Walgreens profits sink

Walgreens' recently announced first quarter earnings disappointed investors, as the company contends with the fallout from its split with Express Scripts.

The national pharmacy and retail chain suffered through a tough first fiscal quarter, company officials said when announcing earnings this week. Walgreens executives noted that a slow flu season, coupled with its decision to not agree to a new deal with pharmacy management company Express Scripts, fueled a 4 percent drop in quarterly earnings.

Walgreens and Express Scripts were unable to reach an agreement over the rates the latter pays to the former to fill prescriptions, Walgreens chief executive Greg Wasson asserted. The standoff prompted the pharmacy giant to walk away from the bargaining table, but analysts said the move could have far-reaching implications.

Express Scripts is one of the nation's biggest pharmacy management companies. Walgreens could implement a business cost reduction initiative in an effort to improve profitability, but experts said its decision to walk away from the supplier contract negotiation underscored its frustration over what it perceived as unfair reimbursement rates.

"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," Wasson said.

The company's net income registered $554 million in its latest fiscal quarter. That figure represents a decline from the $580 million it logged in net income during the same period the year prior. Walgreens said revenue grew by 4.7 percent compared to 2010, reaching $18.16 billion. Analysts, however, had projected the company would report $18.24 billion.

The delay of the flu season hurt the company's bottom line. Compared to the same point last year, Walgreens has sold roughly 600,000 fewer flu shots, The Associated Press reports. Wasson affirmed the company does not expect its split with Express Scripts to affect long-term profitability, noting it had expected a difficult first quarter as it dealt with the aftermath.

"The first quarter was expected to be a very challenging one for gross profit dollar growth as we faced comparisons with strong gross profit performances in the first quarter of the two previous years," he said in a statement. "Despite that, we're pleased with important aspects of our business including our record sales of $18.2 billion, the first-quarter record number of prescriptions filled, the continued profitable growth of our front-end business and delivering on our commitment to return cash to our shareholders."