WAG Q3 call speaks to Boots alliance; many U.K. programs can be replicated in U.S.

DEERFIELD, Ill. — The days of Walgreens quarterly conference calls focusing primarily on lost prescriptions from the Express Scripts pharmacy network soon may be over with the retail pharmacy's announcement early Tuesday morning that Walgreens and the U.K. pharmacy operation Alliance Boots would merge.



One is not in reaction to the other, however. "It would be very naïve to assume this [Boots transaction] is in response to [ESI]," Wade Miquelon, Walgreens EVP and CFO, told analysts in Walgreens's conference call to discuss third-qaurter results. "I find it almost silly to believe this [merger] responsive," Miquelon added, noting that the Walgreens-Boots alliance has been on the negotiating table now for more than a year.



The merger also will not impact near-term domestic initiatives, Miquelon said. "This merger will allow us to not only drive those [initiatives] but accelerate [them]," he said.  Walgreens and Boots will be exploring ways to parlay core competencies from one country to the other in the months ahead. One of those competencies mentioned on the quarterly conference call was Boots Opticians, a U.K. eye care retailer with around 625 locations, which could catapult Walgreens into the retail eye care business. Another core competency coming out of Boots would be its loyalty card program. That program boasts two-thirds of all English women as members, Miquelon noted. "It's also very emotive," he said. "That is where we can really learn as we draw the lines as to where we're going [with] 'Well.'"



Back stateside, Walgreens third-quarter sales decreased 3.4% from the prior-year quarter to $17.8 billion, while sales for the first nine months increased 0.6% to $54.6 billion. Front-end comparable-store sales decreased 0.9% in the third quarter, customer traffic in comparable stores decreased 2.6% and basket size increased 1.7%, while total sales in comparable stores decreased 6.6%.



Prescription sales, which accounted for 62.9% of sales in the quarter, decreased 6.6%, while prescription sales in comparable stores decreased 9.9%. The company filled 192 million prescriptions in the quarter, a decrease of 8.4% over last year’s third quarter. Prescriptions filled in comparable stores decreased 9.1% in the quarter. Redacting the negative impact of no longer being in the Express Scripts network would net a 1.6% uptick in same-store prescription sales, Miquelon told analysts Tuesday morning. Regarding the potential of lost Medco business with the merger of Medco into ESI, Miquelon reiterated, "As of now we continue to serve those customers." There is no indication that either party — ESI-Medco or Walgreens — will be revisiting those active contracts.



For the third quarter ended May 31, Walgreens posted net earnings of $537 million, a 10.8% decline. Net earnings per diluted share for the quarter decreased 4.9% to 62 cents, compared with 65 cents per diluted share in the year-ago quarter. Compared with the prior-year’s quarter, the impact of no longer being part of the Express Scripts pharmacy provider network as of Jan. 1, 2012, was 6 cents per diluted share net of cost controls.



The Alliance merger also negatively impacted net earnings in the quarter by 1 cent per diluted share.



According to Miquelon, Walgreens delivered a record quarter and fiscal year to date of operating cash flow of $1.9 billion and $3.7 billion, respectively, driven by solid earnings and strong working capital progress. Free cash flow totaled $1.5 billion for the quarter, up 46.8%. Walgreens also announced an increase in its quarterly dividend of 22.2% to 27.5 cents per share from the previous rate of 22.5 cents per share. Walgreens has paid a dividend in 319 straight quarters (more than 79 years) and now has increased its dividend for 37 consecutive years. Over the past five years, Walgreens annual dividend rate has increased from 38 cents per share to $1.10 per share, resulting in a compound annual growth rate of nearly 24%.