Gross-margin improvements send profits to 4-year high

Drug Store News,  Jan 17, 2005  

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DEERFIELD, Ill. -- Putting a flourish to its long streak of record sales and earnings, Walgreen Co. early this month announced its largest quarterly profit increase in the last 16 quarters.

The 4,680-store chain drug giant recorded net income of $332.7 million for the first quarter of fiscal 2005, a jump of 30.5 percent over the same period a year ago. Sales for the quarter ended Nov. 30, 2004, rose 13.4 percent to $9.9 billion, with same-store sales rising 9.4 percent.

Factoring out a pretax first quarter gain of $15 million from the settlement of litigation over drug-company pricing practices, Walgreens recorded a net income gain of 26.8 percent, to $323.2 million.

Walgreens pharmacy operation, continues to carry an increasingly dominant share of the sales and earnings freight. Prescriptions sales rose 14.4 percent in the quarter, accounting for 65 percent of total revenues. Same-store pharmacy sales were up 11.3 percent, with third party payers now responsible for 93 percent of all prescription sales.

"Earnings this quarter were powered by solid prescription and general merchandise sales, as well as our second straight quarter of significantly higher gross profit margins," said Chairman and Chief Executive Officer Dave Bernauer.

Also boosting performance: a healthy rise in gross margins to nearly 27.5 percent of total sales. Walgreens attributed the improvement to "better purchasing terms, digital photofinishing and growth in generic drug sales."

Indeed, said President and Chief Operating Officer Jeff Rein: "We're incurring significant costs with our conversion to digital labs, but those are far outweighed by improved customer satisfaction and better gross profit. Our convenient locations and hours make digital labs a particularly worthwhile investment for Walgreens."

Along those lines, he said, all Walgreens units now process digital photos for 29 cents per print, and more than 1,400 24-hour Walgreens stores offer the service "any time they want--even at 3 a.m."

The costs of converting all stores to digital processing and improving service at the photo counter added to Walgreens' selling, occupancy and administrative expenses, however, pushing SG&A up to 22.35 percent of sales, Rein acknowledged. Lower-priced generic drugs also represented a drag on the sales-to-cost ratio by slowing top-line sales growth.

Wall Street was buoyed by the latest earnings performance, pushing Walgreens' stock price to a 52-week high of $40.46 when first quarter results were announced Jan. 3. Noted Lehman Brothers retail analyst Meredith Adler, "Walgreens continues to improve gross margin through increased penetration of generics and better procurement of products."

In other company news, a system overload led Walgreen Co. to mistakenly bill millions of customers more than once for their holiday purchases. Walgreens revealed that a glitch in its payment processing system led to overcharges for as many as 4 million customers. The problem was quickly discovered and reimbursements were issued electronically, the company reported.

The billing snafu arose because heavy sales activity on Dec. 23 and 24 overwhelmed the automated payment processing system for debit and credit card purchases, said Polzin. As a result, the system erroneously reported single transactions two or more times to its customers' banks.

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