Shares of drugstore operator Walgreen Co. (WAG) surged higher on Monday along with the broader market despite posting a 7 percent decline in second quarter profit. The company, which operates nearly 6,700 stores, said it earned 65 cents per share in the quarter ended Feb. 28 compared to earnings of 69 cents per share a year earlier.
However, excluding restructuring charges Walgreen earned 69 cents per share in the quarter topping analyst estimates of 66 cents per share, according to Reuters Estimates. Sales rose 7 percent to $16.5 billion, though stores open at least a year saw a less robust rise in sales of 1.3 percent.
Walgreen Co. President and CEO Gregory D. Wasson said the company made solid progress in the quarter executing its long-term growth strategies in a challenging retail environment.
He said the new management team is implementing significant cost reductions, engaging its customers more effectively and broadening access to affordable health care.
Walgreen’s “Rewiring for Growth” plan is already paying dividends — 2 cents per share in the recently completed quarter. In January the company said it would cut 1,000 jobs in order to reduce overhead, as well as more effectively manage workers’ hours to rein in salary costs.
It will also slow store openings and reduce the number of 24-hour pharmacies as it hopes to save $500 million in fiscal 2010 and $1 billion the year after.
Analysts were duly impressed with the results. Morningstar says Walgreen is going to emerge from the downturn “a better firm” with improved margins and a strong balance sheet. It gives Walgreen a “five-star” rating and has a $38 price target on the shares.
The company said its gross profit margins sank 0.6 percentage points from a year ago as front-end (non-prescription) margins took a hit as the recession meant more promotions on things like paper towels, tissues, food and other items.
In past years Walgreen could charge higher prices on those items as its customers looked to the chain for convenience instead of value. Now, it’s the other way around and Walgreen is touting itself as the place to shop for “Affordable Essentials.”
Walgreen did see a rise in prescription sales in the quarter, but it came at a price. It said its Prescription Savings Club had 1.7 million members at the end of the quarter, up from 1.4 million from the previous quarter.
Members of that club are allowed to buy 90-day supplies of many common generic medicines for $12 and as a result it filled more 90-day prescriptions, reducing same-store prescription growth. That also cut into front-end sales as it meant fewer store visits.
Walgreen opened or bought 57 stores last quarter, while closing just nine. It is taking advantage of the weak economy by taking market share from weakened competitors. It bought 12 Rite Aid stores in February and last week acquired 32 Drug Fair stores in New Jersey.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
