Highlights From Walgreens (WAG) Q3 Conference Call, Solid Quarter Leaves Company on Tract

Walgreen Company (NYSE: WAG) reported Q3 EPS of $0.65, $0.03 better than the analyst estimate of $0.62. Revenue for the quarter came in at $18.37 billion versus the consensus estimate of $18.33 billion.

• Prescription sales up 4.1%, front end sales up 3.9%, total sales up 4.1%, and prescriptions filled were up 4.6% for the quarter.
  
• Quarterly script trends increased by 4.6%, up from last year's 2.5%, and continuing to outpace the industry growth rate of 1.1%.
  
• Comparable prescriptions increases remain in the 6% to 8% range.
  
• Retail prescription market share for the quarter was 20.1%, compared to a 19.7% a year ago.
  
• Cash flow from operations for the quarter of $1.2 billion and free cash flow of $1 billion.
• Gross profit grew by 8.5% and while SG&A increased by 7.2%. Performance this quarter was a result of WAG's ability to grow gross profit dollars faster than SG&A dollars. Gross profit dollar growth was $122 million above SG&A dollar growth, yielding an EBIT growth of 14.8%.
• SG&A trends also showed steady improvement to 12.4%, down from 13.4% last year and 17.6% in 2009.
  
• Gross margin as a percent of sales was 28.1% in the quarter, compared to 27.6% last year
  
• Overall margins in the quarter were positively impacted by higher Retail Pharmacy margins, as the effect of Generic drug sales more than offset market driven reimbursements. Front end margins were driven by OTC drugs.
  
• While the substance of the Durbin Amendment to the Dodd-Frank financial reform bill is clear, both the timing and financial implications are still unknown and it's premature to speculate on any impact to our business.
• Customer-Centric Retailing conversions and in early June, reached a milestone of 4,000 CCR stores. On track to achieve goal of 5,500 stores transitioned to CCR by the end of October this calendar year.
• Completing stores 30% faster this year than last, with costs running at about $45,000 per store.
• Completed transaction with drugstore.com on June 3, 2011 and closed the transaction with Catalyst Health systems on June 13, 2011.�
• Also during the quarter, the company developed collaborations with a number of hospitals and health systems designed to improve patient care, provide greater access to important pharmacy and healthcare services and lower costs.
• Take Care Health Systems has developed relationships with Ochsner Health Systems in New Orleans and Memorial Health in Jacksonville, Florida.
• Company believes the CCR initiative, including expansion of and focus on core product categories and the roll-out of beer and wine, continue to gain traction and drive our comps.
• Compared to the industry, our sales continue to perform well. When viewing a true apples-to-apples time period that compares our front end comps to our top three competitors based on their most recent reporting. Continue to outperform on a two-year stack basis.
  
• This quarter included a LIFO provision of $50 million versus $18 million a year ago.
• Estimated annual inflation rate for the current year remained at 2.25% versus 1.25% a year ago. Restructuring costs were $11 million, down from $17 million last year. Net interest expense was $18 million, down from $24 million a year ago, primarily as a result of reduced interest rates associated with our interest rate swaps.
• Tax rate was 35.4% versus 42.5% last year.
• Average diluted shares outstanding were 922 million versus 982 million a year ago.
  
• Cash and cash equivalents were $2.7 billion at May 31st, up 14.7%. Overall working capital decreased by 2.3% versus a year ago, while working capital as a percent of sales decreased by 8.5%.
• Total FIFO inventory increased by 7.7% in the quarter and by 5% on a per-store basis. Capital expenditures were $699 million, down from $786 million last year.
• Company returned $535 million, including $160 million in dividends and $375 million through share repurchases to its shareholders. Year to date, have returned a total of nearly $1.7 billion to shareholders.
• Starting in January, Express Scripts Provider Network will no longer include our 7,700 Walgreen stores and Duane Reade pharmacies.
• For all other plans managed by Express Scripts, we offered to hold rates for a new contract at the level that will be in effect with Express Scripts at year-end, which will be lower than current rates. As for the impact on our business from this decision, we estimate that Express Scripts will reimburse Walgreens approximately $5.3 billion in fiscal 2011. This figure represents about 7% of our total company sales.
• Company did not speculate publicly about the amount of business it can retain in fiscal year 2012 or the potential impact on its financial metrics and stated goals. In the long run, they believe employers will want plans with Walgreens in the network. With that said, Walgreens is moving forward with its strategies.
  

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