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Walgreens 4Q profit down but beats forecasts

Walgreen Co. ended a rough fiscal 2012 with a steep bottom-line decline that reflects onetime costs from its acquisition of a 45% stake in Alliance Boots GmbH and the impact of its dispute with pharmacy benefit manager Express Scripts Inc., which ended earlier this month.

Nonetheless, Walgreens management sounded an upbeat note about the company's prospects for fiscal 2013.

Walgreens on Friday reported a 55% drop in fourth-quarter net income to $353 million, or 39 cents per share, as sales declined 5% to $17.07 billion. Results for the fourth-quarter of fiscal 2011 were bolstered by the sale of its PBM business, Walgreens Health Initiatives, which provided an after-tax gain of $273 million, or 30 cents per share.

Excluding special items that included expenses related to its Alliance Boots acquisition, other acquisition-related amortization costs and the LIFO charge, adjusted earnings decreased 8% to $553 million, or 63 cents per share, from $599 million, or 66 cents per share.

Analysts surveyed by Thomson Reuters had expected earnings of 56 cents per share on sales of $17.14 billion. Such estimates typically exclude special items.

Full-year net income fell 22% to $2.13 billion as net sales slipped 0.8% to $71.63 billion. Because the Alliance-Boots deal closed within one month of Walgreens’ fiscal year-end on August 6, Alliance-Boots’ results are not included in reported net earnings for the quarter or the year.

Compared with the prior-year periods, the negative impact of not being part of the Express Scripts pharmacy network, was 6 cents per diluted share in the fourth quarter and 21 cents per diluted share for the fiscal year, in line with Walgreens' projection.

“This was a challenging, but very important, year for Walgreens, and we finished with a tough quarter,” president and chief executive officer Greg Wasson said in a statement. “While we controlled costs and generated strong cash flow in the fourth quarter, our performance also reflected a strategic shift in promotional spending, a continued economically challenged consumer and the impact from Express Scripts. Entering the new fiscal year, we believe we are positioned for growth as we benefit from the launch of our Balance Rewards loyalty program, our reentry into the Express Scripts pharmacy provider network and our execution of the Alliance Boots strategic partnership.”

Walgreens noted that brand-to-generic drug conversions impacted sales by $664 million, or 3.7 percentage points, in the fourth quarter and by $1.4 billion, or 1.9 percentage points, in the fiscal year.

Same-store sales for the fourth quarter fell 8.7%. Front-end comparable store sales were down 1.3%. Customer traffic in comparable stores declined 3.2, though basket size grew 1.9%. Comparable pharmacy sales dropped 12.8%. Overall prescription sales, which accounted for 63.3% of sales in the quarter, were down 8.1%.

The company said it filled 188 million prescriptions in the fourth quarter, down 6.9% from a year earlier. Prescriptions filled in comparable stores decreased 8%.

In fiscal 2012, Walgreens filled 784 million prescriptions, representing a retail prescription market share of 18.7%.

“As we faced the challenges of the last fiscal year, we focused on the execution of our core business,” Wasson stated. “Our overall sales in fiscal 2012 were nearly flat. We controlled our SG&A dollar growth while making investments related to store IT infrastructure, the launch of our loyalty program and the opening of 169 new stores and our growing Well Experience store base of nearly 350 locations. We delivered record operating cash flow and record free cash flow in the fiscal year. And with significant improvements in working capital, we returned substantial cash to shareholders including a record $787 million in dividends.”

As of Aug. 31, Walgreens operated operated 8,385 locations in all 50 states, the District of Columbia, Puerto Rico and Guam, including 7,930 drug stores and hospital on-site pharmacies. Walgreens' Take Care Health Systems subsidiary manages more than 700 in-store health clinics and work-site health and wellness centers.

Walgreens also noted that besides the Alliance Boots deal and the renewed agreement with Express Scripts, fiscal 2012 also saw the drug chain acquire USA Drug and community pharmacy assets of BioScrip, launch the Balance Rewards loyalty program, completing a three-year plan to refresh Walgreens stores nationwide under the Customer-Centric Retailing program and expand its Well Experience store format to nearly 350 locations.

"The hard work, tough decisions and strategic investments we made in fiscal 2012 put Walgreens in a strong position to deliver both short-term and long-term growth for the company, a new experience for our customers and patients, and greater value for our shareholders," Wasson commented. "We have the strategy, structure and talent in place to drive strong operating performance."

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