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Walgreen Profit Up 2%, Helped By Cost Cutting

Reuters
Monday, 23 Jun 2008 | 1:29 PM ET

Walgreenposted a 2 percent increase in quarterly profit as a weak U.S. economy and slowing growth in demand for prescription drugs muted sales.

Walgreens Store
Nick Ut
Walgreens Store

But the company also said it was on pace to open more stores than planned this fiscal year and that new locations were continuing to meet or exceed its target for return on investment.

Walgreen , one of the largest U.S. drugstore chain operators, said earnings rose to $572 million, or 58 cents a share, in the third quarter that ended May 31 from $561 million, or 56 cents a share, a year earlier.

Analysts on average had forecast profit of 59 cents a share, according to Reuters Estimates.

Earnings suffered because of a $16.1 million inventory-related charge, while in the year-earlier period, the company had an inventory gain of $3.5 million and a $13.5 million tax credit.

Sales rose 9.6 percent to $15.01 billion.

Sales at stores open at least a year rose 3.4 percent, including increases of 2.7 percent for prescription drugs and 4.6 percent for nonprescription items.

Walgreen has seen the pace of prescription drug sales slow as the allergy medicine Zyrtec became available over the counter.

The company also said it was on pace to open more than the 550 new stores it had planned for this fiscal year, expanding its store base by more than 9 percent.

During a conference call with investors, Chief Executive Officer Jeff Rein said that after new stores got up and running, they were making more than a 15 percent return on invested capital.

This may have assuaged come concerns about the company's expansion as Walgreen has opened stores at a brisk pace to try to boost its business.

"They continue saying that they are meeting their internal rate of return target," said Sovereign Asset Management retail analyst Sarah Henry.

Henry also said Walgreen, like other drugstore companies, should get a profit boost starting in the next fiscal year as a number of blockbuster drugs become available in generic form, including Pfizer's Lipitor cholesterol fighter and Caduet, which combines Lipitor with a blood-pressure medicine.

"If you look at the schedule for large blockbuster drugs there's going to be another big bubble of them," Henry said.

While generic drugs carry a lower price and cut into drugstore sales, they are also more profitable.

Selling, general and administrative expenses as a percentage of sales were about flat, as Walgreen cut advertising spending and slowed the pace of salary and cost increases in stores.

Walgreen shares were down 22 cents at $34.85 in afternoon New York Stock Exchange trade. The stock is down about 8 percent this year, compared with a 2.3 percent rise for rival CVS Caremark.

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