Walgreen’s Cutting Back Store Openings As Profits Slow

As the current recession continues to dig deeper into company’s bottom lines, higher costs and lower profits equals contraction rather than growth.  Walgreen Co. (WAG) reported earnings on Tuesday and a 5 cent miss sent shares reeling throughout another tough day for Wall Street.  One of the countries largest drug store companies, behind industry leader CVS (CVS), reported earnings the the third quarter ending on November 30 of 41 cents per share on sales of $14.9 billion.Net earnings for the last quarter were down over 10 percent to $408 million compared with $456 million or 46 cents per share.  Analysts were expecting 46 cents per share with $15.1 billion in sales.

Even though overall store sales were up 6.6% over the last 3 months, higher selling, general, and administrative costs related to the opening of a record 212 new or acquired stores throughout the quarter.  Gross profits were also hurt by an increase in the LIFO provision to $43 million in this year’s quarter versus a provision of $27 million in last year’s first quarter.

In response to the tougher economic conditions, Walgreen plans on reducing further new store openings to 4 - 4.5% in 2010 and 2.5 - 3%t in 2011 to save an additional $500 million in capital expenditures beyond the $500 million announced in June.  Plans for store openings have been cut further after a 5% organic growth rate was announced back in July but have to be cut to allow for more savings.  The goal is to utilize the savings from fewer store openings by remodeling and renovating current stores as well as expanding merchandise variety to take full advantage of already well-established operations.  With online sales at Walgreens.com up 45% in November and prescription sales up 6.6% during the quarter, Walgreens has been able to maintain its strong industry position. Walgreen’s CEO, Gregory D. Wasson, commented:

“We continue to post solid sales results and achieve strong cost control in this difficult retail environment.  Customer traffic strengthened through the quarter and we’re making substantial progress on our growth strategies to get more from our core operations and enhance the customer experience.”

On top of cutting back on store expansion over the next couple of years, Walgreens has implemented their Rewiring for Growth and Power initiatives which are designed to enhance patient-pharmacist interaction and reduce costs in the areas of indirect procurement, general overhead, and labor.  Their goal is $1 billion in total costs savings by fiscal 2011.  The first quarter results were negatively impacted by 1 cent per diluted share related to Rewiring for Growth one-time costs.

Ceo Wasson added:

“We believe that further slowing of organic store growth is a prudent step in the context of current economic conditions. Furthermore, by freeing up human and financial capital, substantial upside exists to drive greater value creation by enhancing the best community-based store network in America. This includes refreshing and remodeling existing stores, more efficient assortment within stores, prescription file buys and continued expansion of retail and worksite clinics.”

Even with consumers cutting back, drug stores and discount retailers are still holding tough.  Even with Walgreen’s miss showing discount retailers are feeling the pinch, CVS showed some strength as they rallied back after a steep drop at the open and reiterated their earnings guidance for fiscal 2008.  It’s obvious the Walgreen’s increased SG&A expenses are on the rise due to store openings and the demand simply is not there for their historic store growth for the next couple of years.  I anticipate profits to be under more pressure going into 2009 and further lowering of growth estimates possible going forward.

Disclosure: None

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