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Competitive Watch: Walgreen 1Q Profit Jumps 20 Percent

DEERFIELD, Ill. -- Walgreen Co. reported a nearly 20-percent jump in quarterly profit, attributable in good part to strong growth in its prescriptions business.

The drug chain's first quarter sales rose 9.5 percent to a record $16.4 billion. Cash flow from operations for the quarter more than tripled to $1.2 billion, driven by improved working capital and drugstore performance, the company said in a statement.

Noteworthy in the quarter was the more than 17,000 Walgreens and Take Care Clinic immunizers who administered 5.4 million flu shots, up from 1.2 million last year.

Net earnings for the quarter ended Nov. 30 were $489 million, a 19.6-percent increase from $408 million in the same quarter a year ago.

"We're extremely pleased to report solid, double-digit earnings growth," said Walgreen president and CEO Greg Wasson. "We remain confident we can continue to generate strong cash flow, which provides us the financial strength and flexibility to continue investments in our core strategies while returning cash to shareholders."

Total sales in comparable stores (those open at least a year) increased 4.9 percent in the quarter, while front-end comparable store sales increased 2.7 percent. Prescription sales, which accounted for 66.2 percent of sales in the quarter, climbed 10.0 percent, while prescription sales in comparable stores increased 6.1 percent. The company's number of prescriptions filled increased 12 percent over last year's first quarter, including a benefit of 0.7 percentage points due to more patients filling 90-day prescriptions. The company exceeded by 5.5 percentage points the industry-wide prescription growth rate, excluding Walgreens, during the same period as reported by IMS Health.

An early flu season and a well-executed flu shot campaign that launched Sept. 1 -- a month earlier than last year -- lifted front-end and pharmacy sales in September, October and, to a lesser extent, November, according to the company.

"Consumer concerns over high unemployment and the challenging economy were a drag on holiday sales at the end of November, and we've seen a similar pattern through mid-December," Wasson said. "Like every Christmas season, our performance is driven by the final days, which makes this an important week. The calendar works in our favor this year, with Christmas falling on a Friday. That means the convenience of our more than 7,100 stores makes us an ideal destination for last-minute shopping needs."

Gross profit margins decreased 0.1 percentage points vs. the year-ago quarter to 27.7 as a percent to sales. Negatively impacting margins were front-end product mix, non-retail businesses and Customer Centric Retailing markdowns. Helping overall margins were an increase in pharmacy margins due to the impact of generic drug sales and flu shots, and a LIFO provision of $34 million this year vs. $43 million last year.

In September, the company launched its largest flu shot campaign in history, administering more than 5 million shots by the end of November compared with 1.2 million in the entire previous flu season. The program attracted many new patients to Walgreens pharmacies, as two-thirds of flu shot recipients hadn't filled a prescription at Walgreens in the last six months.

"Our seasonal flu shot program was one of the best-executed initiatives in my 30 years at Walgreens," said Wasson. "We see big opportunities to deliver preventive services including pharmacist-delivered immunizations and vaccinations as we continue to expand our capabilities in this area. It's a great illustration of the accessibility of our pharmacists on the front lines of health care."

The company opened or acquired 172 new drugstores (a net gain of 150 after relocations and closings) in the quarter compared with 212 (or a net gain of 187) in the year-ago quarter. Walgreens expects organic store growth of between 4.5 percent and 5 percent in fiscal 2010, and between 2.5 percent and 3 percent annually beginning in 2011.

In October, Walgreens announced the acquisition of certain assets from 12 Eaton Apothecary pharmacies in the Boston area. The transaction, expected to close in January, is an example of the company's market share growth opportunities through targeted acquisitions, the retailer said in a statement.

The company is adding its new beer and wine selection to most stores and now has nearly 1,600 stores with the products. Walgreens also launched its new brand campaign, "Walgreens. There's A Way" in September, followed by the re-launch of with a variety of new healthy living and product resources, and simplified shopping tools and services.

"We approach the coming year confident in our strategies and cautious about the economy," Wasson said. "Despite ongoing economic challenges, our strong balance sheet and unparalleled network of locations and services position us for continued growth. We'll continue to execute our strategies in order to drive sales, accelerate earnings and deliver strong cash flow."

As of Nov. 30, Walgreens operated 7,649 locations in all 50 states, the District of Columbia, Puerto Rico and Guam. That includes 7,147 drugstores, as well as worksite health centers, home care facilities and specialty, institutional and mail service pharmacies. Its Take Care Health Systems subsidiary manages more than 700 in-store convenient care clinics and worksite health and wellness centers.

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