This is a summary of the third quarter fiscal 2007 earnings call conducted by Walgreen Company (WAG: chart) on June 25, 2007.

Management:
Director of Finance: Rick Hans

Key Investor Issues

- Profit for the quarter was $561.2 million, or 56 cents per share versus $469.2 million, or 46 cents per share a year ago.
- Revenue climbed nearly 13% to $13.7 billion from $12.2 billion last year.
- Prescription sales, which accounted for 65.9% of the total sales, jumped 13.8%.
- Same-store sales rose 7.8% and non-pharmacy same-store sales climbed 5.6%.
- At the end of the quarter Walgreen operated 5,751 drugstores in 48 states and Puerto Rico.

Second Quarter Highlights

- Third quarter earnings were up 19.6% to $561 million, or 56 cents per diluted share on a sales increase of 12.5% to $13.7 billion.
- This year’s quarter includes a $13.5 million credit from the resolution of a multi-year state tax matter, compared to a $13.6 million tax credit a year ago from the settlement of prior years’ federal tax matters.

The company also decreased its LIFO inflation index in the third quarter, resulting in a LIFO credit of $3.5 million this quarter versus a provision of $24.2 million in the year-ago period. The lower index reflects less inflation than anticipated among pharmacy inventories.

For the first nine months of fiscal 2007, sales increased 14.5% to $40.3 billion.

- Net earnings rose 22.9% to $1.64 billion or $1.63 per share diluted.
- This year’s nine-month earnings also benefited from the lower LIFO rate, while both this year’s and last year’s nine-month earnings include the previously mentioned tax benefits.

Front-end or non-pharmacy sales continued a strong showing in the quarter.

During the most recently reported 52-week period, the company gained market share in 56 of its top 60 core product categories versus our drugstore, grocery and mass merchant competitors compared to a year ago.

This year’s store growth continues on target.

- The company opened 129 new stores in the third quarter, including 35 acquisitions.
- For the first nine months of the fiscal year the company opened 352 stores, including 43 acquired stores. That puts Walgreen’s on schedule to open about 500 new stores in fiscal 2007, including more than 400 net new locations.
- The company’s store count as of May 31st is 5,751, a net increase of exactly 500 from a year ago. The company is on track to exceed 7,000 stores in 2010.

Total comparable drugstore sales were up 7.8% in the quarter, while front-end comparable drugstore sales rose 5.6%.

- Pharmacy sales climbed 13.8% overall and 9% on a comparable drugstore basis in the quarter.
- The number of prescriptions filled in comparable drugstores rose 5.4%.

Gross profit margins increased 84 basis points versus the year-ago quarter to 28.3 as a percent of sales.

Both pharmacy and front-end margins showed improvement. While pharmacy margins increased with the growth in generic drug sales, some of that benefit was offset by an overall sales shift toward the pharmacy business, which carries lower margins than front-end merchandise. Margins on the front-end increased as a result of a shift in mix toward higher margin items. The lower LIFO inflation index in the quarter also helped gross profit margins.

Selling, occupancy and administration expenses rose 41 basis points to 22.06 as a percent of sales, mostly due to increases in store level salaries and expenses.

The impact of new, lower-cost generic drugs, which slowed pharmacy sales growth by 5.1 percentage points and total sales growth by 3.4 percentage points in the quarter, continued to affect expense ratios.

Operating income for the third quarter increased 43 basis points over the previous year to 6.24 as a percent of sales.

- The effective tax rate for the third quarter this year was 35.2%, compared to 35.12% in last year’s third quarter.
- The effective tax rate for the first nine months of this year was 36.23%, compared to 36.35% in the year-ago period.
- The company expects its effective tax rate for the fourth quarter to be 36.75%.