WAG

Walgreen Co. (WAG)

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Walgreen Co. (WAG)

F3Q13 Earnings Call

June 25, 2013 8:30 a.m. ET

Executives

Rick Hans – Divisional VP, Investor Relations

Greg Wasson – President and CEO

Wade Miquelon – CFO

Kermit Crawford - President, Pharmacy

Mark Wagner - President, Store Operations

Analysts

Lisa Gill - JPMorgan

Tom Gallucci - Lazard Capital Markets

John Heinbockel - Guggenheim Securities

Ajay Jain - Cantor Fitzgerald

Matthew Fassler - Goldman Sachs

Ross Muken - ISI Group

Andrew Wolf - BB&T Capital Markets

Ricky Goldwasser - Morgan Stanley

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Walgreen’s third quarter 2013 earnings conference call. [Operator instructions.] I will now turn the call over to your host, Rick Hans. Please begin.

Rick Hans

Thank you, operator. Good morning, everyone. Welcome to our third quarter conference call. Today, Greg Wasson, our president and CEO; and Wade Miquelon, executive vice president, CFO and president, international will discuss the quarter. Also joining us on the call are Kermit Crawford, president of pharmacy, and Mark Wagner, president of store operations.

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 reconciliations to the most directly comparable GAAP measures and related information. You can find a link to our webcast on our Investor Relations 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 statements that are 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 and 10-Q and subsequent filings for a discussion of risk factors as they relate to forward-looking statements.

Now, I'll turn the call over to Greg.

Greg Wasson

Thank you, Rick. Good morning everyone, and thank you for joining us on our call. Today I’ll begin with the highlights of our results for the quarter. Second, I’ll update the steps we’re taking to improve our daily living business, expand our role in the changing healthcare system, and advance our long term strategic growth drivers. Then I’ll turn the call over to Wade for a more in-depth look at our results and key considerations for the remainder of the year.

We recognize our business has become more complex, with a number of moving parts, and we do want to help you get to the underlying performance of our business as we remain confident in our long term strategic direction. Starting with our financial results, we reported adjusted earnings per diluted share of $0.85 and GAAP diluted EPS of $0.65.

In the quarter, along with Alliance Boots, we announced a strategic long term relationship with AmerisourceBergen, one of the largest pharmaceutical supply chain companies in America. Through this relationship, we have formed a collaborative, integrated wholesale retail model here in the U.S., with a 10-year comprehensive primary distribution agreement for our branded and generic products.

Combined with our partnership with Alliance Boots, Europe’s leading fully integrated wholesale retail model, we are now best positioned to drive efficiency and innovation throughout the entire pharmaceutical supply chain, harnessing the benefits of global sourcing and making it easier for manufacturers to bring products to market and providing patients with better access to healthcare.

Cash flow from operations was $1.4 billion, with $1.1 billion in free cash flow, which is one of our strongest quarters for both. Earlier this month, we launched the Boots No 7 men’s product line in more than 5,000 stores across the country. We’ve already introduced with great success the No 7 women’s skincare line and other Boots products in four of our flagship locations, with more expansion planned.

And finally, our joint synergy program with Alliance Boots is meeting our expectations. We’re on track to deliver $125 million to $150 million in combined synergies, compared to our previous target of $100 million to $150 million.

Now let me walk through our quarterly results on a GAAP and non-GAAP adjusted basis. Sales came in at $18.3 billion, up 3.2%, from the same quarter a year ago. GAAP operating income for the quarter was $991 million, up 13.5% from $873 million for the same period last year.

Non-GAAP adjusted operating income for the quarter was $1.2 billion, up 22.9% from just over $1 billion in third quarter 2012. GAAP net earnings for the quarter were up 16.2%, from $537 million, or $0.62 per diluted share last year to $624 million, or $0.65 per diluted share.

The non-GAAP adjusted net earnings for this quarter were a record $812 million, or $0.85 per diluted share compared to adjusted net earnings of $628 million, or $0.72 per diluted share in the same quarter last year.

Turning to trends in gross profit dollars and SG&A dollars, in the third quarter, on a GAAP basis, our gross profit dollar growth increased 4.1%, or $208 million from a year ago. SG&A dollar growth increased 5.3%, or $221 million, compared to a year ago.

Now, on a non-GAAP basis, adjusted gross profit dollar growth increased $268 million, or 5.3% year over year. Non-GAAP adjusted SG&A dollar growth was up $182 million, or 4.5%. During the quarter, the rate of growth in adjusted FIFO gross profit dollars exceeded adjusted SG&A dollar growth by 80 basis points. You can see this was the first positive spread in six quarters, and we’re pleased that this is moving in the right direction.

Now let me update our progress on the three key strategic growth drivers we put in place last year to position our company for long term growth and value creation. First, on creating a well experience, while we’re seeing several positive indicators in our daily living business, such as increases in customer delight, basket size, and gross margins, our front-end sales and traffic are still not up to our expectations.

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