Walgreen 4Q profits: the good times won't last

Posted Sep 26th 2006 11:25AM by Victoria Erhart
Filed under: Major Movement, Earnings Reports, Bad News, Consumer Experience, Competitive Strategy, Wal-Mart (WMT)

Walgreen Company (NYSE:WAG) released Q4 2006 figures on Monday, 25 September 2006. Earnings grew 25% based largely on an 18% increase in prescription drug sales and a 16% increase in total revenue to $12.17 billion from $10.49 billion. Q4 earnings were $412.3 million. Earnings per share for the quarter were .41, up from $329 million or .32 per share in Q4 2005. Walgreen opened or acquired 476 new stores in fiscal 2006, giving the company a total of 5,461 stores in the US and Puerto Rico. Walgreen costs related to Hurricane Katrina were almost $55 million. Full year earnings increased to $1.75 billion from $1.56 billion in FY 2005. EPS for 2006 were $1.72, up from $1.52 in 2005.

Things were looking good for another year of expansion, and then Wal-Mart announced last Thursday it would drop prices on almost 300 generic drugs to $4 per prescription. Walgreen stock has dropped 11% since the announcement, closing at $44.47 on Monday, 25 September. Walgreen CFO Rick Hans has spent a lot of time talking to investors since the Wal-Mart announcement. He claims 95% of Walgreen pharmacy patients have prescription insurance coverage. Wal-Mart's $4 per generic prescription drug "won't significantly impact our business."

Who is this guy trying to kid? Sounds a lot like whistling past the graveyard. Walgreen is betting its continued financial health on its convenient locations and higher level of customer service. Will that be enough to counteract Wal-Mart's massive 'always low prices' publicity machine?

Perhaps a significant number of Walgreen prescription holders won't switch, but the bulk of new prescriptions will be filled at Wal-Mart.

The fallout from the Wal-Mart announcement continues. CVS, another national pharmacy chain, has seen its stock drop over 9%. Rite Aid has dropped over 5%. Drug wholesaler and distributor Amerisource-Bergen has fallen almost 5%, while Cardinal Health is off 3%. Mail order generic drug providers Medco Health Solutions, Caremark Rx and Express Scripts will all take a hit from Wal-Mart. It remains to be seen how large and widespread the hit will be.

Tags: CVS, drug prices, DrugPrices, pharmaceuticals, prescriptions, wag, Wal-Mart, Walgreen

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Reader Comments (Page 1 of 1)

9-26-2006 @ 1:15PM

Dick Ericson said...

Before you write an article, I wish you would do a little more homework.

9-27-2006 @ 3:39AM

Arnie said...

I think that you MUST know how a pharmacy retail operates compared to Walmart. The prescriptions that Walmart offers are already low priced. And their large number (almost 300) prescriptions are not all different. For example, how many makers make aspirin?? It's the same with their 300 prescriptions that they offer, one formula and its brand name could be counted several times. Also, very few people actually get these generic prescriptions now days. The TRUE fact is that most people get the newer and BETTER generic prescriptions, and those would be impossible to sell at $4.00 because their cost could be $50, $100, and even much higher! Would they sell that for $4.00? Also, if you are sick, do you want to spend five to ten minutes finding parking, then you get out from your car, walk their BIG BOX with a bunch of customers around with their big shopping carts, and their high speakers? Or would you simply pick-up a prescription in drive-through pharmacy? In this case, customer service does count! Walgreens is here to stay, they have for more than 100 years!

9-26-2006 @ 4:47PM

William Geary said...

I re-iterate. Do your homework. Walmart has started a formulary of approximately 90 generic drugs. Most of these are very old drugs with lousy safety profiles. I think it is wonderful that Walmart is providing an 'at-cost' community service to provide uninsured folks with cheap generic drugs. Although these generics have lousy side effects, having some therapy, rather than none is wonderful. Now let's get serious. The big money in pharmaceutical retail is for (1) the latest ethical (Rx) and (2) the latest generic of the latest Rx which has fallen off 7 year patent. These drugs are EXPENSIVE. Walgreens has an average margin around 5% on these sales. Walgreens manages their supply chain superbly as demonstrated by their wheel-barrels of cash. This will only continue. Our country is filled with folks with chronic disease. New diseases are invented every year by pharma companies to sell new drugs. I know, this is what I do for a living. Did you ever hear of ADHD more than 10 years ago? How about female sexual arousal dysfunction (FSAD)? Walgreens will be pulling the dollars through for the next millenia until we actually can convert the entire pill-popping culture of the US from chronic disease to cure from gene therapy. If Walmart tried to cut into the real dollar business on less than a 5% margin, Walmart would be bankrupt in months. In conclusion, accolades to Walmart for selling some kind of therapy to an underserved population but, that has nothing to do with where the money is. Follow the money ... Walmart can't sustain carrying a REAL FORMULARY with GOOD PHARMACEUTICALS on less than a 5% margin. Walmart would need considerable cooperation from the pharma companies, they are not going to get it.