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VOL. 124 | NO. 121 | Tuesday, June 23, 2009

Walgreen Fiscal Q3 Profit Falls 9 Percent

MARLEY SEAMAN | AP Health Writer

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NEW YORK (AP) - Drugstore operator Walgreen Co. said Monday its profit fell 9 percent in the fiscal third quarter despite improving sales as greater expenses, including those related to its reorganization efforts, reduced its income.

Deerfield, Ill.-based Walgreen aims to cut its annual expenses by $1 billion starting in 2011, which is adding to its costs this year. In the quarter ended May 31, it earned $522 million, or 53 cents per share, down from $572 million, or 58 cents per share.

Analysts were expecting 56 cents per share, according to a poll by Thomson Reuters. Revenue grew 8 percent to $16.21 billion from $15.02 billion. Analysts forecast $16.16 billion in revenue, on average.

Gross margins declined 0.8 percentage points to 27.5 percent as the company offered more discounts, sold less profitable products and set aside more money for inventory accounting.

In Monday morning trading, Walgreen shares slipped $1.64, or 5.2 percent, to $29.79.

The company's selling, general and administrative expenses rose 8 percent during the quarter, which included 1 percentage point from its savings plan, called "Rewiring for Growth." Walgreen, the country's second-largest pharmacy chain by locations, said the plan is on track for $1 billion in annual savings beginning in 2011. It hopes to save $500 million in fiscal 2010. As part of that plan, Walgreen said in January it would eliminate 1,000 jobs, mostly in management.

Walgreen CEO Gregory Wasson said the company had "solid results in a difficult economy while recording significant restructuring costs." He said that Walgreen's customers are using less credit and are spending closer to payday. He added that customers are looking harder for bargains, and Walgreen is targeting those customers with its savings club, store-brand merchandise and the Affordable Essentials discount program.

Sales of Walgreen brand products grew 12.8 percent in the third quarter, Wasson said during a conference call.

Walgreen filled 187 million prescriptions, helping bump up prescription revenue 8.2 percent during the quarter. Despite rising unemployment, Chief Financial Officer Wade Miquelon said prescription growth was better than it had been earlier this year.

Walgreen says cost-cutting and sales initiatives cost it 6 cents per share, but resulted in savings of 6 cents per share. Pharmacy sales improved, but sales of non-pharmacy items were hit by the recession.

Walgreen's same-store sales, or revenue from locations open at least one year, rose 2.8 percent. That includes growth of 3.8 percent in the pharmacies, where Walgreen makes about two-thirds of its sales, and a decrease of 0.9 percent at the front end of the stores.

The company is testing a program called "Consumer Centric Retailing" that is designed to improve its front-end results by reducing the total number of products the company carries and better target consumer preferences. The program is being tested at 35 stores, and Walgreen said those stores are doing better than expected.

Sales of necessities like paper, cleaning supplies were the strongest in the third quarter, but sales of discretionary items were down.

Walgreen has announced it will open fewer new stores in the coming years, slowing down to growth of 2.5 percent to 3 percent in fiscal 2011. During the third quarter, Walgreen opened or bought 162 stores, which gave it a total of 6,857. It also has about 500 worksite health and wellness centers, along with specialty, institutional, and mail-order pharmacies. The company opened 122 stores in the third quarter of 2008.

The fourth quarter is typically Walgreen's busiest in terms of store openings because it wants the stores to be operational during the holiday shopping season. The company opened 199 stores in the fourth quarter of fiscal 2008, and expects a slightly lower number in the last quarter of fiscal 2009. That translates to growth of about 9 percent.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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