Walgreens posts monster Q2 gains

DEERFIELD, Ill. — With record second-quarter sales and earnings under its belt, a grasp on 20.1% of the retail prescription drug market and a sharpened focus on core assets, Walgreens' executives expressed optimism on future growth — despite such external challenges as a soft economy and continued pressure on Medicaid reimbursement — and reiterated the company's focus on core strategies.

"We continue to make substantial progress on our key initiatives even in this challenging economic environment. While the economy is slowing improving, unemployment remains high at 8.9%, and food and gas prices are rising. As costs rise and jobs remain soft, customers continue to look for value," Walgreens president and CEO Greg Wasson told analysts during Tuesday morning's conference call to discuss quarterly results.

Wasson also told analysts that he expects continued pressure on Medicaid reimbursement. Given this, the company is working closely with states to help them understand two "significant opportunities": the upcoming generic wave and improvements to medication adherence.

"The generic wave that begins this November will be a big benefit to all payors, including the states, as drug cost trends improve. In fact, if you look at IMS projections for generic introductions in the next five years, more than one-quarter of prescription drug costs will come out of the system due to brand-to-generic conversions. As a result, prescription drug costs as a percentage of overall healthcare spend will likely decrease," Wasson said. "Second, by improving patient compliance and adherence through these more affordable generic drugs, states can avoid billions of dollars in medically related costs, such as emergency rooms and hospitalizations. So we look forward to working with states to highlight the importance of these two opportunities in terms of providing access to these affordable drugs as a means of controlling costs."

Despite such challenges, the company — which posted a 10.4% boost in second-quarter earnings and record sales of $18.5 billion — continues to forge ahead and remains focused on enhancing its full scope of services via three core strategies: leveraging its store network, enhancing the customer experience and making major cost reductions and productivity gains.

"We continue to differentiate ourselves from our competitors with progress in several areas. We are extending our community-based retail network with store openings running at 2.5% to 3% in fiscal 2011, while progressing on our transformation to become the leading provider of pharmacy and health-and-wellness solutions," said Wasson, who noted that the company remains on track to deliver $1 billion in cost savings by end of fiscal 2011.

Wasson told analysts that its integration of Manhattan-based Duane Reade is moving forward as system conversions are "on track" and the pace of Duane Reade store remodels gain momentum entering the second half of the year.

Walgreens also is leveraging its brick-and-mortar assets through its e-commerce business with a goal to become the leader in multichannel retailing.

Meanwhile, aligning assets with core strategies remains a significant focus for Walgreens, as most recently demonstrated by its decision to sell to Catalyst Health Solutions its pharmacy benefit management business for $525 million in a cash transaction expected to close in June 2011.

"The sale [to Catalyst Health Solutions] has three strategic benefits. First, we are divesting noncore assets so we can further increase our focus and discipline on our core strategies. The transaction accelerates our strategy of leveraging the best community store network in America by providing and expanding pharmacy and health-and-wellness solutions to all of our patients and payers," Wasson explained. "Second, the sale accelerates our [business-to-business] strategy of taking pharmacy and health-and-wellness solutions to our customers, employers and government agencies either directly or with our PBM and health plan partners without the inherent conflict of owning a PBM. Third, we retain and look to grow our specialty pharmacy and mail-service businesses, as they are an integral part of our full-service pharmacy offerings."

Further in line with this effort, Walgreens is limiting its presence in the respiratory therapy and durable medical equipment market in order to accelerate its infusion pharmacy business. As a result, in December, the company began selling facilities and, to date, has sold respiratory therapy and durable medical operations in six states, Wasson said.

In looking at second-quarter financial results, net earnings were $739 million, or 80 cents per diluted share, compared with $669 million, or 68 cents per share, in the year-ago period. Sales rose 8.9% to a record $18.5 billion. Same-store sales rose 4.1%.

Front-end same-store sales rose 4.3% during the second quarter, benefiting from solid performance in cough-cold products, growth in beer and wine sales, and "good" holiday performance.

Behind the pharmacy counter, prescription sales in comparable stores grew by 3.9%. During the quarter, the company's share of the overall retail prescription market improved at 20.1% — marking a milestone by filling 1-of-every-5 retail prescriptions for the first time in the company history.

Through the end of the quarter, the company had opened or converted more than 2,300 Customer Centric Retailing stores as it works toward its goal of transitioning 5,500 new and existing stores by the end of 2011. Walgreens' CCR effort is aimed at aligning the chain's mix with what its customers really want from the stores, eliminating hundreds of redundant, slow-turning SKUs, and boosting front-end productivity.