EarningsCenter

Global Income Helps Walgreen, but Not Enough

Earns Walgreen Co
Steven Senne/AP
By TOM MURPHY

Walgreen's (WAG) fiscal third quarter earnings jumped 16 percent compared with last year, aided in part by a lower income tax rate, but the drugstore chain's performance again fell short of Wall Street's expectations.

The Deerfield, Illinois, company also left investors and analysts hanging after announcing quarterly results Tuesday. Walgreen executives said they are considering their option to complete a takeover of Swiss health and beauty retailer Alliance Boots -- a move that could involve an overseas reincorporation -- but they won't be ready to discuss their next step until late July or early August.

For the fiscal third quarter, Walgreen said an increase in foreign income helped knock its tax rate down to 31.5 percent, compared with 38.7 percent last year. As a result, the company's income tax provision dropped $43 million in the quarter.

The lower-than-expected tax rate contributed a benefit of at least 8 cents a share toward the company's bottom line, Cantor Fitzgerald analyst Ajay Jain said in a research note that described Walgreen's overall earnings as weak.

Walgreen Co. earned $722 million, or 75 cents a share, in the quarter that ended May 31. That's up from $624 million, or 65 cents a share, a year ago.

Falling Short

Adjusted earnings excluding one-time items totaled 91 cents a share, which was two cents below average analyst expectations. The drugstore chain also fell short in its fiscal second quarter.

Walgreen's revenue climbed 6 percent to $19.4 billion. Analysts expected $19.44 billion in revenue, according to FactSet.

Walgreen is feeling pressure from both drugmakers who are raising prices and payers like health insurers that are reducing what they will pay for prescriptions, said Vishnu Lekraj, who covers the company for Morningstar (MORN).

"They're getting squeezed from both sides, both from the supplier and the customer," he said.

Walgreen acquired an initial 45 percent stake in Alliance Boots in 2012, and it has an option to buy the rest of the company next year. Alliance Boots runs the largest drugstore chain in the United Kingdom.

Company executives told analysts Tuesday that they have to consider a host of variables like the deal's capital structure and what it could do for Walgreen's tax rate before they discuss their decision later this summer.

"We are working around the clock to try to understand all the above so that we are able to make the right decision for the company," CEO Greg Wasson said.

Several large U.S. companies have used mergers recently to reincorporate overseas in countries with lower tax rates. These moves are raising concerns among some U.S. lawmakers, since they can cost the federal government billions in tax revenues.

Earlier this month, U.S. medical device maker Medtronic (MDT) said that it agreed to buy Ireland-based competitor Covidien (COV) for $42.9 billion in cash and stock. The combined company would have its executive offices in Ireland, which has a 12.5 percent corporate income tax rate.

Another Deerfield company, Horizon Pharma (HZNP), said in March it would buy the privately held Vidara Therapeutics International in a deal that also creates an Ireland-based company.

Walgreen shares slipped 48 cents to $72.25 in midday trading while the Standard & Poor's 500 index (^GPSC) climbed slightly.


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