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Drugstore chain Walgreen's profit slips as generic drug benefit wanes, frigid winter bites

Walgreen's fiscal second quarter earnings slipped from a year ago as the nation's largest drugstore chain reaped a smaller benefit from generic drugs and took a $60 million hit due to rough winter weather.

But the Deerfield, Ill., company's underlying performance impressed investors, and its shares rose, approaching the all-time high that they reached last month.

Walgreen executives said Tuesday that a wave of new generic drug introductions peaked in last year's quarter, which helped the company's bottom line then but made comparisons difficult for this year's quarter.

Generic drugs, which are cheaper alternatives to branded medicines, squeeze drugstore sales but improve profitability because they come with a wider margin between the cost for the pharmacy to purchase the drugs and the reimbursement it receives.

The company said Tuesday that the tough comparison between this year's quarters and last year will ease later this year. Walgreen expects generics to start helping its year-over-year performance again by the end of the fiscal year.

Walgreen said a tough winter also affected its performance in the quarter by keeping customers away from its stores, forcing it to temporarily close some locations and adding about $23 million in snow removal costs.

Overall, Walgreen Co. earned $754 million, or 78 cents per share, in the quarter that ended Feb. 28. That's down from $756 million, or 79 cents per share, a year ago.

Adjusted earnings were 91 cents per share. Analysts expected 93 cents per share, according to FactSet.

Its revenue rose to about 5 per cent to $19.61 billion and matched Wall Street expectations.

Walgreen competitor CVS Caremark Corp. made a big splash nationally last month when it said it planned to phase out tobacco product sales from its stores by October. Walgreen stores still sell tobacco, and an analyst asked CEO Greg Wasson during a Tuesday morning conference call whether the company would stick with it unless such sales a banned by a local government.

Wasson didn't address the future of tobacco sales. Instead, he emphasized that the drugstore chain has pharmacists who can help people quit as well as smoking cessation products.

"We think we're well-positioned to help folks change their behaviour," he said.

Gabelli Funds portfolio manager Jeff Jonas said Walgreen stores may gain some business from smokers once CVS quits selling tobacco.

"We're in an environment right now where traffic is really tough to come by ... so every little bit helps," he said.

Walgreen shares rose $1.95, or 3 per cent, to $66.26 after rising as high as $68.15 earlier in the day. The stock started 2014 strong, hitting an all-time high price of $69.84 at the end of last month.

The Canadian Press


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