Promotions, fewer new generic drugs hurt Walgreen

By Phil Wahba

Dec 20 (Reuters) - Walgreen Co (NYSE: WAG - news) reported higher quarterly sales on Friday, but an increase in promotions and a slowdown in the introduction of higher-profit generic drugs cut into its gross profit margin at the largest U.S. drugstore operator.

Earnings also rose in the fiscal first quarter, but gross profit margin fell 1.3 percentage points to 28.1 percent of sales amid what Chief Executive Greg Wasson called "the continued soft economy."

Wasson said he expects profit margin in its pharmacy business will also be hurt in the current quarter due to fewer new generic drugs, but this pressure should ease in the second half of the year.

Rival drugstore chain Rite Aid Corp on Thursday lowered its full-year profit forecast for the same reason. Generic drugs generate less revenue but are more profitable than brand drugs.

Walgreen Chief Financial Officer Wade Miquelon told analysts the challenging environment in some international markets had put growth "a bit below" the rate needed to meet certain income goals from the tie-in with Alliance Boots Holdings Ltd, which runs Europe's largest pharmacy chain.

Walgreen acquired a 45 percent stake in Alliance Boots in 2012 and has an option to buy the rest in about two years.

Guggenheim Securities analyst John Heinbockel said the drop in gross margin was worse than in the preceding quarter and was greater than the declines at rivals CVS Caremark Corp and Rite Aid (Frankfurt: 857022 - news) .

Wasson said the business environment was challenging and said Walgreen would focus on containing costs to protect margins. He gave no specifics.

Earlier this week, CVS told analysts that it has held on to 60 percent of the business it picked up in 2012 as the result of a dispute between Walgreen and pharmacy benefits manager Express (Frankfurt: 02Z.F - news) Scripts Holding Co. For a few months, Walgreen stopped filling prescriptions for members of Express Scripts. The companies ended their fight in July 2012.

Walgreen said its aggressive promotions of general merchandise helped increase the number of customer visits in the first quarter. Citing IMS Health data, it also said its share of the retail drug prescription market had risen by half a percentage point to 19.4 percent.

Net (Frankfurt: NETK.F - news) income climbed to $695 million, or 72 cents per share, in the first quarter ended Nov. 30, from $413 million, or 43 cents per share, a year earlier.

Sales increased 5.8 percent to $18.33 billion.

Walgreen shares were up 25 cents to $57.19 in morning trading.