKUs and higher sales per customer.

Walgreens is well along on the conversion of its massive store base to the CCR format and a new, more shopper-friendly store decor package. The company has converted a total of more than 1,800 of its stores to the CCR merchandising presentation, and more than 1,500 of its units now feature the new decor package.

“This extensive refresh of our stores is being accomplished at an average cost of $50,000 per store, and I’m very encouraged by the favorable customer response these stores have been receiving, and the improved performance we’re seeing from this investment,” Wasson told analysts this morning. “In fact, the overall performance of our CCR pilot stores is getting better and better as we continue our refinements.”

Walgreens carefully has been monitoring customer behavior at its CCR stores, executives said, and will continue to refine the concept with a targeted, chainwide completion date set for the end of calendar 2011. In the latest 26-week period ended Aug. 28, pilot stores outperformed a control group of stores by 3.7%, Wasson said. “The improvements that we’re making -- including new product adjacencies, new assortments of merchandise and the inventory decor package -- all are contributing to our results.”

Wasson and other company leaders ticked off other accomplishments they said helped drive the sales and earnings gains in fiscal 2010. Among them:

• Continued progress on company efforts to leverage its store network, enhance the customer experience and drive cost reduction and productivity gains;
• The filling of a record 778 million prescriptions in fiscal 2010, an increase of 7.5%;
• An increase of 60 basis points in retail pharmacy market share, to 19.5%;
• The administration of more than 7 million seasonal and H1N1 flu shots last year. Along those lines, Walgreens has expanded its network of certified immunizers and other health professionals to more than 26,000, up from 16,000 at the start of last year’s flu season. “We have truly reformed the delivery system for flu shots in this country,” asserted Kermit Crawford, president of pharmacy services for the company. Buoyed by ample supplies of flu vaccine, the increase in professional staff, new recommendations from the Centers for Disease Control and Prevention that nearly all Americans get flu vaccinations this year and a new Walgreens flu shot gift card program, Crawford said, Walgreens has set the bar much higher for the flu season in 2010-2011. “Our goal is 15 million shots,” he told analysts.
• The acquisition earlier this year of 258 Duane Reade drug stores in the New York City area. It was the largest acquisition in company history and gave Walgreens a commanding position in the New York market;
• The addition of beer and wine to more than 3,500 stores, boosting its availability to a total of nearly 4,200 stores nationwide;
• The achievement of Walgreens’ “Rewiring for Growth” cost-reduction goals in fiscal 2010. The company is on target for $1 billion in annual savings in fiscal 2011, said EVP and CFO Wade Miquelon; and
• The return of $2.2 billion to shareholders in the fiscal year in the form of dividends and stock repurchases, nearly five times last year’s amount.

Walgreens also is making big inroads with employers and other health-plan payers as it positions itself as an integrated, broad-based provider of lower-cost patient care and preventive health solutions, Wasson asserted. “Maybe the difference between us and [our competitors] is that we’re focused on working with all payers … and improving total healthcare costs,” he noted. “It’s all about providing value. Payers going forward are all going to be looking to improve the quality of their healthcare spend.”

Despite the gains, Walgreens still has much to do as it navigates a dour economy and grapples with the high costs of its CCR conversion. “There’s going to be a lot of headwind this year,” Wasson acknowledged. “We still have a tough economy and tight consumer.”