Walgreen Profit Falls 4% as Costs Rise

Walgreens Store

Walgreen Monday unexpectedly posted its first quarterly profit decline in almost 10 years, citing lower reimbursements for some generic drugs and higher salary and other expenses, sending its shares down more than 11 percent in pre-market trade.

Walgreen, one of the largest U.S. drugstore chains, said lower gross profit from drugs such as simvastatin -- the generic form of the cholesterol drug Zocor -- weighed on earnings.

Blockbuster generic drugs typically are most profitable for drugstores in their first few months and simvastatin has been on the market since June 2006, the company said.

Higher expenses for salaries, advertising and store operations also pressured profit, raising concerns about whether Walgreen is losing control over costs as it continues its aggressive expansion.

"What's going on with Zocor is out of Walgreen's control," said Mitchell Corwin, analyst at Morningstar. "The higher store expenses, that's within their control."

Walgreen said profit for its fourth quarter ended Aug. 31 was $396.5 million, or 40 cents a share, compared with $412.3 million, or 41 cents a share, a year earlier.

Analysts on average forecast 47 cents a share, according to Reuters Estimates.

Walgreens CEO

The decline in profit was the first since the first quarter in fiscal year 1998, a Walgreen spokesman said.

Sales rose 10.3 percent to $13.4 billion. Sales at stores open at least a year rose 6.3 percent. The company filled 4 percent more prescriptions in stores open at least a year than it did in the year-earlier quarter.

"Managing both expenses and lower reimbursements on some generic drugs is my top priority. We're going to fix this, and at the same time continue our aggressive growth plan," Chairman Jeffrey Rein said in a news release.

Walgreen has expanded rapidly in recent years by opening new stores and buying smaller companies. It is also branching into other health-care areas with acquisitions, including the agreement in July to buy Option Care Inc, a provider of home infusion pharmacy services.

Walgreen said it plans to open 550 new stores in fiscal year 2008, with a net of 475 new stores after closings and relocations. The company had 536 net new stores in fiscal year 2007 and operated 5,997 stores as of Aug. 31.

It plans to spend more than $2 billion on new store openings and other capital expenses in 2008.

Walgreen shares traded at $41.79 on Monday in pre-market electronic trading. The stock closed Friday at $47.24 on the New York Stock Exchange. Before Monday, the stock was up 3 percent this year, compared with a 28 percent increase for rival CVS Caremark .