Walgreen Co., the biggest U.S. drugstore chain, said Tuesday its profit sank 11 percent in the third quarter because of higher costs related to the nation's health care rules and its $623 million buyout of rival Duane Reade.
Those costs, CEO Greg Wasson said, converged with a weak economy, lower reimbursement rates and fewer new low-cost generic drugs.
In addition, the latest results were being compared with a strong showing last year when drug stores like Walgreen got an added boost from the swine flu pandemic as treatments flew off shelves.
The Deerfield, Ill., company reported net income of $463 million, or 47 cents per share, in the three months ended May 31. That's down from $522 million, or 53 cents per share one year ago.
Excluding one-time items, Walgreen earned 54 cents per share, short of the 57 cents most analysts were looking for, according to a poll by Thomson Reuters.
Company shares slipped 4.2 percent, or $1.25, to $28.89 in premarket trading.
The new federal health care law eliminated a Medicare Part D tax benefit for retiree health benefits. Walgreen said that reduced net income by 4 cents per share and the acquisition of Duane Reade ate up another 2 cents. The company spent another penny per share in restructuring costs.
Revenue, however, rose 6 percent to $17.2 billion, which just edged out analyst expectations of $17.14 billion.
In early April, Walgreen bought Duane Reade Holdings and its 258 New York City stores, leapfrogging rivals like CVS to become the biggest metropolitan drugstore operator. Walgreen also took on $457 million in Duane Reade debt.
Those stores are performing well, the company said, and Walgreen opened 94 new locations during the quarter.
But the company's older locations didn't do as well. The company said sales at stores open at least one year rose less than 1 percent. Prescription revenue rose 1 percent, and revenue from items like cosmetics and food rose 0.1 percent.
The company has 7,522 stores around the U.S., a few hundred more than CVS Caremark. Walgreen said it filled 198 million prescriptions, including almost 20 percent of all retail prescriptions in the U.S.
Walgreen remodeled about 500 stores during the quarter as part of a plan that is designed to boost its sales by sprucing up the appearance of its stores and improving its product assortments. It has opened or remade 1,200 stores, but it slowing down the pace of conversions. The company expects to have about 2,000 stores remade by the end of 2010 — 500 to 1,000 less than it previously estimated.
Walgreen is now selling beer and wine at almost half its stores.
The company had little to say about its recently resolved dispute with CVS Caremark.
Walgreen wanted Caremark to pay it more money in return for filling prescriptions managed by Caremark, and it objected to some of the company's policies. Walgreen announced June 7 that it would not participate in new Caermark plans, and Caremark was prepared to stop doing business with Walgreen entirely starting in July. But on Friday the companies announced a new agreement.
They have not released any details, but Wasson said he is "very pleased" with the outcome of Walgreen's talks with CVS and expects to build mutually beneficial relationships with Caremark and other pharmacy benefits managers.
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