Not in the Green: Walgreen Pummeled After Missing Expectations

It attributes earnings shortfall to store expansion, lower gross profit margins and slower sales.
By Tim Arango ,

Investors pounded shares in

Walgreen

(WAG)

, the nation's largest drugstore chain, in early trading Monday after the company said quarterly earnings came up a penny short of Wall Street's consensus estimate.

The Deerfield, Ill.-based company earned $213 million, or 21 cents a share, in the third quarter ended May 31, one cent less than the

Thomson Financial/First Call

consensus estimate of 22 cents. Still, it was 10% more than the same period a year ago, when the company earned $194 million, or 19 cents a share. Sales in the quarter rose 16.7% to $6.3 billion, while key same-store sales, which measure sales in shops open at least a year, rose 11.3% in the quarter.

The stock recently was off more than $4.26, or 10%, to $36.75.

The company attributed its slight earnings shortfall to store expansion, lower gross-profit margins and slower sales of front-end products, which include everything besides drugs.

Gross margins declined for the quarter by 67 basis points, mainly because of an increase in lower-margin pharmacy sales and a decline in the sales of front-end products. "While core categories like over-the-counter health and personal care items continued to perform well, the slowing economy may have factored into sluggish seasonal and promotional product sales," Rick Hans, Walgreen's director of finance, said in a prerecorded call to discuss the earnings release.

The company opened 105 new stores in the quarter and is on pace to open 475 new stores by the end of the fiscal year. The company currently operates 3,424 stores and has plans to operate 6,000 stores by 2010.

"We've known that 2001 would be our most challenging year because this is when our new-store build-up peaks," Hans said.

The company didn't back off from its store expansion plan or indicate it's wary of the economy for the remainder of the year, as some retailers have recently.

"We're not a recession-proof company, but we're certainly recession-resistant," Hans said. "The basic products we sell -- everyday items like medicines, toothpaste and shampoo -- are needed by our customers regardless of how well the economy is performing."

Reasonable words, though investors didn't seem to be listening.

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