Current Report

 

 
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 8-K


CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): March 26, 2007
 
 
  WALGREEN CO.          
(Exact name of registrant as specified in its charter)


Illinois       1-604       36-1924025  
(State or other     (Commission File     (IRS Employer
jurisdiction of     Number)       Identification
incorporation)             Number)


200 Wilmot Road, Deerfield, Illinois         60015    
(Address of principal executive offices)     (Zip Code)


Registrant’s telephone number, including area code: (847) 940-2500
 
Not Applicable      
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




 
Item 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION  
 
On March 26, 2007, Walgreen Co. issued a press release announcing financial results for the quarter ended February 28, 2007. A copy of this press release is attached hereto as Exhibit 99.1.
 
In addition to the issuance of a press release, Walgreen Co. also conducted a webcast regarding results for the quarter ended February 28, 2007. A transcript of this webcast is attached hereto as Exhibit 99.2.
 
This information, including exhibits attached hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section. This information shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference to this Form 8-K in such a filing.

Item 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
 
     (d) The following exhibits are being furnished as part of this Form 8-K:
 
Exhibit      
Number       Description

Exhibit 99.1         Press Release issued by Walgreen Co., dated March 26, 2007, announcing the results for the quarter ended February 28, 2007.

Exhibit 99.2         Transcript of Walgreen Co.'s March 26, 2007 Webcast regarding the results for the quarter ended February 28, 2007.


 
   




SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
     
  WALGREEN CO.
 
  		 
  		 
 
Date: March 26, 2007 By:   /s/ William M. Rudolphsen
 
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
   
 
 





 
 

Walgreen Co. Corporate Communications l 200 Wilmot Road   l Deerfield, Ill. 60015   l   (847) 940-2500
 
Contact: Michael Polzin
(847) 914-2925
 
FOR IMMEDIATE RELEASE                                                 INTERNET: http://www.walgreens.com

WALGREEN CO. REPORTS 24.5 PERCENT EARNINGS INCREASE
AND RECORD SALES IN SECOND QUARTER 2007

·  
Diluted earnings per share increase to 65 cents
·  
Strong holiday season contributes to growing front-end sales
·  
Gross profit margins expand while expenses shrink as a percent to sales in second quarter

     DEERFIELD, Ill., March 26, 2007 - Walgreen Co. (NYSE, NASDAQ: WAG) today announced record fiscal year 2007 second quarter and first half sales and earnings.
 
     Net earnings for the quarter ended Feb. 28 were up 24.5 percent to $652 million or 65 cents per share (diluted), from $524 million or 51 cents per share (diluted) in the same quarter a year ago.
 
     First half net earnings climbed 24.7 percent to $1.08 billion or $1.07 per share (diluted) versus last year’s $869 million or 85 cents per share (diluted).
 
     Sales increased 14.6 percent to a record $13.9 billion for the second quarter and 15.5 percent to $26.6 billion for the first half. Total sales in comparable stores (those open more than a year) were up 8.9 percent in the quarter, while front-end comparable drugstore sales rose 5.7 percent in the quarter.
 
     Prescription sales, which accounted for 62.4 percent of sales in the quarter, climbed 16.4 percent. Prescription sales in comparable stores rose 10.9 percent in the quarter, while the number of prescriptions filled in comparable stores increased 6.3 percent. Third party plans now account for 94.7 percent of all prescription sales.

       
 
(more)  
 


- 2 -
 


     “Our growth in retail prescriptions filled in the quarter continued to outpace the growth in both the retail pharmacy and mail service pharmacy industries,” said President and CEO Jeffrey A. Rein. “We posted very good gains in prescriptions filled at comparable stores even though this winter saw fewer than normal doctor visits due to the flu, the same scenario we experienced a year ago.
 
     “Meanwhile, we saw solid sales increases in the front-end of the store, especially during the Christmas season.”
 
     For the 52-week period ending Jan. 27, Walgreens increased its market share in 58 of its top 60 product categories compared to food, drug and mass merchandise competitors, as measured by A.C. Nielsen.
 
     Gross profit margins increased 52 basis points versus the year-ago quarter to 28.96 as a percent to sales. Although pharmacy margins increased with the growth in generic drug sales, some of that benefit was offset by an overall sales shift toward the pharmacy business, which carries lower margins than front-end merchandise. Margins for the front-end increased as a result of a shift in sales mix to higher margin items.
 
     Walgreens decreased its LIFO inflation index in the second quarter, resulting in a LIFO provision of $13.4 million this quarter versus a provision of $23.8 million in the year-ago period. The lower index reflects less inflation than anticipated among pharmacy inventories.
 
     Selling, occupancy and administration expenses decreased 5 basis points in the quarter to 21.64 as a percent to sales. Among the factors for the decrease were lower occupancy costs, including store closing costs, as a percent to sales. Partially offsetting those factors were provisions for legal matters.
 
     During the quarter, Walgreens:
·  
Announced a new stock repurchase program of up to $1 billion, which the company plans to execute over the next four years. In November 2006, Walgreens completed a $1 billion repurchase program that was announced in July 2004.

(more)
 
 
 


- 3 -

·  
Began receiving merchandise at its new Anderson, S.C., distribution center in anticipation of the facility’s opening in April. Walgreens is well on the way toward its goal of employing people with disabilities for at least one-third of the facility’s workforce.
·  
Agreed to acquire select assets of Farmington, Conn.-based Familymeds Group Inc., a specialty pharmacy and medical specialty product provider. Walgreens is acquiring 53 Familymeds pharmacies in 11 states for approximately $60 million, in addition to assuming certain real estate leases.
 
     Walgreens opened or acquired 223 new stores in the first half of fiscal 2007, compared to 222 in the comparable period a year ago, with a net gain of 180 stores after relocations and closings. “We’re on track to open 500 new drugstores this year, with a net increase of more than 400,” said Rein.
 
     At Feb. 28, Walgreens operated 5,641 stores in 48 states and Puerto Rico. Walgreens plans to operate more than 7,000 stores in 2010.
 
     For additional information on the quarter’s results, investors can listen to a recorded Webcast discussion on Walgreens Investor Relations Web site at: http://investor.walgreens.com.

This news release may contain forward-looking statements that involve risks and uncertainties. The following factors could cause results to differ materially from management expectations as projected in such forward-looking statements: seasonal variations, competition, risks of new business areas, the availability and cost of real estate and construction, and changes in federal or state legislation or regulations. Investors are referred to the "Cautionary Note Regarding Forward-Looking Statements" in the Company’s most recent Form 10-K, as amended, which Note is incorporated into this news release by reference.
 
(more)

- 4 -
 


WALGREEN CO. AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
 
(UNAUDITED)
 
(In Millions, Except Per Share Amounts)
 
   
   
Three Months Ended
 
Six Months Ended
 
   
February 28,
 
February 28,
 
February 28,
 
February 28,
 
   
2007
 
2006
 
2007
 
2006
 
                           
Net sales
 
$
13,933.7
 
$
12,163.1
 
$
26,642.2
 
$
23,063.5
 
                           
Costs and Deductions:
                         
Cost of sales
   
9,897.9
   
8,703.8
   
19,030.8
   
16,601.7
 
Selling, occupancy and administration
   
3,015.3
   
2,638.4
   
5,919.0
   
5,099.1
 
     
12,913.2
   
11,342.2
   
24,949.8
   
21,700.8
 
Other Income:
                         
Interest income
   
10.2
   
10.0
   
20.8
   
16.8
 
                           
Earnings before income tax provision
   
1,030.7
   
830.9
   
1,713.2
   
1,379.5
 
Income tax provision
   
378.8
   
307.4
   
629.6
   
510.4
 
Net earnings
 
$
651.9
 
$
523.5
 
$
1,083.6
 
$
869.1
 
Net earnings per common share-
                         
Basic
 
$
.65
 
$
.52
 
$
1.08
 
$
.86
 
Diluted
 
$
.65
 
$
.51
 
$
1.07
 
$
.85
 
                           
Dividends declared
 
$
.0775
 
$
.065
 
$
.155
 
$
.13
 
                           
Average shares outstanding
   
999.6
   
1,010.7
   
1,002.7
   
1,011.7
 
Dilutive effect of stock options
   
7.6
   
9.3
   
7.9
   
9.4
 
Average shares outstanding assuming dilution
   
1,007.2
   
1,020.0
   
1,010.6
   
1,021.1
 
                           


(more)


- 5 -


WALGREEN CO. AND SUBSIDIARIES
 
  CONSOLIDATED CONDENSED BALANCE SHEETS
 
(UNAUDITED)
 
(In Millions)
 
           
SUBJECT TO RECLASSIFICATION
 
February 28,
 
February 28,
 
   
2007
 
2006
 
Assets
         
Current Assets:
             
Cash and cash equivalents
 
$
694.2
 
$
578.8
 
Short term investments - available for sale
   
263.9
   
646.0
 
Accounts receivable, net
   
1,979.1
   
1,848.2
 
Inventories
   
6,531.3
   
5,616.0
 
Other current assets
   
225.4
   
220.7
 
Total Current Assets
   
9,693.9
   
8,909.7
 
Property and Equipment, at cost, less
accumulated depreciation and amortization
   
7,451.7
   
6,501.4
 
Other Non-Current Assets
   
523.3
   
228.0
 
Total Assets
 
$
17,668.9
 
$
15,639.1
 
Liabilities and Shareholders' Equity
             
Current Liabilities:
             
Trade accounts payable
 
$
3,883.5
 
$
3,270.2
 
Accrued expenses and other liabilities
   
1,723.1
   
1,506.2
 
Income taxes
   
209.0
   
193.2
 
Total Current Liabilities
   
5,815.6
   
4,969.6
 
Non-Current Liabilities:
             
Deferred income taxes
   
87.3
   
171.2
 
Other non-current liabilities
   
1,199.7
   
1,045.2
 
Total Non-Current Liabilities
   
1,287.0
   
1,216.4
 
               
Shareholders' Equity
   
10,566.3
   
9,453.1
 
               
Total Liabilities and Shareholders' Equity
 
$
17,668.9
 
$
15,639.1
 


 

(more)


- 6-

 

WALGREEN CO. AND SUBSIDIARIES
 
  CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
(In Millions)
 
           
SUBJECT TO RECLASSIFICATION
 
Six Months Ended
 
   
February 28,
 
February 28,
 
   
2007
 
2006
 
           
Cash flows from operating activities:
             
Net earnings
 
$
1,083.6
 
$
869.1
 
Adjustments to reconcile net earnings to net cash provided by
operating activities -
             
Depreciation and amortization
   
318.7
   
271.7
 
Deferred income taxes
   
(45.8
)
 
(74.0
)
Stock compensation expense
   
49.8
   
63.6
 
Income tax savings from employee stock plans
   
3.3
   
17.6
 
Other
   
21.1
   
33.8
 
Changes in operating assets and liabilities
             
  Inventories
   
(480.9
)
 
(13.3
)
  Trade accounts payable
   
58.3
   
346.6
 
  Accounts receivable, net
   
81.7
   
(439.2
)
  Accrued expenses and other liabilities
   
3.3
   
(2.9
)
  Income taxes
   
206.3
   
122.2
 
  Other
   
69.6
   
71.1
 
Net cash provided by operating activities
   
1,369.0
   
1,266.3
 
               
Cash flows from investing activities:
             
Purchases of short term investments - available for sale
   
(4,170.0
)
 
(4,018.0
)
Proceeds from sale of short term investments - available for sale
   
4,329.2
   
3,874.2
 
Additions to property and equipment
   
(818.0
)
 
(601.2
)
Disposition of property and equipment
   
19.3
   
2.4
 
Business and intangible asset acquisitions, net of cash received
   
(46.3
)
 
(131.3
)
Net cash used for investing activities
   
(685.8
)
 
(873.9
)
               
Cash flows from financing activities:
             
Stock purchases
   
(673.1
)
 
(344.7
)
Proceeds related to employee stock plans
   
144.1
   
98.4
 
Cash dividends paid
   
(155.9
)
 
(131.7
)
Bank overdrafts
   
(213.9
)
 
-
 
Other
   
(10.1
)
 
(12.4
)
Net cash used for financing activities
   
(908.9
)
 
(390.4
)
               
Changes in cash and cash equivalents:
             
Net (decrease) increase in cash and cash equivalents
   
(225.7
)
 
2.0
 
Cash and cash equivalents at beginning of year
   
919.9
   
576.8
 
Cash and cash equivalents at end of period
 
$
694.2
 
$
578.8
 
 


# # # # #




Walgreen Co. Webcast
Second Quarter Ending Feb. 28, 2007

March 26, 2007
Hello, and thanks for tuning in to Walgreens audio webcast for the second quarter of fiscal year 2007. I’m Rick Hans, Walgreens Director of Finance, and I invite you to use this information in conjunction with the press release and other financial information posted on our Web site.

Safe Harbor Language
Before we begin, I’d like to go over the safe harbor language. Certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market, competitive and regulatory expectations that involve risk and uncertainty. Please see our Form 10-K, as amended, for the fiscal year ended August 31, 2006, for a discussion of factors as they relate to forward-looking statements.

[Preliminary and unaudited]
Sales and Earnings
Today we announced second quarter earnings were up 24.5 percent to $652 million, or 65 cents per share (diluted). That came on a sales increase of 14.6 percent to $13.9 billion.

For the first six months of fiscal 2007, sales increased 15.5 percent to $26.6 billion. Net earnings rose 24.7 percent to $1.08 billion or $1.07 cents per share, diluted.
 
A strong Christmas season led our front-end sales in the quarter. In fact, we gained market share in 58 of our top 60 core product categories versus our drugstore, grocery and mass merchant competitors compared to a year ago.

This year’s store growth remains ahead of last year’s pace, as we plan for 500 new drugstores to open during fiscal 2007. We opened or acquired 223 new stores in the first half of this fiscal year, compared to 222 in the year-ago period. That brought our store count to 5,641 as of Feb. 28, a net increase of 485 from a year ago. We remain on track to operate more than 7,000 stores in 2010.

Comparable Sales
Total comparable store sales - for stores open more than a year - were up 8.9 percent in the quarter, while front-end comparable store sales rose 5.7 percent.

Please note that these numbers correct the originally reported December and January comparable store sales figures. Two types of non-Walgreen gift cards were inadvertently included in sales figures at their gross value instead of their net value. As a result, December front-end comparable store sales were lowered by 0.8 percentage points and January front-end comparable store sales were lowered by 0.2 percentage points.

Pharmacy sales climbed 16.4 percent overall and 10.9 percent on a comparable store basis in the quarter. The number of prescriptions filled in comparable stores rose 6.3 percent. That’s a very strong number when you realize that the flu season didn’t generate as many doctor visits as normal and, as a result, we saw fewer flu-related prescriptions than normal. This was the same scenario we faced a year ago.

The comparable prescription numbers also were hurt by the partial cycling of the Medicare Part D prescription drug benefit, which began in January 2006.

Pharmacy accounted for 62.4 percent of our second-quarter sales, a slightly lower percent than the first quarter because this quarter includes the busy holiday shopping season.

Gross Profit Margins   and SO&A
Gross profit margins rose 52 basis points versus the year-ago quarter to 28.96 as a percent to sales. On the pharmacy side, margins increased with the growth in generic drug sales. In the quarter, 62.9 percent of all retail prescriptions we dispensed were for generics. But some of the gross profit margin benefit from generics was offset by an overall sales shift toward the pharmacy business, which has lower margins than front-end merchandise. Speaking of which, front-end margins increased because of a shift in sales mix to higher margin items.

In this year’s second quarter we lowered our LIFO index, resulting in a LIFO provision of $13.4 million this quarter versus a provision of $23.8 million in the year-ago period. The lower index reflects less inflation than anticipated among pharmacy inventories.

Meanwhile, selling, occupancy and administration expenses (including depreciation and amortization) decreased 5 basis points to 21.64 as a percent to sales. Among the factors for the decrease were lower occupancy costs, including store closing costs, as a percent to sales. Partially offsetting those factors were provisions for legal matters.

Tax Rate
The effective tax rate for the second quarter and first half of this year was 36.75 percent, compared to 37 percent in last year’s second quarter and first half.

[Preliminary and unaudited]
From the Balance Sheet
The consolidated balance sheet and statement of cash flows can be found with our press release. Cash and short-term investments decreased from $1.22 billion at the end of last year’s second quarter to $958 million at the end of this year’s second quarter.

Accounts receivable increased 7.1 percent, while accounts payable increased 18.8 percent.

LIFO inventories were $6.53 billion, a 16.3 percent increase from the year ago quarter versus a sales gain of 14.6 percent.
 
From the Statement of Cash Flows
Meanwhile, for the first six months depreciation and amortization increased 17.3 percent from $272 million to $319 million. This is due, in part, to the amortization of intangibles from prescription file buys and the acquisitions of the Happy Harry’s pharmacy chain and Medmark Specialty Pharmacy Solutions. Capital expenditures for the six months were $818 million versus $601 million last year.
 
Share Repurchase Plan
In the second quarter, we announced a new stock repurchase program of up to $1 billion, which we plan to execute over the next four years. You’ll recall that last November, we completed the $1 billion repurchase program that was announced in July 2004.

Wrapup
With the benefit of more generic drugs hitting the market, and a strong focus on our drugstore business and organic growth, we were able to improve gross profit margins while reducing our expense ratio this quarter - a best-of-both-worlds scenario. This is a testament to the efforts of all our store, distribution and support employees. Meanwhile, our store growth plans continue unabated as we move down a clear, methodical, organic growth path toward having 7,000 stores in 2010.

As we weigh the pros and cons of the CVS-Caremark merger, we believe our clear focus on being a healthcare provider will crystallize our position in the minds of payers. And that will place us in a preferred position with them and other PBMs.

Looking ahead, I want to point out that Easter was on April 16 last year, but falls on April 8 this year. With a portion of holiday sales pushed into March, this will affect our comparable store sales results for March and April. To show an apples-to-apples comparison to 2006, we’ll report combined March/April results with our usual April sales announcement.

Thank you for listening. Our next earnings announcement, for the third quarter of fiscal 2007, is scheduled for June 25 th . Once again, thanks for being a loyal Walgreen shareholder, and remember, “You’re Always Welcome at Walgreens!”
 
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