Strong pharmacy sales helped boost Walgreen earnings in its fiscal first quarter, just as it is poised to complete its acquisition of European counterpart Alliance Boots.
Walgreen reported net income of $809 million, or 85 cents per share, compared with $695 million, or 72 cents per share, a year earlier. For the quarter, pharmacy sales accounted for about two-thirds of sales and Walgreen filled a record 222 million prescriptions, an increase of 4.3 percent over last year’s first quarter.
The nation’s largest drugstore chain also announced that, pending shareholder approval in a vote Monday, it expects to complete its merger with Alliance Boots earlier than expected, by Dec. 31. Walgreen owns a 45 percent stake in the company and will buy the remaining 55 percent for $15.3 billion.
Walgreen shares rose during the quarter, starting September at $60.01 and ending November at $68.61. In trading Tuesday, the shares rose $2.24, or 3 percent, to $76.51.
CEO Greg Wasson announced this month that he will step down after the deal with Alliance Boots is complete. He will hand power to Stefano Pessina, an Italian-born nuclear engineer turned drugstore mogul and the executive chairman of Alliance Boots, until the board finds a permanent successor.
Wasson said goodbye to investors and analysts during a conference call Tuesday.
“Bringing these two iconic brands together will be difficult if not impossible to replicate,” Wasson said of the merger with Alliance Boots. “It has been my privilege to lead us to this point, to have had the opportunity to bring Walgreens to the world and Alliance Boots to America. … From everything I know and everything I’ve learned at this company over the past 35 years, I’m completely confident that the combination of Walgreens and Alliance Boots will truly change the face of global pharmacy retail, and I’m even more confident that the best days for our company are still ahead.”
Walgreen CFO Tim McLevish said during the conference call that the company was on track to reach its target of $650 million in cost savings from the Alliance Boots deal in the fiscal year that ends Aug. 31.
However, he said, margins remain under pressure because of the rising cost of generic drugs and reimbursement rates that haven’t kept up with costs. Those challenges were partially offset in the quarter by an increase in purchasing power, aided by its joint venture with Alliance Boots, he said. Gross margins fell 1 percentage point to 27.1 percent.
Another challenge Walgreen has been dealing with is a defamation lawsuit Wade Miquelon, the company’s former chief financial officer, filed against the company Oct. 16. He alleges Walgreen defamed him in news reports suggesting he was “personally responsible” for a $1 billion error in the company’s earnings forecast.
Miquelon, eligible for a $3.2 million severance and $1.2 million bonus, signed a severance agreement this month, but it’s not clear how that will affect his ability to move forward with his lawsuit. The next court date is Jan. 29.
Jeff Windau, consumer staples analyst for Edward Jones, said Walgreen exceeded expectations in its first quarter, but he foresees challenges ahead with the upcoming transformation into a global company and a step down in Medicare Part D reimbursements starting Jan. 1.
He has a neutral rating on Walgreen stock and said that without more information on Alliance Boots’ performance, it’s hard to gauge how the next quarter or two will pan out.
“They seem to be taking the right steps to be able to manage their head winds,” Windau said, “but with all the noise coming in, it’s really hard to get our arms around the next quarter.”