Walgreen Co. (WAG)

Q1 2011 Earnings Call

December 22, 2010 8:30 a.m. ET


Rick Hans - Divisional VP of IR and Finance

Greg Wasson - President and Chief Executive Officer

Wade Miquelon - Executive Vice President and Chief Financial Officer

Kermit Crawford - President of Pharmacy Services


Andrew Wolf - BB&T Capital Markets

Scott Mushkin - Jefferies & Company

Robert Willoughby - Bank of America-Merrill Lynch

Mark Miller - William Blair

Matthew Fassler - Goldman Sachs

Tom Gallucci - Lazard

John Heinbockel - Guggenheim

David Magee - SunTrust Robinson Humphrey



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Please stand by. We are about to begin. Good day everyone and welcome to this Walgreen Company first quarter 2011 earnings conference call. Today’s call is being recorded. At this time I am pleased to turn the conference over to Mr. Rick Hans. Please go ahead, sir.

Rick Hans

Thank you Jennifer and good morning everyone. Welcome to our first quarter conference call. Today Greg Wasson, our President and CEO, will discuss the quarter’s highlights and our continued progress in executing our core strategies. In addition, Wade Miquelon, Executive Vice President and Chief Financial Officer, will detail our first quarter financial results.

Also joining us on the call and available for questions is Kermit Crawford, our President of Pharmacy Services. When we get to your questions please limit yourself to one. As a reminder today’s presentation includes certain non-GAAP financial measures and I would direct you to our Web site at investor.walgreens.com for reconciliations. Also I’m available throughout the day by phone to answer any additional questions you have.

You can find a link to our Web cast under investor relations on our investor relations Web site. After the call this presentation will be archived on our Web site for 12 months. We’re also making that call available as a podcast. You can download that too at our investor relations Web site. Just to remind you, certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market, competitive and regulatory expectation that involve risk and uncertainty.

Except to the extent required by law we undertake no obligation to update publicly any forward-looking statement after this presentation whether as a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K for a discussion of risk factors as they relate to forward-looking statements. Now I’ll turn the call over to Greg.

Greg Wasson

Thank you Rick and thank you everyone for joining us on our call. This morning I want to cover three main points. First I’ll review our first quarter financial results. As you saw in our release this morning this was a particularly strong quarter in terms of earnings growth as we continue our focus on gross profit margins and controlling our costs.

I’d like to point out that we were up against a very strong quarter a year ago as well. Second I’ll discuss the economic environment and some of the challenges we’re likely to face as we move into the second quarter and the balance of the year. And finally I want to highlight our progress in the quarter on our key initiatives, particularly some of the great work our people are doing and also bring you up to speed on our flu shot program.

We reported record first quarter sales of $17.3 billion, which are up 6% from $16.4 billion last year. Net earnings for the quarter were $580 million, up almost 19% from $489 million in the same quarter in 2010. First quarter net earnings per diluted share were up 26.5% to a record 62 cents. That compared with 49 cents per diluted share in the first quarter a year ago, which included 3 cents in restructuring and restructure related costs associated with our Rewiring for Growth initiative.

Strong cash flow trends continued this quarter with cash flow from operations of $1.2 billion and free cash flow of $892 million. Now taking a more in depth look at the quarter, let me turn to our front end performance. In this chart we’re comparing our front end performance this quarter to last year’s first quarter by month. As you can see, we cycled some challenging comparisons in September and October.

For the quarter front end comps increased by 0.4% versus 2.7% a year ago. We continue to focus on and enhance our approach to merchandising to strike the right balance between margin and sales. We’re sourcing product globally and having great results from our recently opened office in Hong Kong and we’re managing our pricing models and promotional investments. All of this is having a positive impact on front end margins.

We continue to expand our new beer and wine convenience category. We’re now in nearly 5000 stores up from just under 2000 in November 2009. And that growth has contributed more than 75 basis points to the front end comp. Our fresh food initiative is bringing healthy products to food (grocers) in Chicago and other select locations and we’re taking the best of Duane Reade’s approach to urban retailing and beauty and expanding it into select Walgreen’s stores.

We’re also integrating the best of Walgreen’s pharmacy expertise into Duane Reade. As we roll out our customer centric retailing initiative across the chain we’re seeing improved sales, increased efficiencies, lower inventory and a better customer experience evidenced by our improved customer satisfaction scores. We call it a four-way win and you’ll see it reflected in our front end comp, gross margins and SG&A.

For second quarter our December holiday season will once again be influenced by the final days. We opened the season with a solid Thanksgiving weekend but this is an important week for us. With our stores open Christmas Eve and Christmas Day we’re an ideal destination for last minute shoppers. Just as our front end performed well this quarter, our pharmacy turned in solid results especially when you consider double digit script comps in September and October of the prior year.

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