WAG

S&P 500: +54.38 (+7.08%)

Stocks surged on details of the Treasury’s Public-Private Investment Program.

Walgreen Co. (WAG) +9.43%
Walgreen reported profit and sales that exceeded estimates as store traffic has held steady despite the weak consumer spending environment. Revenue increased 7 percent during the quarter, with same-store sales rising 1.3 percent, or 2.1 percent adjusting for calendar shifts (including the absence of the leap day in 2009).

Prescription sales climbed 7.8 percent year-over-year, accounting for 63 percent of sales in the quarter. Walgreen’s prescription sales are outpacing the rest of the industry – Walgreen’s number of prescriptions filled increased 4 percent compared with a 1 percent decline for the rest of the industry. Prescription sales help offset weaker front-end (non-pharmacy) results, which were pressured by promotional pricing to attract cash-strapped consumers.

Promotional pricing and a higher LIFO charge negatively impacted margins, but the biggest impact came from clearing out holiday merchandise that it bought well before the economic downturn steepened. On the bright side, the company reported a 40 percent increase in free cash flow due to “improved inventory control and slower new store openings.”

Reorganization costs cut profit by 6 cents a share, while the program saved 2 cents a share. The company is eliminating 1,000 jobs, or 9 percent of employees in corporate and field management, to help save $1 billion annually by the year ending August 2011.

The company is aggressively seeking small acquisitions to further broaden its footprint and strengthen its foundation during tough times.

Walgreen is a perfect example of what you want to see from companies during an economic downturn. The company has significantly slowed new store openings to focus on improving existing stores, remodeling stores and scrutinizing its merchandise to enhance consumer experience and convenience. Walgreen has also started a network of pharmacies, in-store clinics and company health centers that it is marketing to corporate and government employers nationwide.

We continue to believe Walgreen is positioned for strong growth once the economy recovers.


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Peter Lazaroff, Junior Analyst