Walgreen Profit Trails Analysts’ Estimates

Walgreen Co. (WAG), the largest U.S. drugstore chain, reported first-quarter profit that trailed analysts’ estimates as a dispute with employee-benefit manager Express Scripts Inc. (ESRX) drove customers to rivals. The shares fell.

Net income fell 4.5 percent to $554 million, or 63 cents a share, in the quarter ended Nov. 30, from $580 million, or 62 cents, a year earlier, the Deerfield, Illinois-based company said today in a statement. Analysts projected 67 cents, the average of 23 estimates compiled by Bloomberg.

The standoff with Express Scripts, which prompted CVS Caremark Corp. (CVS) and Rite Aid Corp. (RAD) to try to lure customers, and a delay in the cold and flu season, hurt Walgreen’s profit. While Walgreen reiterated that it doesn’t plan to be part of the Express Scripts network beginning Jan. 1, the company said today it remains open to “any fair and competitive offer.”

“Patients could develop new buying habits as they are forced to move away from Walgreen to other retailers if no deal is reached,” Tom Gallucci, an analyst at Lazard Capital Markets in New York, wrote today in note to clients. “After working to move their prescriptions to a new store, all patients may not return to Walgreen even if they ultimately regain access to Walgreen,” said Gallucci, who rates the shares “neutral.”

Walgreen fell 5.6 percent to $31.64 at 9:00 a.m. in New York. The shares had dropped 14 percent this year before today.

Flu Shots

The contract with Express Scripts is valued at more than $5 billion in annual drug sales. The six-month dispute revolves around how much St. Louis-based Express Scripts would reimburse Walgreen.

Walgreen said the decision to end the Express Scripts contract reduced per-share profit in the quarter by 2 cents, including 1 cent because of a reduction in same-store pharmacy sales. Walgreen gave 5 million flu shots in the quarter, down from 5.6 million a year earlier, reducing profit by 1 cent, according to the statement.

Revenue advanced 4.7 percent to $18.2 billion, matching the average of 19 estimates compiled by Bloomberg. Sales by stores open at least a year rose 2.4 percent.

Even without the Express Scripts agreement, Walgreen projected it will achieve 97 percent to 99 percent of last year’s prescription volume in the fiscal year through August 2012.

CVS, based in Woonsocket, Rhode Island, said yesterday the end of Walgreen’s agreement to provide drugs for Express Scripts customers may give it as many as 23 million prescription sales and boost profit as much as 11 cents a share next year.

‘Significant Opportunity’

The impasse “could present a very significant opportunity for us,” CVS Chief Financial Officer Dave Denton told analysts in New York. “We think many customers are more likely to move to another major chain.”

About 43 percent of CVS stores are within one mile of a Walgreen drugstore and 85 percent are within five miles, CVS said.

With a third of its stores within a mile of Walgreen’s locations, Camp Hill, Pennsylvania-based Rite Aid “is certainly going to do our best” to grab Walgreen customers, Chief Executive Officer John Standley told analysts last week. He declined to discuss advertising and other efforts.

To contact the reporter on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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