Walgreen Discusses Margin Pressure From Medicare Part D

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. (CVS), Rite Aid (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.