- Company reports adjusted second quarter
earnings per diluted share of 91 cents, compared with adjusted
earnings per diluted share of 96 cents in year-ago quarter; GAAP
earnings per diluted share of 78 cents compared with 79 cents in
last year’s second quarter
- Second-quarter sales increase 5.1
percent to record $19.6 billion as total sales in comparable stores
increase 4.3 percent
- Combined synergies with Alliance Boots
in first half of fiscal 2014 reach approximately $236 million;
strategic partnership with Alliance Boots contributes 8 cents per
diluted share to second quarter adjusted results
- Walgreens delivers second-quarter
operating cash flow of $1.1 billion
Walgreen Co. (NYSE: WAG) (Nasdaq: WAG) today announced earnings
and sales results for the second quarter and first half of fiscal
year 2014 ended Feb. 28.
Net earnings determined in accordance with generally accepted
accounting principles (GAAP) for the fiscal 2014 second quarter
were $754 million or 78 cents per diluted share, compared with $756
million or 79 cents per diluted share in the year-ago quarter.
Adjusted fiscal 2014 second quarter net earnings were $880
million or 91 cents per diluted share, compared with adjusted net
earnings of $915 million or 96 cents per diluted share in the
year-ago quarter. This year’s second quarter earnings adjustments
had a net positive impact of $126 million or 13 cents per diluted
share. Last year’s second quarter earnings adjustments had a net
positive impact of $159 million or 17 cents per diluted share.
Net earnings for the first half of fiscal 2014 ended Feb. 28
determined in accordance with GAAP were $1.45 billion or $1.51 per
diluted share, compared with $1.17 billion or $1.23 per diluted
share in the first half of fiscal 2013.
Adjusted net earnings for the first half of fiscal 2014 were
$1.57 billion or $1.63 per diluted share, compared with adjusted
net earnings of $1.47 billion or $1.54 per diluted share in the
first half of fiscal 2013. This year’s first-half earnings
adjustments had a net positive impact of $119 million or 12 cents
per diluted share. Last year’s first-half earnings adjustments had
a net positive impact of $299 million or 31 cents per diluted
share.
Please see the “Reconciliation of Non-GAAP Financial Measures”
table and accompanying disclosures at the end of this press release
for more detailed information regarding the non-GAAP financial
measures in this press release, including the factors reflected in
adjusted net earnings calculations.
“Our second quarter performance, in spite of expected headwinds
from slower generic drug introductions, comparisons with last
year’s flu season and severe weather, was marked by solid top-line
growth driven by record quarterly sales and record second-quarter
prescriptions filled,” said President and CEO Greg Wasson. “We also
continued to gain prescription market share while we maintained a
firm hold on our costs.
“We head into the second half of the year with nearly 80 million
active members in our Balance® Rewards loyalty program and with
expectations that the generic drug headwind that affected the first
half will ease and turn around by the end of the year. In addition,
our joint synergy program with Alliance Boots is expected to exceed
its second-year estimate, and we are bringing critical elements of
the Well Experience to additional stores.”
The combined synergies for Walgreens and its strategic partner,
Alliance Boots, in the first half of fiscal 2014 were approximately
$236 million. The joint synergy program is now estimated to deliver
second-year combined synergies of $375-$425 million, an increase
from the previous second-year estimate of $350-$400 million.
Alliance Boots contributed 8 cents per diluted share to Walgreens
second quarter 2014 adjusted results. The company estimates that
the accretion from Alliance Boots in the third quarter of fiscal
2014 will be an adjusted 13 to 14 cents per diluted share. This
estimate does not include amortization expense, the impact of
AmerisourceBergen warrants or one-time transaction costs, and
reflects the company’s current estimates of IFRS to GAAP conversion
and foreign exchange rates.
FINANCIAL HIGHLIGHTS
Sales
Second quarter sales increased 5.1 percent from the prior-year
quarter to a record $19.6 billion, while first half sales increased
5.5 percent to $37.9 billion. Front-end comparable store sales
(those open at least a year) increased 2.0 percent in the second
quarter, customer traffic in comparable stores decreased 1.4
percent and basket size increased 3.4 percent, while total sales in
comparable stores increased 4.3 percent.
The company is leveraging insights from its Balance Rewards
loyalty program to provide customers with more value and simplified
promotions. Balance Rewards reached a milestone in February with
more than 100 million enrollees and nearly 80 million active
members at the end of this year’s second quarter.
Prescription sales, which accounted for 62.2 percent of sales in
the quarter, increased 7.0 percent, while prescription sales in
comparable stores increased 5.8 percent. The company filled 214
million prescriptions in the quarter, an increase of 2.8 percent
over last year’s second quarter. Prescriptions filled in comparable
stores increased 2.2 percent in the quarter. As of Feb. 28,
Walgreens increased its retail prescription market share 20 basis
points from a year ago to 19.0 percent as reported by IMS Health on
a 30-day adjusted basis.
Walgreens also saw strong growth in prescriptions filled for
Medicare Part D patients, which increased 16 percent in the second
quarter compared with last year’s quarter, while the company’s Part
D market share increased 0.8 percentage point in February compared
with the same month a year ago.
The total number of all CDC-recommended immunizations and
vaccines administered by Walgreens reached 8.6 million in the first
half of the fiscal year, an 11 percent increase over the previous
year.
Gross Profit and SG&A
GAAP total gross profit dollars increased $43 million, or 0.8
percent, compared with the year-ago second quarter, with gross
profit margins decreasing 1.3 percentage points versus the year-ago
quarter to 28.8 as a percentage of sales. Adjusted gross profit
dollars increased $22 million, or 0.4 percent, compared with the
year-ago second quarter.
Pharmacy gross profit dollars were primarily impacted by the
shift in the generic drug wave from a peak in the prior year to a
trough in the first half of fiscal 2014. A less severe flu season
in this year’s second quarter compared with a year ago also
negatively impacted pharmacy gross profit dollar growth. Front-end
margins decreased as the company invested in promotions. The LIFO
provision was $51 million in this year’s second quarter versus $72
million last year.
GAAP selling, general and administrative expense dollars
increased $72 million, or 1.6 percent, compared with the year-ago
quarter. Incremental winter weather related expenses added 0.5
percentage points to SG&A expenses in the quarter, new store
expenses added 1.3 percentage points and comparable store expense
added 0.4 percentage point. These expenses were offset by lower
headquarters and acquisition related costs of 0.5 percentage point
and 0.1 percentage point, respectively. Adjusted selling, general
and administrative expense dollars increased $76 million, or 1.7
percent, compared with the year-ago quarter.
Walgreens delivered free cash flow of $877 million in the second
quarter and operating cash flow of $1.1 billion in the quarter, as
lower inventories drove improvements in working capital.
Inventories benefited from the company’s ongoing transition to
source generic drugs from AmerisourceBergen, which is expected to
be completed by Sept. 1. AmerisourceBergen already supplies all
Walgreens stores with brand name prescription drugs.
Walgreens also announced today that as part of its efforts to
optimize the company’s asset base, it plans to close 76 drugstores
during the second half of fiscal 2014. Including these store
closures, Walgreens still expects a net increase in its store count
in fiscal 2014 of approximately 55-75 locations.
“While we seize the opportunity for store growth as the
population ages and consumers look to community pharmacy for their
health care needs, we also continue to focus on optimizing our
assets and organization to position Walgreens for our future as a
global company,” Wasson said.
The company’s store optimization is expected to result in an
annual operating income (EBIT) benefit of $40-$50 million beginning
in fiscal 2015, representing an estimated 2 to 3 cents in adjusted
diluted earnings per share benefit in fiscal 2015. It also is
expected to result in charges of $240-$280 million, substantially
all of which is expected to be recognized in the third and fourth
quarters of fiscal 2014.
In the fiscal 2014 second quarter, the company opened or
acquired 28 new drugstores compared with 29 in the year-ago
quarter.
At Feb. 28, Walgreens operated 8,681 locations in all 50 states,
the District of Columbia, Puerto Rico, Guam and the U.S. Virgin
Islands. The company has 8,210 drugstores nationwide, 138 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 will hold a one-hour conference call to discuss the
second quarter results beginning at 8:30 a.m. Eastern time today,
March 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,
March 25 through April 1 by calling 855-859-2056 within the U.S.
and Canada, or 404-537-3406 outside the U.S. and Canada, using
replay code 12526699.
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
whether the costs associated with our store optimization plan will
exceed current forecasts, our ability to realize expected savings
and benefits in the amounts and at the times anticipated, 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 in minority investments, 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 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, 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, 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 Six Months Ended February 28,
February 28, February 28, February 28, 2014 2013 2014 2013
Net sales $ 19,605 $ 18,647 $ 37,934 $ 35,963 Cost of sales
(1) 13,955 13,040 27,132
25,257 Gross Profit 5,650 5,607 10,802 10,706
Selling, general and administrative expenses 4,569 4,497 8,948
8,895 Equity earnings in Alliance Boots 194 85 345 89 Gain on sale
of business - 20 -
20 Operating Income 1,275 1,215 2,199 1,920 Interest
expense, net 37 23 78 60 Other (expense)/income (59 )
- 166 - Earnings Before Income
Tax Provision 1,179 1,192 2,287 1,860 Income tax provision
411 436 815 691
Net Earnings 768 756 1,472 1,169 Net earnings attributable to
noncontrolling interests 14 - 23
- Net Earnings Attributable to Walgreen Co. $
754 $ 756 $ 1,449 $ 1,169 Net
earnings per common share attributable to Walgreen Co.: Basic $ .79
$ .80 $ 1.52 $ 1.24 Diluted $ .78
$ .79 $ 1.51 $ 1.23 Dividends
declared $ .3150 $ .2750 $ .6300 $ .5500
Average shares outstanding 951.9 945.4 950.6 945.4 Dilutive
effect of stock options 11.8 8.0
12.0 6.9 Average Diluted Shares 963.7
953.4 962.6 952.3
Percent of Sales Percent of Sales Net sales
100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 71.2
69.9 71.5 70.2 Gross
Margin 28.8 30.1 28.5 29.8 Selling, general and administrative
expenses 23.3 24.1 23.6 24.7 Equity earnings in Alliance Boots 1.0
0.4 0.9 0.2 Gain on sale of business - 0.1
- 0.1 Operating Income 6.5 6.5
5.8 5.4 Interest expense, net 0.2 0.1 0.2 0.2 Other
(expense)/income (0.3 ) - 0.4
- Earnings Before Income Tax Provision 6.0 6.4 6.0
5.2 Income tax provision 2.1 2.3
2.1 1.9 Net Earnings 3.9 4.1 3.9 3.3 Net
earnings attributable to noncontrolling interests 0.1
- 0.1 - Net Earnings
Attributable to Walgreen Co. 3.8 % 4.1 % 3.8 %
3.3 % (1) Second quarter fiscal 2014 includes a LIFO
provision of $51 million versus $72 million in the previous year.
Fiscal 2014 six month period includes a LIFO provision of $109
million versus $127 million in the previous year.
WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED CONDENSED
BALANCE SHEETS (UNAUDITED AND SUBJECT TO
RECLASSIFICATION) (In Millions)
February 28, February 28, 2014 2013 Assets
Current Assets: Cash and cash equivalents $ 1,777 $ 2,431 Accounts
receivable, net 2,774 2,481 Inventories 7,213 7,253 Other current
assets 272 267 Total Current Assets 12,036 12,432
Non-Current Assets: Property and Equipment, at cost, less
accumulated depreciation and
amortization
12,136 12,048 Equity investment in Alliance Boots 6,804 6,181
Alliance Boots call option 904 884 Goodwill 2,455 2,387 Other
non-current assets 2,746 1,632 Total Non-Current
Assets 25,045 23,132 Total Assets $ 37,081 $ 35,564
Liabilities and Equity Current Liabilities: Short-term borrowings $
577 $ 1,299 Trade accounts payable 4,488 4,388 Accrued expenses and
other liabilities 3,280 3,229 Income taxes 154 109
Total Current Liabilities 8,499 9,025 Non-Current Liabilities:
Long-term debt 4,489 5,058 Deferred income taxes 878 517 Other
non-current liabilities 2,382 1,991 Total Non-Current
Liabilities 7,749 7,566 Equity 20,833
18,973 Total Liabilities and Equity $ 37,081 $ 35,564
WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED CONDENSED
STATEMENTS OF CASH FLOWS (UNAUDITED AND SUBJECT TO
RECLASSIFICATION) (In Millions)
Six Months Ended February 28, February 28, 2014 2013
Cash flows from operating activities: Net earnings $ 1,472 $
1,169
Adjustments to reconcile net earnings to
net cash provided by operating activities -
Depreciation and amortization 663 640 Change in fair value of
warrants and related amortization (166 ) - Deferred income taxes 34
(9 ) Stock compensation expense 52 45 Earnings in equity method
investments (345 ) (89 ) Other 48 44 Changes in operating assets
and liabilities - Accounts receivable, net (117 ) (292 )
Inventories (288 ) (93 ) Other current assets 13 43 Trade accounts
payable (171 ) (63 ) Accrued expenses and other liabilities (25 )
228 Income taxes 47 138 Other non-current assets and liabilities
20 38 Net cash provided by operating
activities 1,237 1,799 Cash flows from
investing activities: Additions to property and equipment (591 )
(581 ) Proceeds from sale of assets 209 18 Proceeds related to sale
of business - 20 Business and intangible asset acquisitions, net of
cash received (297 ) (552 ) Purchases of short term investments
held to maturity (34 ) (49 ) Proceeds from short term investments
held to maturity 34 - Investment in AmerisourceBergen (430 ) -
Other (59 ) (28 ) Net cash used for investing
activities (1,168 ) (1,172 ) Cash flows from
financing activities: Net proceeds from issuance of debt - 4,000
Payments of long-term debt - (3,000 ) Stock purchases (205 ) (116 )
Proceeds related to employee stock plans 416 170 Cash dividends
paid (597 ) (520 ) Other (12 ) (27 ) Net cash (used
for) provided by financing activities (398 ) 507
Changes in cash and cash equivalents: Net (decrease)
increase in cash and cash equivalents (329 ) 1,134 Cash and cash
equivalents at beginning of year 2,106 1,297
Cash and cash equivalents at end of period $ 1,777 $
2,431
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.
The company does not provide a non-GAAP reconciliation for non-GAAP
estimates on a forward-looking basis where it is unable to provide
a meaningful or accurate calculation or estimation of reconciling
items and the information is not available without unreasonable
effort. The supplemental non-GAAP financial measures presented
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 Six months
ended February 28, February 28, February 28, February
28, 2014 2013 2014 2013 Net earnings attributable to Walgreen Co.
(GAAP) $ 754 $ 756 $ 1,449 $ 1,169 Acquisition-related amortization
60 71 118 130 LIFO provision 33 46 70 80 Alliance Boots related tax
47 42 75 42 Acquisition-related costs 11 13 27 36 Organizational
efficiency costs 1 - 16 - Hurricane Sandy costs - - - 24 Increase
in fair market value of warrants (1) (26 ) - (187 ) - Gain on sale
of Walgreens Health Initiatives, Inc. - (13 )
- (13 ) Adjusted net earnings attributable to
Walgreen Co. $ 880 $ 915 $ 1,568 $ 1,468
Net earnings per common share – diluted (GAAP) $ 0.78
$ 0.79 $ 1.51 $ 1.23 Acquisition-related amortization 0.06 0.08
0.12 0.14 LIFO provision 0.04 0.05 0.07 0.08 Alliance Boots related
tax 0.05 0.04 0.08 0.04 Acquisition-related costs 0.01 0.01 0.03
0.03 Organizational efficiency costs - - 0.02 - Hurricane Sandy
costs - - - 0.03 Increase in fair market value of warrants (1)
(0.03 ) - (0.20 ) - Gain on sale of Walgreens Health Initiatives,
Inc. - (0.01 ) - (0.01 )
Adjusted net earnings per common share – diluted $ 0.91 $
0.96 $ 1.63 $ 1.54
(1) These amounts include the accounting
impact of the company’s warrants to acquire AmerisourceBergen stock
for the three- and six-month periods ended February 28, 2014, as
well as the company’s share of the AmerisourceBergen warrants held
by Alliance Boots, which because of the three-month lag, is for the
three- and six-month periods ended November 30, 2013.
Three months ended February 28,
February 28, 2014 2013 Gross profit (GAAP) $ 5,650 $ 5,607 LIFO
provision 51 72 Adjusted gross profit $ 5,701
$ 5,679 Adjusted gross profit growth 0.4 % Selling,
general and administrative expenses (GAAP) $ 4,569 $ 4,497
Acquisition-related amortization 73 75 Acquisition-related costs 17
21 Organizational efficiency costs 2 -
Adjusted selling, general and administrative expenses $ 4,477
$ 4,401 Adjusted selling, general and administrative
expenses growth 1.7 % Three months ended February 28, 2014
Net cash provided by operating activities (GAAP) $ 1,104 Less:
Additions to property and equipment 227 Free cash flow (1) $
877
(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.
Walgreen Co.Media Contact:Michael Polzin, 847-315-2920orInvestor
Contacts:Rick Hans, CFA, 847-315-2385orAshish Kohli, CFA,
847-315-3810http://news.walgreens.com@WalgreensNewsfacebook.com/Walgreens
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