Walgreen Co. (NYSE:WAG) (NASDAQ:WAG) today announced earnings
and sales results for the third quarter and first nine months of
fiscal year 2013 ended May 31.
Net earnings determined in accordance with generally accepted
accounting principles (GAAP) for the fiscal 2013 third quarter were
$624 million, a 16.2 percent increase from $537 million in the same
quarter a year ago. Net earnings per diluted share for the quarter
increased 4.8 percent to 65 cents, compared with 62 cents per
diluted share in the year-ago quarter.
Adjusted fiscal 2013 third quarter net earnings were $812
million, a 29.3 percent increase from $628 million in the same
quarter a year ago. Adjusted net earnings per diluted share for the
quarter increased 18.1 percent to 85 cents, compared with 72 cents
per diluted share in the year-ago quarter. This year’s adjusted
third quarter results exclude the negative impacts of 8 cents per
diluted share from the quarter’s LIFO provision, 5 cents per
diluted share in acquisition related amortization, 5 cents per
diluted share related to a legal settlement with the U.S. Drug
Enforcement Administration (DEA), 5 cents per diluted share in
Alliance Boots related tax and 2 cents per diluted share in other
acquisition related costs. Also excluded is the positive impact of
5 cents per diluted share in fair value adjustments and
amortization related to the company’s warrants to purchase
AmerisourceBergen’s common stock.
“This quarter we continued to see a strengthening in our
pharmacy performance as we maintained strong margins and increased
our retail pharmacy market share from 18.4 percent to 19.2 percent
year over year,” said Walgreens President and CEO Greg Wasson.
“This, in combination with our focus on cost control, and the
contribution from Alliance Boots and related synergies, resulted in
adjusted earnings per diluted share growth of 18.1 percent in the
quarter. We also produced another strong quarter of operating cash
flow of $1.4 billion. That said, our front-end sales are still not
up to our expectations, and while the economy remains challenging,
increasing customer traffic and front-end sales are our near-term
priorities with a focus on pricing and promotion and the leveraging
of our Balance® Rewards program, which now has 75 million
members.”
Net earnings for the first nine months of fiscal 2013 ended May
31 determined in accordance with GAAP were $1.79 billion, an
increase of 1.1 percent compared with $1.77 billion in the first
nine months of fiscal 2012. Net earnings per diluted share for the
first nine months of fiscal 2013 decreased 7.4 percent to $1.88,
compared with $2.03 per diluted share in the first nine months of
fiscal 2012.
Adjusted net earnings for the first nine months of fiscal 2013
ended May 31 were $2.28 billion, an increase of 13.2 percent
compared with adjusted net earnings of $2.01 billion in the first
nine months of fiscal 2012. Adjusted net earnings per diluted share
for the first nine months of fiscal 2013 increased 3.5 percent to
$2.39, compared with $2.31 per diluted share in the first nine
months of fiscal 2012. This year’s adjusted nine-month results
exclude the negative impacts of 19 cents per diluted share in
acquisition related amortization, 16 cents per diluted share from
the LIFO provision, 9 cents per diluted share in Alliance Boots
related tax, 5 cents per diluted share in other acquisition related
costs, 5 cents per diluted share related to a legal settlement with
the DEA and 3 cents per diluted share in costs related to Hurricane
Sandy. Also excluded is the positive impact of 5 cents per diluted
share in fair value adjustments and amortization related to the
company’s warrants to purchase AmerisourceBergen’s common stock and
1 cent per diluted share in additional proceeds from the 2011 sale
of the company’s pharmacy benefit manager business.
Walgreens joint synergy program with its strategic partner,
Alliance Boots, is on track to deliver combined first-year
synergies of $125-$150 million, compared with the company’s
previous target of $100-$150 million. Alliance Boots contributed 10
cents per diluted share to Walgreens third quarter adjusted
results, including a negative impact of 2 cents per diluted share
due to reconciliation of International Financial Reporting
Standards (IFRS) with GAAP. Alliance Boots is anticipated to
contribute 8 cents per diluted share to fourth quarter adjusted
results, including a negative impact of 1 cent per diluted share
from weakening in the British pound between February and May.
FINANCIAL HIGHLIGHTS
Sales
Third quarter sales increased 3.2 percent compared with the
prior-year quarter to $18.3 billion, while sales for the first nine
months decreased 0.5 percent to $54.3 billion. Front-end comparable
store sales (those open at least a year) increased 0.4 percent in
the third quarter, customer traffic in comparable stores decreased
3.9 percent and basket size increased 4.4 percent, while total
sales in comparable stores increased 1.4 percent.
Prescription sales, which accounted for 63.1 percent of sales in
the quarter, increased 3.4 percent, while prescription sales in
comparable stores increased 2.0 percent. The company filled 209
million prescriptions in the quarter, an increase of 8.7 percent
over last year’s third quarter. Prescriptions filled in comparable
stores increased 7.1 percent in the quarter.
Gross Profit and SG&A
Total gross profit dollars increased $208 million, or 4.1
percent, compared with the year-ago third quarter, with gross
profit margins increasing 30 basis points versus the year-ago
quarter to 28.5 as a percentage of sales. The growth in margins was
driven primarily by an increase in generic prescription drugs
dispensed and positive contribution from the front end. The LIFO
provision was $120 million in the third quarter, compared with $60
million in the year-ago quarter, primarily driven by prescription
drug inflation.
Selling, general and administrative expense dollars increased
$221 million, or 5.3 percent, compared with the year-ago quarter,
including 0.2 percentage point of SG&A expenses for
acquisition-related costs and 0.6 percentage point for a legal
settlement with the DEA.
The company opened or acquired 39 new drugstores in the third
quarter compared with 52 in the year-ago quarter.
Interest expense increased to $50 million in this year’s third
quarter compared with $17 million in the year-ago quarter. The
increase in interest expense was primarily attributable to the $4.0
billion note issuance associated with the Alliance Boots
transaction and also includes a $7 million negative impact from a
non-cash fair market value adjustment to the company’s outstanding
interest rate swaps.
Walgreens also delivered operating and free cash flow of $1.4
billion and $1.1 billion, respectively, in the third quarter.
Other third quarter highlights
- In March, Walgreens and Alliance Boots
announced a strategic, long-term relationship with
AmerisourceBergen that expands Walgreens existing relationship into
a 10-year agreement with AmerisourceBergen for pharmaceutical
distribution. Under the agreement, AmerisourceBergen also will
collaborate with Walgreens and Alliance Boots on global supply
chain opportunities, and Walgreens and Alliance Boots together will
have rights to acquire a minority equity position in
AmerisourceBergen.
- To help meet the need for greater
access to affordable health services and bridge gaps in patient
care, while also improving care coordination, Walgreens announced
its Take Care Clinics now offer an expanded scope of health care
services. The new services, now available at most of the more than
370 Take Care Clinics located at select Walgreens, include
assessment, treatment and management for chronic conditions such as
hypertension, diabetes, high cholesterol, asthma and others, as
well as additional preventive health services.
- Walgreens Balance® Rewards loyalty
program has grown to 75 million enrollees. The company announced
that members can participate in additional health-related
activities and goal tracking to earn more points through walking,
running and weight management goals that can be logged and tracked
through Steps with Balance Rewards.
- Walgreens opened new flagship stores in
Washington, D.C., Boston, San Francisco and the Empire State
Building in New York City, showcasing a unique pharmacy format that
provides comprehensive care such as health tests and immunizations,
as well as health and daily living offerings like fresh food and an
enhanced beauty department.
- Walgreens was among 65 U.S. employers
that received the 2013 Best Employers for Healthy Lifestyles® award
by the National Business Group on Health’s Institute on Innovation
in Workforce Well-Being. Walgreens was honored for its ongoing
commitment and dedication to promoting a healthy workplace and
encouraging its workers and families to pursue and maintain healthy
lifestyles.
At May 31, Walgreens operated 8,560 locations in all 50 states,
the District of Columbia, Puerto Rico and Guam. The company has
8,097 drugstores nationwide, 207 more than a year ago. Walgreens
also operates worksite health and wellness centers, infusion and
respiratory services facilities, specialty pharmacies and mail
service facilities. Its Take Care Health Systems subsidiary manages
more than 700 in-store convenient care clinics and worksite health
and wellness centers. Walgreens e-commerce business includes
Walgreens.com, drugstore.com, Beauty.com, SkinStore.com and
VisionDirect.com.
Walgreens will hold a one-hour conference call to discuss the
third quarter results beginning at 8:30 a.m. Eastern time today,
June 25. The conference call will be simulcast through Walgreens
investor relations website at: http://investor.walgreens.com. A
replay of the conference call will be archived on the website for
12 months after the call. A podcast also will be available on the
investor relations website.
The replay also will be available from 11:30 a.m. Eastern time,
June 25 through July 2 by calling 855-859-2056 within the U.S. and
Canada, or 404-537-3406 outside the U.S. and Canada, using replay
code 69672856.
Cautionary Note Regarding Forward-Looking Statements. Statements
in this release that are not historical, including, without
limitation, estimates of future financial and operating
performance, including the amounts and timing of future accretion
and synergies, are forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Words such as "expect," "likely," "outlook,"
"forecast, "would," "could," "should," "can," "will," "project,"
"intend," "plan," "goal," “target,” "continue," "sustain,"
"synergy," "on track," "believe," "seek," "estimate," "anticipate,"
"may," "possible," "assume," variations of such words and similar
expressions are intended to identify such forward-looking
statements. These forward-looking statements are not guarantees of
future performance and involve risks, assumptions and
uncertainties, including, but not limited to, those relating to our
commercial agreement with AmerisourceBergen, the arrangements and
transactions contemplated by our framework agreement with
AmerisourceBergen and Alliance Boots and their possible effects,
the Purchase and Option Agreement and other agreements relating to
our strategic partnership with Alliance Boots, the arrangements and
transactions contemplated thereby and their possible effects, the
parties' ability to realize anticipated synergies and achieve
anticipated financial results, the risks associated with
transitions in supply arrangements, the risks associated with
international business operations, the risks associated with
governance and control matters, whether the option to acquire the
remainder of the Alliance Boots equity interest will be exercised
and the financial ramifications thereof, the risks associated with
potential equity investments in AmerisourceBergen including whether
the warrants to invest in AmerisourceBergen will be exercised and
the financial ramifications thereof, changes in vendor, payer and
customer relationships and terms, changes in network participation,
levels of business with Express Scripts customers, the
implementation, operation and growth of our customer loyalty
program, changes in economic and market conditions, competition,
risks associated with new business areas and activities, risks
associated with acquisitions, joint ventures and strategic
investments, the ability to realize anticipated results from
capital expenditures and cost reduction initiatives, outcomes of
legal and regulatory matters, and changes in legislation or
regulations. These and other risks, assumptions and uncertainties
are described in Item 1A (Risk Factors) of our most recent Annual
Report on Form 10-K and Quarterly Report on Form 10-Q, each of
which is incorporated herein by reference, and in other documents
that we file or furnish with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those indicated or
anticipated by such forward-looking statements. Accordingly, you
are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date they are made. Except
to the extent required by law, Walgreens does not undertake, and
expressly disclaims, any duty or obligation to update publicly any
forward-looking statement after the initial distribution of this
release, whether as a result of new information, future events,
changes in assumptions or otherwise.
Please refer to the supplemental information presented below for
reconciliations of the non-GAAP financial measures used in this
release to the most comparable GAAP financial measure and related
disclosures.
WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED CONDENSED
STATEMENTS OF EARNINGS (UNAUDITED) (In Millions,
Except Per Share Amounts) Three Months Ended
Nine Months Ended May 31, May 31, May 31, May
31, 2013 2012 2013 2012 Net sales $ 18,313 $ 17,752 $ 54,276
$ 54,560 Cost of sales (1) 13,091 12,738
38,348 39,053 Gross Profit 5,222 5,014 15,928 15,507
Selling, general and administrative expenses 4,362 4,141 13,257
12,629 Equity earnings in Alliance Boots (2) 131 - 220 - Gain on
sale of business - - 20 - Operating
Income 991 873 2,911 2,878 Interest expense, net 50 17 110
51 Other income 77 - 77 - Earnings
Before Income Tax Provision 1,018 856 2,878 2,827 Income tax
provision 394 319 1,085 1,053 Net
Earnings 624 537 1,793 1,774 Net
earnings per common share: Basic $ .66 $ .63 $ 1.90 $ 2.04
Diluted $ .65 $ .62 $ 1.88 $ 2.03 Dividends declared $ .2750
$ .2250 $ .8250 $ .6750 Average shares outstanding 947.7
859.8 947.7 869.6 Dilutive effect of stock options 11.3
5.4 6.8 5.4 Average Diluted Shares
959.0 865.2 954.5 875.0 Percent
of Sales Percent of Sales Net sales 100.0% 100.0% 100.0%
100.0% Cost of sales 71.5 71.8 70.6
71.6 Gross Margin 28.5 28.2 29.4 28.4 Selling, general and
administrative expenses 23.8 23.3 24.3 23.1 Equity earnings in
Alliance Boots 0.7 - 0.3 - Gain on sale of business -
- - - Operating Income 5.4 4.9 5.4 5.3
Interest expense, net 0.3 0.1 0.2 0.1 Other income 0.5
- 0.1 - Earnings Before Income Tax Provision
5.6 4.8 5.3 5.2 Income tax provision 2.2 1.8
2.0 1.9 Net Earnings 3.4% 3.0% 3.3%
3.3%
(1) Fiscal 2013 third quarter includes a
LIFO provision of $120 million versus $60 million in the previous
year. Fiscal 2013 nine month period includes a LIFO provision of
$247 million versus $177 million in the previous year.
(2) Equity earnings in Alliance Boots
exclude the results of Walgreens Boots Alliance Development GmbH,
which is consolidated into the company’s results.
WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED
CONDENSED BALANCE SHEETS (UNAUDITED AND SUBJECT TO
RECLASSIFICATION) (In Millions)
May 31, May 31, 2013 2012 Assets Current Assets: Cash and
cash equivalents $ 2,994 $ 1,995 Accounts receivable, net 2,418
2,294 Inventories 6,881 7,004 Other current assets 278
277 Total Current Assets 12,571 11,570 Non-Current Assets:
Property and Equipment, at cost, less
accumulated depreciation and amortization
12,075 11,790 Equity investment in Alliance Boots 6,205 - Alliance
Boots call option 837 - Goodwill 2,400 2,168 Other non-current
assets 1,753 1,671 Total Non-Current Assets
23,270 15,629 Total Assets $ 35,841 $ 27,199 Liabilities and
Shareholders' Equity Current Liabilities: Short-term borrowings $
1,865 $ 13 Trade accounts payable 4,530 4,433 Accrued expenses and
other liabilities 3,221 2,851 Income taxes 74 204
Total Current Liabilities 9,690 7,501 Non-Current Liabilities:
Long-term debt 4,501 2,387 Deferred income taxes 577 368 Other
non-current liabilities 2,093 1,903 Total Non-Current
Liabilities 7,171 4,658 Shareholders' Equity
18,980 15,040 Total Liabilities and Shareholders' Equity $
35,841 $ 27,199
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS
(UNAUDITED AND SUBJECT TO RECLASSIFICATION) (In
Millions) Nine Months Ended
May 31, May 31, 2013 2012
Cash flows from operating activities:
Net earnings $ 1,793 $ 1,774 Adjustments to reconcile net earnings
to net cash provided by operating activities - Depreciation and
amortization 958 856 Change in fair value of warrants and related
amortization (77) - Deferred income taxes 33 92 Stock compensation
expense 70 77 Equity earnings in Alliance Boots (220) - Other 60 27
Changes in operating assets and liabilities - Accounts receivable,
net (214) 230 Inventories 288 1,106 Other current assets 38 33
Trade accounts payable 78 (389) Accrued expenses and other
liabilities 203 (248) Income taxes 98 13 Other non-current assets
and liabilities 70 92 Net cash provided by operating
activities 3,178 3,663 Cash flows from
investing activities: Additions to property and equipment (874)
(1,102) Business and intangible asset acquisitions, net of cash
received (588) (421) Purchases of short term investments held to
maturity (55) - Proceeds from short term investments held to
maturity 5 - Proceeds from sale of assets 27 40 Proceeds (payments)
related to sale of business 20 (45) Other (40) (22)
Net cash used for investing activities (1,505)
(1,550) Cash flows from financing activities: Net proceeds
from issuance of debt 4,000 - Payments of long-term debt (3,000) -
Stock purchases (567) (1,191) Proceeds related to employee stock
plans 391 120 Cash dividends paid (780) (593) Other (20)
(10) Net cash provided by (used for) financing activities
24 (1,674) Changes in cash and cash
equivalents: Net increase in cash and cash equivalents 1,697 439
Cash and cash equivalents at beginning of period 1,297
1,556 Cash and cash equivalents at end of period $ 2,994 $
1,995
WALGREEN CO. AND SUBSIDIARIES SUPPLEMENTAL
INFORMATION (UNAUDITED) RECONCILIATION OF NON-GAAP FINANCIAL
MEASURES (In millions, except per share amounts)
The following information provides reconciliations of the
supplemental non-GAAP financial measures, as defined under SEC
rules, presented in this press release to the most directly
comparable financial measures calculated and presented in
accordance with generally accepted accounting principles in the
United States (GAAP). The company has provided these non-GAAP
financial measures in the press release, which are not calculated
or presented in accordance with GAAP, as supplemental information
and in addition to the financial measures that are calculated and
presented in accordance with GAAP. These supplemental non-GAAP
financial measures are presented because management has evaluated
the company’s financial results both including and excluding the
adjusted items and believes that the supplemental non-GAAP
financial measures presented provide additional perspective and
insights when analyzing the core operating performance of the
Company’s business from period to period and trends in the
company’s historical operating results. These supplemental non-GAAP
financial measures should not be considered superior to, as a
substitute for or as an alternative to, and should be considered in
conjunction with, the GAAP financial measures presented in the
press release.
Three months ended Nine months ended May 31,
May 31, May 31, May 31, 2013 2012 2013 2012 Net earnings
(GAAP) $ 624 $ 537 $ 1,793 $ 1,774 Acquisition-related amortization
52 41 182 117 Alliance Boots related tax 44 - 86 - LIFO provision
76 38 156 111 Hurricane Sandy costs - - 24 - Acquisition-related
costs 17 12 53 12 DEA settlement costs 47 - 47 - Change in fair
value of warrants and related amortization (48) - (48) - Gain on
sale of Walgreen Health Initiatives, Inc. - -
(13) - Adjusted net earnings $ 812 $ 628 $ 2,280 $ 2,014
Net earnings per common share – diluted (GAAP) $ 0.65 $ 0.62
$ 1.88 $ 2.03 Acquisition-related amortization 0.05 0.05 0.19 0.15
Alliance Boots related tax 0.05 0.09 - LIFO provision 0.08 0.04
0.16 0.12 Hurricane Sandy costs - - 0.03 - Acquisition-related
costs 0.02 0.01 0.05 0.01 DEA settlement costs 0.05 - 0.05 - Change
in fair value of warrants and related amortization (0.05) - (0.05)
- Gain on sale of Walgreen Health Initiatives, Inc. -
- (0.01) - Adjusted net earnings per common share –
diluted $ 0.85 $ 0.72 $ 2.39 $ 2.31
Three months ended May 31, 2013 Net cash
provided by operating activities (GAAP) $ 1,379 Less: Additions to
property and equipment 293 Free cash flow(1) $ 1,086
(1) Free cash flow is defined as net cash provided by operating
activities in a period minus additions to property and equipment
(capital expenditures) made in that period. This measure does not
represent residual cash flows available for discretionary
expenditures as the measure does not deduct the payments required
for debt service and other contractual obligations or payments for
future business acquisitions. Therefore, we believe it is important
to view free cash flow as a measure that provides supplemental
information to our entire statements of cash flows.
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