This is a summary of the fourth quarter fiscal 2007 earnings call conducted by Walgreen Company (WAG: chart) on October 1st, 2007.

Management:
Director of Finance: Rick Hans

Key Investor Issues

- Profit was $396.5 million, or 40 cents a share, compared with $412.3 million, or 41 cents a share, a year ago.
- Sales rose 10.3% to $13.4 billion.
- Same-store sales rose 6.3%.
- The company filled 4% more prescriptions in comparable stores than it did a year ago.

Fourth Quarter Highlights

Fiscal 2007 sales were up 13.4% to a record $53.8 billion, while fiscal year net earnings rose 16.6% to $2.04 billion or $2.03 per share, diluted.

- For the fourth quarter ended Aug. 31, sales were up 10.3% to a record $13.4 billion.
- Net earnings for the quarter declined 3.8% to $397 million or 40 cents per share.

This quarter experienced several factors that drove down profits. They included:

- lower reimbursements on some generic drugs introduced in summer 2006, including simvastatin, the generic version of Zocor;
- higher salary and store expenses, to go along with increased advertising costs;
- an increase in LIFO inflation index that resulted in a $32 million charge this quarter versus a $26.1 million charge a year ago.

Despite the fourth quarter, the company recorded a strong fiscal year performance with earnings up 16.6% and earnings per diluted share up 18%.

Store sales continued their strong results in the fourth quarter. Front-end comparable drugstore sales rose 6.1%, while the number of prescriptions filled at comparable stores rose 40%. That’s a solid number, taking into consideration last year’s lift from Medicare Part D by looking at the two-year stacked comparable prescriptions filled increases. Those figures show an 11% increase in the fourth quarter.

The company’s expansion program continue unabated, with the opening of 269 new or acquired stores bringing the total to a record 621 new stores for the year.

- That includes 120 acquired stores, 58 of which came from our Option Care, Inc. acquisition.
- After relocations and closings, the company had a record net gain of 536 stores this year.
- For fiscal 2008, Walgreen plans to open about 550 new drugstores, including the company’s first store in Hawaii in November.

Total comparable drugstore sales continue to be strong, increasing 6.3% for the quarter and 8.1% for the year.

- Pharmacy sales climbed 10.5% in the fourth quarter and 14.7% for the year.
- Pharmacy sales in comparable drugstores rose 6.5% in the quarter and 9.5% for the year.

As Walgreen dispenses more generic drugs, they slow pharmacy sales increases because of their lower price.

The management believes a better indicator of pharmacy performance is the number of prescriptions filled. In fiscal 2007, that number increased 10% to 583 million, or nearly 17% of all retail prescriptions in the country. On a comparable store basis, the number of prescriptions filled in fiscal 2007 increased 5.7%.

Gross profit margins for the fourth quarter increased 34 basis points versus the year-ago quarter to 27.98 as a percent to sales.

- This quarter includes a LIFO charge of $32 million versus a charge of $26.1 million a year ago.
- The total LIFO charge in fiscal 2007 was $69.3 million versus $95.3 million the previous year.

Pharmacy margins increased, but some of that benefit was offset by an overall shift toward the pharmacy business, which carries lower margins than front-end merchandise. This quarter also demonstrated that pharmacy gross profit margins on some drugs can increase on a percentage basis even while the gross profit dollars they produce fall. Front end margins increased as a result of a shift in sales mix to higher margin items.

Fourth quarter selling, occupancy and administration expenses rose 15.3% or 103 basis points from the previous year, from 22.45 to 23.48 as a percent to sales.

SO&A margins were impacted by new, lower-cost generic drugs, which slowed pharmacy sales growth by 5 percentage points and total sales growth by 3.1 percentage points in the quarter. The amount spent on SO&A grew because of higher salary and store expenses and increased advertising costs. The company has begun a rigorous review of all expense items and will quickly take the necessary steps to better control them.