Second quarter net sales increased 7%, while total comparable sales rose 1.3%.
- Total comp sales were negatively impacted by 0.8 percentage points with the calendar shift in last year’s leap day.
- Prescription sales rose 7.8% and represent 63% of sales for the quarter.
- Prescription sales in comparable stores rose a solid 2.9% and were negatively impacted by 0.7 percentage points by calendar shifts in last year''s leap day.
- The number of prescriptions filled in comparable stores increased 0.3%.
- This was negatively impacted by 1.6 percentage points by more patients filling 90-day scripts versus 30-day scripts.
- The calendar shifts in last year''s leap day negatively impacted comparable scripts by 0.7 percentage points.
Net earnings for the second quarter were $640 million, a 6.7% decline from last year.
- This year''s quarter included a $93 million impact or 6 cents per share from costs associated with Rewiring for Growth.
- The management is now starting to see some Rewire benefits as well and this quarter had approximately 2 cents per share benefit from Rewire.
- This resulted in net costs from the program of approximately 4 cents per share.
- In addition, the quarter included impacts of a negative 1 cent per share for the LIFO reserve versus a year ago, a negative 1% per share for interest expense above the prior year.
Gross profit in the second quarter was $4.7 billion or a 4.8% increase versus the year ago quarter, reflecting the slowing economy.
- Gross margin was down 60 basis points in the quarter compared with the prior year.
- Negatively impacting margins were lower front-end margins due to promotional pricing and product mix, non-retail businesses and a higher LIFO provision.
- Helping the overall margins was an increase in pharmacy margins as a result of the impact of generic drug sales.
- On a two-year stacked basis, SG&A dollar growth in the second quarter has declined from 25.5% to 16.9%, primarily due to salary and store expense control.
The company recorded $93 million in restructuring costs in the second quarter.
- This included $59 million for voluntary and involuntary employee separations, $11 million for inventory write-downs associated with CCR and $23 million for consulting and other costs.
- Overall, the company is still on track for $300 million to $400 million in costs through fiscal 2010.
- The LIFO provision was $49 million versus $31 million in the second quarter of 2008.
- This was mainly reflecting higher than anticipated price increases for non-prescription drugs and other front-end merchandise.
Net interest expense was $20 million compared with $2 million last year due to the issuance of $2.3 billion in long-term debt.
-The effective tax rate was 36.7% versus a rate of 36.8% in the year ago period.
- Accounts receivable were up 21.2% in the quarter.
- The increase was partly driven by growth in third-party retail prescription sales and the impact of the quarter ending on a Saturday.
- Inventories grew only 3.5% despite a sales gain of 7%.
- Accounts payable increased 17.9%, again due primarily to a normal business growth and the quarter ending on a Saturday.
- The company held a successful bond offering in the quarter of $1 billion in 5.25% 10-year treasury bonds.
- This was a spread of 2.875% to benchmark treasury notes, an exceptional result in these times by any standard.
- The net debt at the end of the quarter was $785 million compared with $1.5 billion at the end of the first quarter.
- This reflects long term debt of $2.3 billion offset by cash and cash equivalents of $1.6 billion.
- The company finished the quarter with more than $2.8 billion in cash and credit lines available, more than sufficient to operate in the toughest retail environments and to drive winning strategies.
- Depreciation and amortization for the quarter was $242 million, up 19.3% over a year ago.
- The big driver was amortization for prescription file buys, which continued to be robust.
For the first half of the fiscal year, the management invested $1.1 billion in additions to property, plant and equipment versus $1.0 billion last year.
- The investment was mostly for the addition of 245 new stores versus 275 last year.
- The management continues to estimate that capital spending for the full year will be around $1.8 billion or about $400 million less than fiscal 2008.
- Free cash flow amounted to $647 million for the first half of the fiscal year, up 40% from year ago.
Key questions and answers from the second quarter fiscal 2009 earnings call conducted by Walgreen Company (WAG) on March 23, 2009.
Andrew Wolf (BB&T Capital):
Are you going to remain committed to general merchandise and a robust gift and Christmas program.
Greg Wasson: One of the things we hear loud and clear is that our consumer likes our fun atmosphere. They like seasonal. They like being able to find items quickly and they also like the new items as they are launched. We are not going to deviate from that part of our business. That is where we excel and have excelled for years.
Andrew Wolf (BB&T Capital):
On the Rewire initiatives, you''re reportedly managing down full-time equivalence from top-down directives at the store level and overtime pay. Is that part of your rewire savings or it is part of the normal course of running a tighter shift at Walgreens?
Wade Miquelon: We''re looking everything off of the 2008 base. We are looking for savings in three buckets. The middle bucket is really looking for savings and corporate overheads, field management and at the store level but except that there is some tightening that is factored into it.
Andrew Wolf (BB&T Capital):
At the store level could, what is the full-time equivalent reduction going to work out to?
Wade Miquelon: We haven''t given any numbers or thoughts on that. Obviously, if we’re going to reduce labor there we are going to have to re-engineer processes. People work very hard at the store; they''ve a lot to do. Hence making sure that we have simpler promotions, few allotments and all that is going to help but we haven''t given any specifics on that to date.
Robert Willoughby (Banc of America):
On the receivables build, can you comment on how much may be attributable to the shift into healthcare franchises that you have?
