Walgreens drives accelerating renewal program to big profit gains in record-setting first quarter

WHAT IT MEANS AND WHY IT’S IMPORTANT — Everyone likes to be proven right. And Walgreens' leaders are justifiably proud of the company’s record performance in first quarter fiscal 2011.

(THE NEWS: Walgreens drives accelerating renewal program. For the full story, click here)

Two years after launching a sweeping, top-to-bottom realignment of its management, its retail mission, its cost structure and its merchandising and marketing strategy, Walgreens rode its retooled business to a profit bonanza. Net earnings in the quarter ended Nov. 30 jumped nearly 19%, to $580 million, over the same three-month period last year. On a per-share basis, net income jumped 26.5% to 62 cents per diluted share. Sales also hit a record, rising 6% to $17.3 billion.

All this in the face of a still-weak economy, the continuing integration of the 257-store Duane Reade drug store operation that Walgreens bought last spring and a huge ongoing store remodeling effort as the chain converts its thousands of stores nationwide to its Customer Centric Retailing format.

Dow Jones called the earnings gain “much bigger than expected,” and cited a consensus estimate by analysts polled by Thompson Reuters forecasting that the company would earn 54 cents a share. Walgreens beat that estimate handily.

Also a factor in the solid profit performance: the company’s aggressive stock-repurchase plan, which it said added four cents a share to the bottom line in the first quarter. In that three-month period alone, Walgreens bought back another $510 million of its own stock.

As has been the case for many years, the engine pulling the train is the pharmacy, which now accounts for nearly two-thirds (65.8%) of sales. There’s always a risk in putting so many eggs in one basket, but Walgreens’ heavy reliance on its prescription business has, more often than not, paid big dividends through good times and bad. And being the nation’s biggest pharmacy provider — the company said it now has 19.7% of the nation’s total retail prescription business — is not a bad place to be in an aging America.

The first-quarter performance offers solid evidence that the company’s decision in 2008 to shift more of its retail focus and its resources to health, wellness and disease prevention — and away from store expansion — has been fundamentally sound.

In a time of 70 million aging baby boomers moving into their peak prescription-using years, and a time of a healthcare system in dire need of new solutions as it grapples with an unsustainable cost model, Walgreens wisely has repositioned itself as a solution. And with the nation’s largest private flu shot program, along with 8,133 “points of care” — including 7,529 drugstore pharmacies, 122 on-site hospital pharmacies, home care centers, specialty pharmacies and hundreds of in-store clinics and worksite health centers — the pharmacy and healthcare giant offers some pretty convincing numbers as it markets itself to employers and government health plans as a lower-cost, patient-accessible alternative to steadily rising healthcare costs.

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