Walgreen Profits Increase 16 Percent Amid Expansion

Walgreen Co. (WAG) delivered better-than-expected results for its fiscal third quarter Monday, boosting profits 16 percent even as it maintained a breakneck expansion pace.

Prescription drug sales, which have fueled a series of double-digit earnings and revenue gains for the Deerfield, Ill.-based company in recent years, continued their momentum and accounted for 64 percent of company sales in the quarter — matching the highest percentage ever.

The gains came as Walgreen opened 78 more stores over the March-through-May quarter, mainly targeting Sun Belt states (search) with their growing and aging populations.

Net earnings were $344.6 million, or 33 cents a share, up from $296.1 million, or 29 cents a share, a year earlier. That was a penny higher than the consensus estimate of analysts surveyed by Thomson First Call.

Revenues totaled $9.6 billion, up 15 percent from $8.3 billion.

"Strong sales, improved overall margins and good expense control combined for an excellent quarter," chairman and CEO David Bernauer said.

Comparable sales, or those from stores open more than a year, increased by 10.4 percent over the previous year's quarter, including a solid 13.4 percent for prescription sales, which rose 17 percent overall.

Analyst Mark Miller of Chicago-based William Blair and Co. called it Walgreen's best quarter in the past 18 months, citing both earnings growth and gains in comparable sales.

"The company has really been investing heavily in the business," he said, citing spending on 24-hour stores, new distribution centers and digital photo labs. "What's really encouraging is that even with all that, we're starting to see some acceleration in earnings-per-share growth."

Walgreen last month opened its fourth distribution center in three years, a facility in Moreno Valley, Calif., that delivers merchandise to the fast-growing market in Southern California and neighboring states.

The company is being overtaken in a key category this year by rival CVS, whose purchase of 1,260 Eckerd stores from J.C. Penney (JCP) will give it the U.S. drugstore lead by roughly 1,000 outlets when the deal closes next month.

But industry observers note that Walgreen will remain No. 1 in sales and earnings growth, same-store sales, prescription drug market share and prescription sales per store.

Retail industry analyst Richard Hastings said Walgreen's cost efficiency in spreading expenses across its store base is a major reason for its competitive edge.

"The good earnings news is confirmation that Walgreen's expansion strategy is sound and is competitively well positioned against CVS," said Hastings, of the New York-based credit advisory firm Bernard Sands.

For the first nine months of the fiscal year, earnings were $1.03 billion, or $1 a share, up 15 percent from $898.6 million, or 87 cents a share, in the same period of 2003. Revenue rose 16 percent to $28.1 billion.

Walgreen operated 4,414 drugstores in 44 states and Puerto Rico as of May 31 — 364 more than a year earlier. Bernauer said the company is on pace to open more than 425 new stores this year, for a new increase of more than 350 after store relocations and closings.

Shares in the company rose 87 cents, or 2.5 percent, to close at $35.77 Monday on the New York Stock Exchange (search).