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Walgreens Misses Estimate As Front End Fades

For the third quarter ended May 31, Walgreen Co. announced that GAAP earnings were $624 million, or 65 cents per diluted share, versus $537 million, or 62 cents per diluted share, in the period a year ago. Adjusted earnings were $812 million, or 85 cents per diluted share, versus $628 million, or 72 cents per diluted share, in the year-earlier quarter.

A Zacks Consensus Estimate for adjusted diluted earnings per share was 90 cents.

Third quarter front-end comparable store sales including general merchandise such as home goods increased 0.4% as customer traffic decreased 3.9% versus the year-earlier period and basket size increased 4.4%. Third quarter total sales increased 3.2% to $18.3 billion compared to the prior-year quarter.

Walgreens CEO Greg Wasson, in a conference call, said weather and a soft economy had hurt front-end sales, but acknowledged that the retailer needed to do more to support that element of the business. In a conference call, he alluded to three initiatives to bolster general merchandise and other non-prescription revenues. First, he said, the company is making ongoing adjustments to its pricing and promotions. The company also is applying data gleaned from its Balanced Rewards loyalty program while maximizing the initiative’s value by placing more emphasis on redemption and rewards. And, finally, Wasson noted, Walgreens is enhancing store segmentation to meet local needs and preferences with assortments and circular content that better addresses community inclinations.

Prescription revenue, which accounted for 63.1% of sales in the quarter, increased 3.4%. Prescription sales in comparable stores gained 2%.

“This quarter we continued to see a strengthening in our pharmacy performance as we maintained strong margins and increased our retail pharmacy market share from 18.4% to 19.2% year over year,” said Wasson. “This, in combination with our focus on cost control, and the contribution from Alliance Boots and related synergies, resulted in adjusted earnings per diluted share growth of 18.1% in the quarter. We also produced another strong quarter of operating cash flow of $1.4 billion. That said, our front-end sales are still not up to our expectations, and while the economy remains challenging, increasing customer traffic and front-end sales are our near-term priorities with a focus on pricing and promotion, and the leveraging of our Balance Rewards program, which now has 75 million members.”