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Walgreen (WAG)

Q2 2011 Earnings Call

March 22, 2011 8:30 am ET


Kermit Crawford - President of Pharmacy Services

Wade Miquelon - Chief Financial Officer and Executive Vice President

Mark Wagner - President of Community Management

Rick Hans - Divisional Vice President of Investor Relations & Finance and Assistant Treasurer

Gregory Wasson - Chief Executive Officer, President and Director


Edward Kelly - Crédit Suisse AG

David Magee - SunTrust Robinson Humphrey, Inc.

Lisa Gill - JP Morgan Chase & Co

Patricia Baker - Scotia Capital Inc.

Mark Wiltamuth - Morgan Stanley

Deborah Weinswig - Citigroup Inc

Ann Hynes - Caris & Company

Eric Bosshard - Cleveland Research



Good day, everyone. And welcome to the Walgreen Co. Second Quarter 2011 Earnings Conference Call. [Operator Instructions] And at this time, I'm pleased to turn the conference over to Mr. Rick Hans. Please go ahead, sir.

Rick Hans

Thank you, Allen. And good morning, everyone. Welcome to our second quarter conference call. Today, Greg Wasson, our President and CEO, will discuss the quarter's highlights and our continued progress in executing our core strategies. In addition, Wade Miquelon, Executive Vice President and Chief Financial Officer, will detail our second quarter financial results.

Also joining us on the call and available for questions is Kermit Crawford, our President of Pharmacy Health and Wellness Services and Solutions; and Mark Wagner, President of Community Management. When we get to your questions, please limit yourself to one question. As a reminder, today's presentation includes certain non-GAAP financial measures, and I would direct you to our website at for reconciliations. Also, I'm available throughout the day by phone to answer any additional questions you may have.

You can find a link on our webcast under our Investor Relations website. After the call, this presentation will be archived on our website for 12 months. We're also making the call available as podcast. You can download that too at our Investor Relations website.

Certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market, competitive and regulatory expectations that involve risks and uncertainty. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K for a discussion of risk factors as they relate to forward-looking statements.

Now I'll turn the call over to Greg.

Gregory Wasson

Thank you, Rick. And good morning, everyone. Thank you for joining us on our call today. We will cover three main areas today. First, I'll touch on key items in our strong second quarter financial results. You saw this morning we had record sales and earnings for the quarter, contributing to our third consecutive quarter of double-digit EPS growth. Second, I'll take you through a number of recent actions that are accelerating the execution of our strategies. And finally, Wade will walk you through our financial performance in more detail and give you perspective on the second half of the year.

Starting with our results today, we reported record sales of $18.5 billion for the quarter. That's up 8.9% from nearly $17 billion in the second quarter of last year. Net earnings for the quarter were $739 million, up 10.4% from $660 million during the same quarter last year. Net earnings per diluted share were up 17.6% to $0.80 compared to $0.68 in the same period last year. Our strong cash flow trends also continued this quarter. Cash flow from operations was $886 million, and free cash flow was $690 million. We also completed $300 million in stock buybacks during the quarter, putting us nearly halfway through our $1 billion share repurchase authorization.

Next, let's look at the key drivers of our performance as we continue to turn our core business strategies into results. Running comparable store sales increased 4.3% in the quarter. As the economy slowly improves and our initiatives take hold, we're seeing increases in both traffic and basket size. We also saw a strong performance in cough and cold products, which drove sales in all three months of the quarter, and reflected a later onset than last year of the cough/cold flu season. Beer and wine sales continue to grow, and added 77 basis points to the front-end comp for the quarter. And finally, we also posted good holiday performance. Sales for Christmas and Valentine's Day solidly beat last year's numbers and demonstrated the power that our combination of convenience and value brings to the customers who are shopping later and later into the season.

We also had another strong quarter in Pharmacy. Prescription sales and comparable stores grew by 3.9%, and comp scripts adjusted for Dayfall, grew by 4.4% over the same quarter last year. The cough/cold flu season added 110 basis points to our script comp. Our share of the overall retail prescription market, not including flu shots, improved to 20.1% for the quarter. With that performance, we achieved a milestone, filling one out of every five retail prescriptions for the first time in company history. For the flu season this year, when we administered 6.4 million flu shots, while industry-wide demand for shots was less than we expected, we continued to grow our market share.

Outside of the federal government, we provide more flu shot immunizations than any of the other single entity in the country. So we are confident in our strategy to pursue the flu and broader vaccinations and immunization markets aggressively. Through these efforts, we are making healthcare solutions affordable and accessible, driving prevention and wellness and leading the transformation of community pharmacy.

Solid sales in both the front-end and pharmacy continue to support a healthy relationship between gross profit dollar growth and SG&A dollar growth, allowing us to deliver on our goal of double-digit earnings per share growth. This quarter, gross profit dollar growth is $120 million or 70 basis points, above SG&A dollar growth. Along with strong seasonal sales, we're driving momentum in gross profit dollar growth through store openings and comp store sales, which include the positive impact of our Customer Centric Retailing initiative. In the quarter, we opened in 19 new stores, and transitioned 159 more stores to our CCR format. Through the end of the quarter, we've converted or opened more than 2,300 CCR stores, well on our way to transitioning 5,500 new and existing stores by the end of 2011.

SG&A control in the quarter was also very good in spite of tough comparison from a year ago. Comparable store expense was the primary driver of expense control, although we continue to see expense growth from new store openings in acquisitions like Duane Reade and CCR. More broadly across the company, we are focused on making cost control and continuous process improvement a way of life. That means moving away from cost savings through major restructurings to a discipline that ensures we are finding opportunities to be more efficient and productive every day.

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