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Walgreens riding out economic storm, propelling surge in chain’s stock price

BY Jim Frederick

DEERFIELD, Ill. Investors in Walgreens breathed a big sigh of relief Monday at the company’s less-than-stellar second-quarter sales and earnings performance, snapping up shares in the nation’s premier drug store operator and proving once again that in a dismal economy, any sign of corporate stability or renewed momentum can be seen as extremely good news.

Walgreens reported a modest pullback in quarterly profits Monday, and meager same-store sales growth. In response, shares of Walgreens stock surged ahead more than 10%, and the company’s top executive, president and CEO Greg Wasson, sounded positively buoyant in a conference call with Wall Street analysts.

The reason: Walgreens appears to be weathering the nation’s worst economy since the Great Depression in far better shape than some retail watchers had feared. The company Monday reported a 6.7% decline in net earnings for the three-month period ending Feb. 28, to $640 million, along with a 7% rise in overall sales vs. the year-earlier period, to a record $16.5 billion. Spurred by a relatively healthy prescription business, same-store sales rose a modest but nevertheless real 1.3% in the quarter – or 2.1% adjusted for a leap-year calendar shift in 2008 – despite a 1.2% slide in same-store front-end sales.

At the back of the store, Walgreens pharmacists filled 4% more prescriptions in the period ending Feb. 28 than they did in the second quarter of 2008.

“That compares to an industry-wide decline of 1%…during the same period, according to IMS Health and Walgreens figures,” the company reported.

Also driving Walgreen’s stock-price surge Monday: investors appear to have embraced the company’s prospects, its largely new management team and its ambitious plans to return to double-digit sales and profit growth.

“We’re moving fast to execute our growth strategy and strengthen our position as America’s most convenient provider of consumer goods and services, as well as pharmacy health and wellness services,” said Wasson in a phone conference following Walgreens’ earnings release. “In an economy more challenging than most of us have experienced in our professional lives, Walgreens is well positioned to win. We’re responding to the new consumer landscape with new merchandising efforts focused on value. We are aggressively reducing costs across the company to maintain a healthy balance sheet, which gives us significant flexibility at a time when cash is king.”

That flexibility, Wasson added, “allows us to take advantage of…[acquisition] opportunities when they make sense,” including the purchase last week of 32 Drug Fair stores and additional prescription files in New Jersey, as well as the February purchase of 12 Rite Aid stores in San Francisco and eastern Idaho.

Sales results at the front of the store, said Wasson, point up the stark realities of operating broadly merchandised drug stores in the midst of an economic tsunami.

“We’re continuing to see evidence of customers changing their buying habits,” he said. “Front-end comps for discretionary items were down in the second quarter, but that was offset by positive comps for non-discretionary and other items.

“Another good sign is that we are holding our own in terms of attracting customers into our stores,” Wasson asserted. “Adjusted for last year’s leap day, comparable store traffic was virtually flat in the quarter compared with a year ago. That means we are keeping our doors swinging at a good pace, even while the retail industry as a whole is seeing more doors permanently close.”

In his talk with analysts this morning, Wasson repeatedly emphasized the challenges now facing Walgreens and other retailers.

“Consumer behavior has changed dramatically in recent months, beyond just the kind of products they are purchasing,” he said. “Job losses and other financial pressures have led to fewer doctor visits, which means fewer prescriptions being written and filled.”

Despite that, said Walgreens’ CEO, “We filled 164 million prescriptions during the quarter.”

Walgreens also continues to add to its total of more than 6,400 community drug stores, albeit at a slower pace as it cuts back on capital expenditures.

“The first half of fiscal 2009 saw us open or acquire 269 drug stores,” Wasson said. “Even though that’s 13 fewer openings than a year ago, the significant impact from our slowdown in new-store openings will hit later in fiscal 2010 and 2011. We also opened 117 Take Care clinics in the first half of the year, including 41 in the second quarter.”

Going forward, Wasson told analysts, Walgreens is focused on three key strategies: to “leverage the best community drug store network in America,” enhance the customer experience and “significantly cut costs and boost our productivity.”

Walgreens is making progress on all fronts, Wasson and other executives assert, as it rounds out a major reshuffling of management and cuts its store growth. Among recent milestones:

  • The rollout of the Customer Centric Retailing project. “CCR is about streamlining assortments and reworking promotions. It’s not simply about SKU reduction, but about prioritizing categories and items within categories,” said Wasson.
  • The launch of Complete Care and Well-Being, an integrated cost-effective program that brings to bear all Walgreens’ health care capabilities on behalf of employer-based health plan sponsors, including its pharmacies, in-store clinics, worksite health and wellness centers and other prescription drug services;
  • The implementation of the POWER pharmacy initiative in about half of Walgreens’ Florida stores, while also introducing key components of the new model in more than 30 Arizona locations. POWER is designed to enhance patient-pharmacist interaction and reduce costs;
  • An increase in the company’s Prescription Savings Club to 1.7 million members;
  • The restructuring of the field organization by moving senior store operations management out of the central office and deploying them in local markets;
  • The successful issue of a $1 billion, 5.25% 10-year bond offering;
  • The addition of a new, highly automated distribution center in Windsor, Conn. The new center was designed to be 20% more productive than the earlier generation of Walgreens distribution centers. “As part of an ongoing initiative, employees with disabilities comprise more than 30 % of the facility’s workforce,” Walgreens noted.

“We believe the underlying strength of the best community-based retail network and the Walgreens brand, along with our lower cost structure and financial flexibility will enable us to emerge from the current challenging environment well positioned for the future,” Wasson said. “We’re committed to returning the company to strong double-digit earnings growth and top tier shareholder return.”

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