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Walgreen Sees Cash-Strapped Customers Delaying Prescriptions

http://online.wsj.com/article/SB123781195247013721.html

›Net Drop Reflects Shifting Consumer Behavior and Markdowns, but Chain Stands to Gain From Generics Trend

MARCH 24, 2009
By AMY MERRICK

Walgreen Co.'s chief executive, sorting through the details that led to a 6.7% drop in profit on a 7% rise in quarterly sales, said, "Consumer behavior has changed dramatically in recent months, beyond just the kinds of products they are purchasing."

Rising unemployment and other economic problems are causing Americans to visit the doctor less often, resulting in fewer prescriptions being written and filled in the U.S., Walgreen Chief Executive Gregory Wasson said in a conference call with analysts.

Walgreen plans to focus on updating older stores.

Still, Walgreen's number of prescriptions filled increased 4% during the quarter, compared with a 1% decline for the rest of the industry, the company said, citing figures from research firm IMS Health.

Mr. Wasson said Walgreen is seeing sales increases in the types of generic drugs targeted by Wal-Mart Stores Inc. and other discounters. Drug stores promote generic prescriptions because they carry higher profit margins for the retailers than brand-name drugs.

He credited Walgreen's prescription savings club, which the pharmacy chain began marketing heavily last summer in response to rivals' promotions, such as Wal-Mart's offer of $4 for one-month generic prescriptions. Walgreen's club now has 1.7 million members, who pay $20 to $35 a year to receive discounts such as a 90-day supply of more than 400 generic medications for $12 each.

The pharmacy chain, based in Deerfield, Ill., said net income for the quarter ended Feb. 28 declined to $640 million, or 65 cents a share, from $686 million, or 69 cents a share, in the same quarter a year earlier.

Amid the tough economy, Walgreen is trying to attract value-conscious shoppers by stocking more staple products such as groceries and pushing its private-label items, which are less expensive than brand-name goods.

Total sales increased 7% during the fiscal quarter, to $16.48 billion from $15.39 billion, generally surpassing analysts' expectations.

Sales at stores open at least a year rose 1.3%, but same-store sales outside the pharmacy declined 1.2%, showing that customers are holding back on spending. The company said its discounting during the quarter hurt gross profit margins, primarily as it cleared out holiday merchandise ordered long before the economic downturn steepened.

The pharmacy chain said the costs of its restructuring program decreased earnings for the fiscal quarter by a net 4 cents a share. It forecast that such costs will hurt earnings slightly for the full fiscal year. As part of its restructuring, Walgreen said in January that it would cut 1,000 corporate and field management jobs, or 9% of the total positions of that type.

Walgreen said the extra day associated with leap year boosted sales in 2008, making year-over-year comparisons more difficult.

The company also said sales declines have leveled off. "If you look at our sales performance in recent quarters, the numbers have essentially stabilized in a very tough retail environment," Walgreen Chief Financial Officer Wade Miquelon said during the conference call.

Walgreen has been changing its business practices and preparing to overhaul its stores. Instead of focusing primarily on opening new locations, it has slowed store growth and is spending more time updating older stores. Executives acknowledge that some departments had grown cluttered with slow-moving merchandise.

Mr. Wasson said the retailer will pilot 35 stores with new formats by this summer and plans to improve all of its nearly 6,700 drugstores over the next 18 months. Stores will give more space to categories such as skin care and cosmetics, he added.

Walgreen's stock jumped 9.4%, or $2.29, to $26.58 in 4 p.m. composite trading on the New York Stock Exchange, where stocks overall rallied on Monday.‹