Walgreen Reports Fiscal 2014 Second Quarter Results [Global Data Point]
(Global Data Point Via Acquire Media NewsEdge) 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.
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%7EA
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%7EA 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.
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