Walgreen Co. F3Q10 (Qtr End 05/31/2010) Earnings Call Transcript - TheStreet

Walgreen Co. (WAG)

F3Q10 (Qtr End 05/31/2010) Earnings Call

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

Executives

Rick Hans - Divisional VP of IR and Finance

Greg Wasson, President and CEO

Wade Miquelon - EVP and CFO

Kermit Crawford - EVP of Pharmacy

Analysts

Ed Kelly - Credit Suisse

Mark Wiltamuth - Morgan Stanley

Derek Leckow - Barrington Research

Meredith Adler - Barclays Capital

David Magee - SunTrust Robinson Humphrey

Andrew Wolf - BB&T Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Walgreen Company's third quarter 2010 earnings conference call. (Operator Instructions)

I would now like to turn things over to Mr. Rick Hans, Divisional Vice President of Investor Relations.

Rick Hans

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Welcome to our third quarter fiscal 2010 conference call. Today, Greg Wasson, our President and CEO, will be discussing the quarter's highlights and our continued progress in executing our growth strategies. In addition, Wade Miquelon, Executive Vice President and Chief Financial Officer, would detail our third quarter financial results.

When we get to your questions, please limit yourself to one question and a follow-up, so that we can give an opportunity to as many investors as possible during our limited time. Also, joining us on the call or available for questions is Kermit Crawford, Executive Vice President of Pharmacy.

As a reminder, today's presentation includes certain non-GAAP financial measures, and I would direct you to our website at investor.walgreens.com for reconciliation. Also, I am available throughout the day by phone to answer any additional questions you may have.

You can find a link to our webcast under our Investor Relations website. After the call, the presentation will be archived on the website for 12 months. We're also making the call available as a podcast. You can download that too at our website.

Certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market, competitive and regulatory expectations that involve risk and uncertainty. Please see our latest Forms 10-K and 10-Q for a discussion of 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. Before I discuss third quarter earnings, I'd like to briefly acknowledge our Friday announcement where we reached a multiyear agreement with CVS Caremark. We won't be providing specific details regarding the economics of the deal, but I would say that we are very pleased with the outcome.

The agreement provides the framework we need to operate our business going forward, which is also good for patients or pharmacists and shareholders. We look forward to continuing to meet the needs of patients and payers across the country. We're also looking forward to building a mutually beneficial relationship with CVS Caremark and other PBMs.

Now let's move to the quarter. As you saw from our press release this morning, Walgreens reported record sales of $17.2 billion in the quarter, a 6.1% increase over the last year. Third quarter net earnings were $463 million compared with $522 million in the same quarter a year ago. And we generated strong cash flow from operations of $1 billion in the quarter and $2.8 billion fiscal year-to-date.

Our reported EPS of $0.47 included $0.04 in costs resulting from the Medicare Part D tax charge, $0.02 from the impact of our Duane Reade acquisition and $0.01 from our Rewiring for Growth initiative. Net sales for the nine-month period grew 6.1% to $50.6 billion, and net earnings were up 3.2%.

We anticipated that this would be a challenging quarter for several reasons. First, the weak economy continued to impact discretionary spending. Second, we faced prescription reimbursement pressure compounded by slower period in relative introduction of new generics. And third, we were cycling last year's high incidents of H1N1 flu, which impacted prescription comps by more than 1% in the quarter.

While we planned for these headwinds and saw a number of positive signs in the quarter, we also believe there is more we can do. Let me touch on some additional highlights of the quarter.

We filled a record 198 million prescriptions and increased our market share to nearly 20%. We made significant progress on our Customer-Centric Retailing initiative, opening or converting 500 stores. We closed on our acquisition of Duane Reade and began the integration to drive the expected benefits and synergies.

We continued on track with our cost control initiatives. We took steps to directly address some of the reimbursement pressure we're experiencing. And we restructured the healthcare division to bring new and unique pharmacy, health and wellness solutions to the market.

Now let's take a more detailed look at the quarter. This slide provides a good snapshot of the quarter's performance relative to recent trends. During the third quarter, gross profit dollars increased by $290 million or 6.5%. SG&A dollars increased $307 million or 8.6%. It's important to note, without Duane Reade, gross profit dollars grew 3.2% and SG&A dollars grew 6%. This rate of growth is near the low point of our SG&A dollar growth over the last six years.

And even at this low rate of SG&A dollar growth, we are investing in areas that would generate incremental sales. These include our e-commerce group, our sales and client services organization and our private brand business. At the same time, we continue our relentless focus on cost control.

Gross profit dollars were impacted by the weak sales and reimbursements I mentioned earlier. Our goal is to consistently drive gross profit dollar growth in excess of SG&A dollar growth.

Next I'll give an update on our Customer-Centric Retailing initiative. Here is a quick look at where we stood at the end of last quarter with total CCR stores. As you may recall, we expect CCR when fully implemented in Brussels reduced working capital and store labor and enhanced the overall shopping experience.

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