Walgreen Discusses Margin Pressure From Medicare Part D

Includes: CVS, LDG, RAD, WBA
by: David Jackson

On Walgreen's (WAG) conference call, Director of Finance Rick Hans discussed the reasons why Walgreen's profit margins contracted. Walgreen's results pressured the stocks of CVS Corp. (NYSE:CVS), Rite Aid (NYSE:RAD) and Longs Drug Stores (LDG):

Our gross profit margins for the fourth quarter decreased 31 basis points versus the year-ago quarter to 27.64 as a percent to sales. This quarter includes a LIFO charge of $26.1 million versus a credit of $2 million a year ago. The total LIFO charge in fiscal 2006 was $95.3 million versus $67.8 million the previous year.

Also contributing to the margin decrease were lower pharmacy margins from additional Medicare Part D business along with the continued shift in our overall sales mix toward prescriptions, which carry lower margins than front-end merchandise. Partially offsetting those factors was the introduction of new, higher margin generic medications. Front end margins increased slightly as a result of a shift in sales mix to higher margin items.

He said this about the positive margin impact of generic drugs:

As many of you are well aware, we’re dispensing more generic drugs, which have higher profit margins than name-brand drugs but also slow our pharmacy sales increases because of their lower price. That’s why we believe a better indicator of pharmacy performance is the number of prescriptions filled. And in fiscal 2006, that number increased 8.1% to 529 million. On a comparable store basis, the number of prescriptions filled in fiscal 2006 increased 4.5%.

The full Walgreen conference call transcript is here.