By a News Reporter-Staff News Editor at Pharma Business Week -- Walgreen Co. (NYSE: WAG) (NASDAQ: WAG) announced earnings and sales results for the third quarter and first nine months of fiscal year 2014 ended May 31 (see also Walgreen Co.).
Net earnings determined in accordance with generally accepted accounting principles (GAAP) for the fiscal 2014 third quarter were $722 million, a 15.7 percent increase from $624 million in the same quarter a year ago. This year's third quarter earnings benefited from a lower GAAP effective income tax rate. The lower rate of 31.5 percent compared with 38.7 percent last year resulted from increased foreign income taxed at a lower rate, favorable audit settlements, certain nondeductible expenses last year and other discrete events. Net earnings per diluted share for the quarter increased 15.4 percent to 75 cents, compared with 65 cents per diluted share in the year-ago quarter.
Adjusted fiscal 2014 third quarter net earnings were $883 million, an 8.7 percent increase from $812 million in the same quarter a year ago. This year's adjusted third quarter earnings also benefited from a lower effective income tax rate, resulting from increased foreign income taxed at a lower rate, favorable audit settlements and other discrete events. Adjusted net earnings per diluted share for the quarter increased 7.1 percent to 91 cents, compared with 85 cents per diluted share in the year-ago quarter. In addition, this year's third quarter earnings adjustments had a net positive impact of $161 million or 16 cents per diluted share. Last year's third quarter earnings adjustments had a net positive impact of $188 million or 20 cents per diluted share.
Net earnings for the first nine months of fiscal 2014 ended May 31 determined in accordance with GAAP were $2.17 billion, an increase of 21.1 percent compared with $1.79 billion in the first nine months of fiscal 2013. Net earnings per diluted share for the first nine months of fiscal 2014 increased 19.7 percent to $2.25, compared with $1.88 per diluted share in the first nine months of fiscal 2013.
Adjusted net earnings for the first nine months of fiscal 2014 ended May 31 were $2.45 billion, an increase of 7.5 percent compared with adjusted net earnings of $2.28 billion in the first nine months of fiscal 2013. Adjusted net earnings per diluted share for the first nine months of fiscal 2014 increased 6.3 percent to $2.54, compared with $2.39 per diluted share in the first nine months of fiscal 2013. Earnings adjustments in the first nine months of this fiscal year had a net positive impact of $280 million or 29 cents per diluted share. Earnings adjustments in the first nine months of the previous fiscal year had a net positive impact of $487 million or 51 cents per diluted share.
Please see the "Reconciliation of Non-GAAP Financial Measures" table and accompanying disclosures at the end of this press release for more detailed information regarding the non-GAAP financial measures in this press release, including the factors reflected in adjusted net earnings calculations.
"We continued to see improving top-line growth in the third quarter driven by increased daily living sales and strong increases in both prescriptions filled and our pharmacy market share," said Walgreens President and CEO Greg Wasson. "At the same time, we are experiencing increased pressure on pharmacy gross profit margins. We maintained solid expense control in the third quarter to offset some of this pressure while understanding that there is more to be done. We will be accelerating our optimization efforts, including taking additional steps to lower expenses companywide. In addition, our joint venture with Alliance Boots continues to generate significant benefits."
The combined synergies for Walgreens and its strategic partner, Alliance Boots, in the first nine months of fiscal 2014 were approximately $367 million. The joint synergy program is now estimated to deliver second-year combined synergies of $400-$450 million, an increase from the previous second-year estimate of $375-$425 million. Alliance Boots contributed 15 cents per diluted share to Walgreens third quarter 2014 adjusted results. The company estimates that the accretion from Alliance Boots in the fourth quarter of fiscal 2014 will be an adjusted 6 to 7 cents per diluted share. This estimate does not include amortization expense, the impact of AmerisourceBergen warrants or one-time transaction costs, and reflects the company's current estimates of IFRS to GAAP conversion and foreign exchange rates. FINANCIAL HIGHLIGHTS Sales Third quarter sales increased 5.9 percent compared with the prior-year quarter to $19.4 billion, while sales for the first nine months increased 5.6 percent to $57.3 billion. Front-end comparable store sales (those open at least a year) increased 2.2 percent in the third quarter, customer traffic in comparable stores decreased 0.7 percent and basket size increased 2.9 percent, while total sales in comparable stores increased 4.8 percent. Walgreens Balance® Rewards loyalty program reached 81 million active members at the end of this year's third quarter.
Prescription sales, which accounted for 64.4 percent of sales in the quarter, increased 8.4 percent, while prescription sales in comparable stores increased 6.3 percent. The company filled 218 million prescriptions in the quarter, an increase of 4.5 percent over last year's third quarter. Prescriptions filled in comparable stores increased 4.1 percent in the quarter. As of May 31, Walgreens increased its retail prescription market share 20 basis points from a year ago to 19.0 percent as reported by IMS Health on a 30-day adjusted basis.
Walgreens also saw strong growth in prescriptions filled for Medicare Part D patients, which increased 11.6 percent in the third quarter compared with last year's quarter, while the company's Part D market share increased 60 basis points in May compared with the same month a year ago. Gross Profit and SG&A GAAP total gross profit dollars increased $218 million, or 4.2 percent, compared with the year-ago third quarter, with gross profit margins decreasing 40 basis points versus the year-ago quarter to 28.1 as a percentage of sales. Adjusted gross profit dollars increased $139 million, or 2.6 percent, compared with the year-ago third quarter.
Pharmacy gross profit dollars were negatively impacted by lower third-party reimbursement, fewer brand-to-generic drug conversions compared with the year-ago quarter, and generic drug price inflation. Both pharmacy and front-end margins benefitted from purchasing synergies from the company's joint venture with Alliance Boots. The LIFO provision was $41 million in this year's third quarter versus $120 million last year.
GAAP selling, general and administrative expense dollars increased $189 million, or 4.3 percent, compared with the year-ago quarter, including 2.3 percentage points of SG&A expenses for store closures and other organizational efficiency costs, 1.8 percentage points for headquarters expense, 1.4 percentage points for new store expenses and 0.1 percentage point for acquisition-related amortization expense. These expenses were partially offset by lower legal, comparable store and acquisition related costs of 0.7 percentage point, 0.3 percentage point and 0.3 percentage point, respectively. Adjusted selling, general and administrative expense dollars increased $121 million, or 2.9 percent, compared with the year-ago quarter.
Walgreens delivered free cash flow of $1.0 billion in the third quarter and operating cash flow of $1.3 billion in the quarter, as lower inventories drove improvements in working capital. Inventories benefited from the company's distribution agreement with AmerisourceBergen.
The company opened or acquired 39 new drugstores in the fiscal 2014 third quarter, the same number opened or acquired in the year-ago quarter. Update on Walgreens-Alliance Boots transaction Walgreens board of directors is moving forward toward consideration of the second step in the Walgreens-Alliance Boots strategic transaction, including determination of timing and structure, combined management teams, cost reduction initiatives and potential changes in the company's future capital structure.
"(Executive Chairman of Alliance Boots GmbH) Stefano Pessina and I are working hard to realize our joint vision for exercising step two of the Walgreens-Alliance Boots strategic transaction for consideration by the Walgreens board of directors," said Wasson. "We are working through complex issues in planning for step two, and we are taking the appropriate time to come to the right resolution for the combined enterprise."
As a result of the many step two considerations and current business performance, the company is withdrawing its fiscal year 2016 goals that were previously announced in 2012. Specifically, once key decisions have been made on the above matters, Walgreens anticipates being in a position to hold an investor call, which is expected to occur by late July or early August. At that time, the company expects to provide a new set of goals and metrics for the proposed combined enterprise for fiscal year 2016.
At May 31, Walgreens operated 8,683 locations in all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. The company has 8,217 drugstores nationwide, 120 more than a year ago. Walgreens also operates worksite health and wellness centers, infusion and respiratory services facilities, specialty pharmacies and mail service facilities. Its Take Care Health Systems subsidiary manages more than 700 in-store convenient care clinics and worksite health and wellness centers. Walgreens e-commerce business includes Walgreens.com, drugstore.com, Beauty.com, SkinStore.com and VisionDirect.com.
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