Walgreen Profit Rises, Plans More Stores

Walgreen Co. (WAG), the top U.S. drugstore chain, Monday said quarterly profit rose 18 percent on strong sales of prescription drugs, digital photo processing and general merchandise.

The Deerfield, Ill., retailer, whose shares rose 1.5 percent, also said it would spend $1.5 billion in the current fiscal year to build or buy additional stores and invest in pharmacy technology to bolster its market share.

The budgeted capital investment is up 50 percent from the previous year.

Walgreen, whose aggressive expansion has seen it convert many of its stores into 24-hour operations at high-traffic locations, earned $327.2 million, or 32 cents a share, in the fiscal fourth quarter ended Aug. 31, compared with $277.1 million, or 27 cents a share, a year earlier.

Analysts on average were expecting 31 cents per share, according to Reuters Estimates.

Walgreen's double-digit earnings growth contrasts sharply with struggling rival Rite Aid Corp. (RAD), whose business has been hurt by a push by some health-care providers to refill prescriptions by mail-order to cut costs.

In addition, Rite Aid, the No. 3 drugstore chain, can hardly afford to spend on real estate and other costly initiatives as it is saddled with $3.2 billion of debt, according to analysts.

The gap between Walgreen and its closest rival, CVS Corp. (CVS), has also continued to widen despite CVS' recent purchase of some Eckerd stores.

"Walgreen continues to grow on an organic basis, which is somewhat higher quality growth," said Barrington Research analyst Derek Leckow, who rates Walgreen "outperform" and does not own its stock.

"Their performance this quarter looks like it was primarily gross-margin driven. This is a very healthy report," he added.

Walgreen, which operates about 4,600 stores, said sales have not slowed, even with the string of hurricanes in the Southeast.

Chief Executive Officer David Bernauer said in a statement that Walgreen was poised for continued growth due to favorable demographic changes.

"In the long term, prescription growth will be fueled by aging Baby Boomers and new drug development and will become more important to controlling health-care costs," he said.

Citing market data from research firm A.C. Nielsen (search), Walgreen said it gained market share against all food, drug and mass-merchandise competitors in 59 of its top 60 product categories.

Quarterly sales grew 14.3 percent to $9.4 billion, while sales at stores open at least a year, or same-store sales -- a key retailing performance measure -- rose 9.7 percent.

Walgreen shares were up 57 cents AT $36.83 on the New York Stock Exchange (search).