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Duane Reade Lowers Guidance

Duane Reade (DRD - Get Report) lowered its fourth-quarter earnings guidance Friday but the news didn't shake anyone's faith in the stock's $17 takeout price.

The drugstore chain, which plans to go private in a leveraged buyout to be completed in the second quarter, lowered its fourth-quarter and full-year earnings outlooks to below analysts' estimates, citing higher-than-expected litigation expenses and lower-than-expected sales.

Duane Reade now sees fourth-quarter earnings of 12 cents to 13 cents a share on $356.4 million in revenue. Analysts were forecasting earnings of 18 cents a share on revenue of $361 million. It cited litigation and promotion costs and bad weather. The company earned $9.5 million, or 39 cents a share, in the year-ago quarter.

Same-store sales increased 3% in the quarter, however, with front-end comps up 0.1% and pharmacy same-store sales rising 7%.

The shares held steady at $16.80, their level since Robert Bass's Oak Hill Capital announced the $17-a-share LBO in late December.

Richard Hastings, retail sector analyst at Bernard Sands, believes the company's news may not be as bad as it seems, saying the company has a "unique advantage" by having a huge amount of stores located in Manhattan.

"They thrive in a place that is a logistical nightmare," said Hastings. "They deal with a lot most retailers deal with only occasionally, including "catastrophic events like blackouts and Sept. 11, the higher cost of labor, complex local regulatory requirements, and higher than national average taxes."

But, the analyst also said that a constant rise in expenses are not offset by revenue, citing in part the decline in prescription drug sales due to major drugs such as Prilosec and Claritin becoming over-the-counter medications.

Additionally, its stores in the suburbs face "brutal competition" from other national drugstore chains like CVS (CVS) and Walgreen (WAG) as well as the discounters that have pharmacies, such as Costco (COST), BJ's Wholesale Club (BJ) and Wal-Mart (WMT), said Hastings.

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