WAG

Walgreen Co. (WAG)

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Walgreen (WAG)

Q1 2012 Earnings Call

December 21, 2011 8:30 am ET

Executives

Gregory D. Wasson - Chief Executive Officer, President and Director

Wade D. Miquelon - Chief Financial Officer and Executive Vice President

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

Analysts

Brian Wang

Brian Wang - Barclays Capital, Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Eric Bosshard - Cleveland Research Company

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Mark R. Miller - William Blair & Company L.L.C., Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Presentation

Operator

Good day, everyone, and welcome to today's Walgreen Co. First Quarter 2012 Earnings Call. Today's call is being recorded. I'll turn things over to your host, Mr. Rick Hans. Please go ahead, sir.

Rick J. Hans

Thank you, Jason. Good morning, everyone. Welcome to our first quarter conference call. Today, Greg Wasson, our President and CEO; and Wade Miquelon, our EVP and Chief Financial Officer, will discuss the quarter and update you on Express Scripts. Also joining us on the call and available for questions is Kermit Crawford, our President of Pharmacy, Health & Wellness Services; and Mark Wagner, President of Community Management.

As a reminder, today's presentation includes certain non-GAAP financial measures, and I would direct you to our website at investor.walgreens.com for reconciliation. You can find a link to our webcast under the IR website. After the call, this presentation and a podcast will be archived on our website for 12 months.

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 risk and uncertainty. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statement 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.

I'll now turn the call over to Greg.

Gregory D. Wasson

Thank you, Rick. Good morning, everyone, and thank you for joining us on our call. Today, I'll begin with our quarterly results. Second, I'll discuss the progress we're making on our strategies. And finally, I'll provide a brief update on Express Scripts, and then Wade will give you more details on our performance and the considerations for the year ahead.

Beginning with our results today. As you saw in our release this morning, we reported record first quarter sales of $18.2 billion, up 4.7% from $17.3 billion a year ago. First quarter net earnings were $554 million, and first quarter earnings per diluted share were $0.63. Compared to the prior year, the delay in cough/cold and flu season impacted net earnings per diluted share by $0.01, while the strategic decision to no longer be part of Express Scripts pharmacy network as of January 1, 2012, cost $0.01 per diluted share in comparable pharmacy sales and $0.01 per diluted share in related expenses. Cash flow from operations for the quarter was $809 million, and free cash flow was $309 million. We returned $803 million to shareholders in the quarter, including the largest dividend payment in the company's history, and $601 million in stock repurchases, up nearly 18% over the first quarter last year.

Now I'd like to put this quarter's results into context. On our September call, we anticipated we would see challenging comparisons for gross profit dollar growth in the first quarter and we did. We were up against 2 strong prior year quarters. As we discussed, our first quarter is always impacted by volatility and the timing and the severity of the cough/cold and flu season, which this year is off to a slow start. We were also impacted by slower rate of generic introductions this quarter compared to the prior year quarter, and that impact will reverse and then accelerate through the fiscal year with the release of new generics, including generic Lipitor. Couple that with a step-down in pharmacy reimbursement, including July rate reductions from Express Scripts that were built into our current contract, and our year-over-year increase in gross profit dollars slowed to $159 million or 3.2%.

Turning to SG&A dollar growth. We continued to invest in our strategies, focusing on our CCR store conversions, our health and daily living pilot stores and driving innovation in E-Commerce. While overall SG&A dollar growth came in at 5% excluding drugstore.com, our costs increased by 4.2%. The spread between gross profit dollar growth and SG&A dollar growth for the quarter was negative $41 million. Recall, we really think about this spread over a longer period of time, not quarter-by-quarter.

As we look further into the results, we continue to see strength in our business fundamentals. We filled a first quarter record 208 million prescriptions, as our 90-day program continued to fuel growth. In fact, 90-day retail prescriptions grew by 37% year-over-year. Based on the most recent data from IMS, on a 30-day basis, our retail pharmacy market share was 19.9%, which is up 40 basis points from a year ago. We administered 5 million flu shots this flu season through November 30 compared to 5.6 million a year ago. We continue to deliver more flu shots than any other single entity outside of the U.S. government and to build a strong immunization program for adults and adolescents, which is an extension of our flu program.

In addition to our work in pharmacy, we maintained momentum in our front end despite weak cough/cold and flu. We completed the successful rollout of CCR, contributing to our front-end sales growth. We're striking the right balance between sales and margins as our front-end margins held steady compared to the first quarter last year. We're outperforming our nearest competitors on comps. And reinforcing the success of CCR, we continue to grow our market share in our targeted signature and power categories compared to food, drug and mass merchandise competitors, measured by the Nielsen company. For the 12-week period ended November 26, Walgreens gained share in key health and wellness, beauty and personal care product categories.

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