Walgreens rides out Katrina, earnings streak intact

Drug Store News,  Oct 10, 2005  

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DEERFIELD, Ill. -- The damage wrought by Hurricane Katrina continues to reverberate.

In an early sign of the financial damage the storm imposed on the retail industry, Katrina took a hefty bite out of Walgreen Co.'s bottom line late in the fourth quarter and 2005 fiscal year. But the company still managed to eke out its 31st consecutive year of record sales and earnings.

Walgreens took a $54.7 million pretax charge for expenses associated with Katrina, which initially closed 74 locations. Although about half of those stores reopened within two weeks, 32 remained closed in New Orleans and the surrounding area as of Sept. 26.

Including hurricane-related costs, the chain reported a 1.4 percent rise over prior-year levels in net income for the fourth quarter ended Aug. 31, with net earnings reaching $329 million. For the full fiscal year, net earnings rose 15.5 percent to $1.56 billion.

Fiscal year 2005 also included pretax litigation settlement gains of $26.3 million, stemming from the settlement of a suit involving drug manufacturers' pricing practices.

Expenses for lost inventory, lease obligations, property and equipment related to Hurricane Katrina, as well as more investment in payroll to improve customer service chainwide, also contributed to a 90-basis point increase in sales, operating and administrative expenses in the fourth quarter, Walgreens reported, to 23.2 percent of sales. "The hurricane alone had a 52-basis point effect on SO&A in the quarter," company officials noted.

Sales in the fourth quarter rose 11.3 percent to $10.5 billion and were up 12.5 percent to $42.2 billion for the year. Comparable-store sales were up 7.0 percent for the quarter and 8.2 percent for the year. Prescription sales, which accounted for 64 percent of sales in fiscal 2005, climbed 11.5 percent in the fourth quarter and 13.4 percent for the year, with same-store script sales rising 7.7 percent in the quarter and 9.8 percent for the year.

"We're in excellent shape to continue our expansion plans," said chairman and chief executive officer David Bernauer.

"Walgreens' strength in pharmacy is best seen in its 6.8 percent increase in the number of prescriptions filled in comparable stores during fiscal 2005," the company reported. "Overall, Walgreens filled 490 million prescriptions in 2005, an increase of 10.6 percent from the previous year and more than any other pharmacy retailer."

Gross profit margins for the quarter increased 22 basis points to 27.95 percent of sales. President and chief operating officer Jeff Rein attributed the margin boost to increased use of higher-margin generic drugs. "Less expensive generics also had the effect of slowing our sales line and contributing to an increase in selling, occupancy and administration expenses when measured as a percent to sales," Rein said.

Walgreens opened 435 new stores during fiscal 2005, for a net gain of 371 stores after closings and relocations.

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