Walgreen profit beats expectations

CHICAGO (Reuters) - Walgreen Co reported a higher-than-expected quarterly profit and predicted sales growth from a new program to upgrade layouts of its drugstores, sending its shares up more than 12 percent on Tuesday.

The company benefited from new generic drugs released during the quarter as well as stronger pricing and fewer markdowns for general merchandise, analysts said.

While generic prescription drugs cost less than name-brand versions, they carry higher profit margins for drugstores.

"The margins are shaking out reasonably well, especially in this quarter vs. last year," said Morningstar analyst Matthew Coffina. "I think that's a really encouraging sign."

Walgreen said gross profit margin rose to 28.4 percent from 27.7 percent a year earlier.

The improvement probably also encouraged investors in CVS Caremark Corp , whose stock rose nearly 3 percent on Tuesday, said SunTrust Robinson Humphrey analyst David Magee.

Walgreen's sales at stores open at least a year rose 1.5 percent during the quarter. Magee said SunTrust Robinson Humphrey had expected same-store sales to be about flat.

On a conference call with analysts, Walgreen executives touted the early success of a program to improve its store layouts by cutting shelf heights, widening aisles and updating signs.

For the 26 weeks ended August 28, the renovated stores outperformed a control group of unrenovated locations by 3.7 percent in sales of four product classes, the executives said.

But the store remodeling involves reducing the number of brands offered for some products, a strategy that has proved tricky for retailers.

Wal-Mart Stores Inc reintroduced products earlier this year after it lost customers because it had pulled some brands from its shelves.

Sales have fallen at some renovated Walgreen stores, particularly for impulse items, Coffina said. The company has upgraded about 1,800 of its 7,500 stores.

"(Customers) come in, and they're really frustrated," Coffina said. "They can't find their brand of Doritos."

Walgreen expects a sales boost from flu shots, which it is offering daily at all pharmacies during their regular hours.

The company has administered about 2 million shots since the program began in late August. Its goal is to deliver 15 million this flu season, more than double the 7.4 million of a year earlier.

But if the shots reduce cases of influenza, Walgreen's traffic could suffer.

Drugstores, including Walgreen competitors CVS Caremark and Rite Aid Corp , face difficult comparisons with last year, when a swine flu outbreak boosted demand for medicines, tissues and other products.

Walgreen's net income for the fourth quarter ended on August 31 rose to $470 million, or 49 cents per share, from $436 million, or 44 cents per share, a year earlier.

Analysts on average expected earnings of 44 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose 7.4 percent to $16.87 billion, beating analysts' expectations of $16.84 billion.

Prescription same-store sales increased 1.6 percent even though people saw their doctors less often and filled fewer prescriptions in an effort to save money in a tough economy.

Walgreen shares were up 12.2 percent at $34.05 in afternoon trading. CVS rose 2.9 percent, while Rite Aid fell 0.6 percent.

(Reporting by Emily Stephenson. Editing by John Wallace, Robert MacMillan and Lisa Von Ahn)

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