CHAINS and BUSINESS

Drugstore sector not immune to economic slowdown

Two of the largest drug chains in the country are apparently caught in the tight grip of the current economic slowdown. CVS lowered its second-quarter earnings forecast while Walgreens missed analysts' quarterly earnings expectations despite a rise in its sales and earnings.

Walgreens, which hasn't fallen short of analysts' expectations in recent years, blamed heavy new store growth as well as a cool economy and a slowdown in sales of seasonal and promotional merchandise for its share of bad news. CVS cited the pharmacist shortage as well as the dampening economy for its financial woes.

Walgreens' third-quarter sales rose 16.7%, and earnings were up 10% for the fiscal third quarter ended May 31. But the chain missed the analysts' consensus estimate of earnings by 1 cent.

"Earnings came up short of analysts' expectations because of heavy new store growth we've invested in over the past three years and a decline in gross profit margins," explained Walgreens spokesman Michael Polzin. Noting that more than 1,300 stores in the chain are a minimum of three years old, he said, "It takes the typical store three years to become profitable."

The chain attributed weak sales of seasonal items, such as fans, water accessories, and lawn chairs, to a cool spring in much of the nation. Weak sales of promotional items was caused by the absence of a "must-have" item.

Walgreens' pharmacy sales remain strong, insisted Polzin. "In our core categories—OTCs and health and personal care items—sales were strong," he said. "We have very steady pharmacy comparable-store sales. In the past year, our comparable- pharmacy sales growth has consistently been between 17% and 20%."

Meanwhile, CVS Corp. announced that it expects earnings per share for the second quarter and full year to be lower than previously anticipated. Todd Andrews, CVS spokesman, told Drug Topics that a slowing in same-store sales growth and increased gross margin pressure led the firm to revise its expectations.

Like Walgreens, CVS cited a softening in the economy and cool May weather for dampening the sale of seasonal items. But heaviest blame for the company's anemic earnings was placed on the pharmacist shortage, which hit the chain hard in the following markets: Washington, D.C.; Hartford and Fairfield counties in Connecticut; Detroit; and Cleveland. "These four markets are where we have a major market share—more than 40%—so when you have a shortage in these areas, it hits hard," said Andrews.

Meanwhile, Walgreens' Polzin claimed that the pharmacist shortage has had no material effect on the chain's bottom line. "We're in better shape today than we were a year ago," he said. "We stepped up our recruiting efforts for currently licensed pharmacists and new graduates ... 1% of our stores or less have any type of reduced hours in pharmacy."

Sandra Levy

Sandra Levy. Drugstore sector not immune to economic slowdown.

Drug Topics

2001;14:38.