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Meaghan Norman/Medill

Walgreens store on Adams Street in the Loop.

Walgreen Co. stock plunges on disappointing earnings

by Meaghan M. Norman
Sep 30, 2008

Walgreen Co. stock plunged 5 percent Monday to its lowest level in nearly five years after the Deerfield-based nationwide drugstore chain reported disappointing earnings. 

The company earned $443 million, or 45 cents per diluted share, in the fourth quarter ended Aug. 31, a 12 percent increase from $396.5 million, or 40 cents per diluted share, a year ago.

Although the result equalled analysts' estimate, analyst David Magee of Sun Trust and Robinson Humphrey said the company benefitted by 5 cents per diluted share from a reversal of over-accrued vacation time. 

Revenues increased 9 percent to $14.6 billion from $13.4 billion, falling a bit short of the $14.67 billion estimated by analysts surveyed by Bloomberg.  Walgreen blamed the drop on an overly ambitious discount and promotions program.

Wade Miquelon, chief financial officer of Walgreen, said during a conference call that there was “heavier promotional spending than originally planned, . . . a higher than year-ago tax rate" and other adjustments. 

Magee commented: “Walgreen elected to intensify its promotional schedule which, upon reflection, didn't seem to have the desired impact on sales trends. More specifically, consumers would visit the stores, cherry-pick marked- down items, but not supplement the basket with additional goods. So, the pricing strategy was a net negative to margins and earnings in the period.”

Analysts estimate that this quarter Walgreen will post an increase in earnings per diluted share to 51 cents from 46 cents in the year-earlier quarter. 

Fiscal year net earnings rose 5.7 percent to $2.16 billion, or $2.17 per diluted share, compared with the previous year's $2.04 billion, or $2.03 per diluted share. Revenues rose 9.8 percent to $59 billion from $53.8 billion.

Magee said the analysts’ estimate for fiscal year 2009 will be reduced to $2.30 per diluted share from $2.47  because of a continuuing trend toward slower sales in the coming months. 

 Analysts also predict that Walgreen will be unsuccessful in its bid to acquire California-based Longs Drug Stores Corp. Walgreen has offered $2.8 billion, or $75 per share, for the company, but Longs management favors a bid from CVS Caremark Corp. Nevertheless, Walgreen Chairman and CEO Jeff Rein said, “We remain committed to our proposal, which we believe is a superior one.”  

Walgreen stock closed Monday at $31, down $1.73.