[R]9:00PM New York – Walgreen earnings shortfall lowered stocks of other drug retailers. Lower generic reimbursement may persist for the next few quarters in the industry.[/R]

Walgreen Company reported sales increase of 10.3% to $13.4 billion in the fourth quarter and 13.4% to $53.8 billion in the fiscal 2007. In the fourth quarter the earnings fell 3.8% to $397 million from $412 million a year ago on lower drug reimbursements and high staff and advertising costs.

Earnings per share in the fiscal year jumped 18% to $2.03 from $1.72 per share but in the fourth quarter dropped to 40 cents from 41 cents.

Total sales in comparable drugstores rose 6.3% in the quarter and 8.1% in the year. Front-end comparable drugstore sales made up of grocery, health and beauty, cosmetics, and other season items, rose 6.1% in the quarter and 5.8% for the year.

Prescription sales which account for 65% of total sales in fiscal 2007 gained 10.5% and for the quarter. Comparable stores prescription sales rose 6.5%. The number of prescriptions filled in the quarter rose 4%.

For the year prescription sales increased 14.7% and comparable sales increased 9.5% for the year. The number of prescriptions filled for the year increased 5.7%.

Total number of prescriptions filled for the year increased to 583 million an increase of 10%.

“In the case of some blockbuster generic drugs, it’s difficult to grow profit dollars after their first few months of availability,” said President Greg Wasson. “As this quarter shows, pharmacy gross profit margins on some drugs can increase on a percentage basis even while the gross profit dollars they produce fall.”

The problem of lower gross margin at the generic drug sales may become industry problem in the coming quarters. Other drug retailers are likely to face similar pressure on generic drug gross margins as newly launched generic drugs enter the second year in the market. The company blamed its problems to lower reimbursement on generics such as simvastatin a drug for cholesterol lowering similar to Zocor.

The company earned same amount of gross profit dollars in the fourth quarter despite filling three times the prescriptions for simvastatin from a year ago.

Stocks of Rite Aid (RAD: chart), CVS Caremark Corp (CVS: chart) fell as well on the news.

In the quarter, gross profit margins rose 34 basis points to 27.98, as a percentage of sales. Selling, occupancy, and administration expense increased 103 basis points from 22.45 to 23.48 as a percent of sales on the account of higher salaries and store expense, and advertising expenses.

Fourth quarter selling, occupancy and administration expenses increased 103 basis points from the previous year, from 22.45 to 23.48 as a percent to sales, primarily due to increases in salaries and store expenses, and advertising costs.

The company’s growth strategy includes adding new stores, providing specialty pharmaceutical and home infusion services, and offering more services at stores including print cartridge refill and convenient care clinics. The company operates 65 clinics and plans to open 400 new clinics by the end of the year.

Including acquisitions, Walgreens opened 536 new stores in fiscal 2007 and plans to open 550 new stores with a net increase of 475 stores in fiscal 20008. The company operated 5,997 stores at the end of August compared to 5,461 stores a year ago. The total investment of $2 billion will include store new openings, investment in technology, and building new distribution centre in Connecticut in the fiscal 2009.

Walgreens (WAG: chart) stocks fell 15% or $7.08 to close at $40.16, down from a one year peak of $49.10. Over the last year, the stock has traded in the range $39.91 to $49.10.

Analysts polled by Thomson Financial expect Walgreen first quarter fiscal 2008 earnings to rise to 49 cents per share with an average revenue estimate of $14.19 billion. Sales are expected to grow 11.7% in the first quarter and 13.6% at full-year. Overall, Walgreen revenue is expected to grow by 14% in the next quarter.