Walgreen Profit Falls 4.5% on Higher Costs

Walgreen Co.'s fiscal first-quarter earnings fell 4.5% on higher costs as the drugstore chain appeared poised to begin the new year without a contract with Express Scripts Inc.

Shares were down 4.5% at $31.99 in premarket trading as earnings missed expectations. Through Tuesday's close, the stock is down 14% this year.

A conflict between Walgreen and the pharmacy-benefits manager over new contract terms erupted publicly in June, when Walgreen said it wouldn't be part of Express Scripts's network when their current deal expires after this year.

A Walgreen exit from Express Scripts's network would mean the benefit manager's clients would have to go elsewhere to fill prescriptions. However, based on current estimates and the assumption that it won't be in the Express Scripts network in 2012, Walgreen said it expects to achieve 97% to 99% of its fiscal 2011 prescription volume.

For the latest quarter, Walgreen said its decision to exit Express Scripts cost a penny per share in comparable pharmacy sales and a penny a share in related expenses.

President and Chief Executive Greg Wasson said "While we remain open to any fair and competitive offer from Express Scripts, we firmly believe that accepting their proposal was not in the best long-term interests of our shareholders." As a result, Walgreen has started to execute plans to reach cost-reduction goals for operating without Express Scripts, Mr. Wasson said.

For the quarter ended Nov. 30, Walgreen reported a profit of $554 million, or 63 cents a share, from $580 million, or 62 cents a share, a year earlier.

The latest period included inventory-related charges of $5 million, while the prior year included $42 million.

Analysts polled by Thomson Reuters most recently forecast earnings of 67 cents.

Gross margin fell to 28.1% from 28.5% on weaker pharmacy margins caused by reduced reimbursement rates. Overhead expenses were up 5% including 0.8 percentage point related to the integration of its drugstore.com acquisition.

Walgreen recently reported that total sales were up 4.7% at $18.16 billion, below analysts' expectations at the time. Same-store sales rose 2.5%, including growth of 2.4% in the pharmacy and 2.5% in the front of the store.

Write to Tess Stynes at tess.stynes@dowjones.com

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