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Longs Drug Stores Corporation Reports 14% Increase in Second Quarter Net Income

Posted on: Wednesday, 16 August 2006, 18:00 CDT

WALNUT CREEK, Calif., Aug. 16 /PRNewswire-FirstCall/ -- Longs Drug Stores Corporation today reported preliminary net income for the second quarter ended July 27, 2006 of $19.0 million, or $0.50 per diluted share. Last year, net income for the second quarter ended July 28, 2005 was $16.7 million, or $0.43 per diluted share, adjusted for the retrospective application of FSP FAS 13-1 for the accounting for leases.

"Our financial results for the quarter reflect the progress we have made on improving the profitability of our core business while pursuing new business opportunities," said Chairman, President and Chief Executive Officer Warren F. Bryant. "We are tackling several complex initiatives this year and we are pleased by the organization's ability to absorb these changes.

"We successfully opened a new distribution facility during the quarter and achieved higher levels of productivity more quickly than we originally anticipated," Bryant said. He added, "The transition costs for the quarter were significantly lower than expected and this was primarily attributable to the number of loyal employees who moved with us to the new facility.

"Our new prescription drug plans generated a profit this quarter after breaking even last quarter," Bryant said. Longs' wholly owned subsidiary, RxAmerica launched the plans for Medicare beneficiaries in January of 2006.

"We successfully completed the purchase of 21 pharmacies from Network Pharmaceuticals. This brings our net addition of new stores to 24 and we plan to open or relocate another 15 to 20 stores by the end of the fiscal year," Bryant said.

Longs reported net capital expenditures for the six months of Fiscal 2007 of $86.7 million and the Company is estimating total capital expenditures for the full year to be in the range of $200 to $220 million.

Longs Drug Stores repurchased 600,000 shares of its common stock during the second quarter for $26.5 million, or an average price of $44.10 per share, bringing the total number of shares the Company has repurchased this year to approximately 684,000 shares at an average price of $44.59. In May 2005, the Company's Board of Directors authorized the repurchase of $150 million of Longs' outstanding common stock during the period extending through May 2008. Approximately $90 million remains under current Board authorization for stock repurchases.

Second Quarter Net Income

Net income for the second quarter ended July 27, 2006, was $19.0 million, or $0.50 per diluted share. This compared with net income for the second quarter ended July 28, 2005, of $16.7 million, or $0.43 per diluted share, including the adjustment for the retrospective application of FSP FAS 13-1. The Company adopted this standard in the first quarter of Fiscal 2007. An 8-K filed with the SEC on May 17, 2006 includes a schedule with the retrospective application of the change in accounting for leases to previously reported quarterly results for Fiscal 2006.

Revenues

Total revenues of $1.27 billion for the thirteen weeks ended July 27, 2006, were 9.5 percent higher than the $1.16 billion reported in the comparable period last year. Total retail drug store sales were $1.19 billion, a 3.9 percent increase from $1.15 billion in the comparable period last year. Same-store sales increased 2.6 percent with pharmacy same-store sales increasing 6.4 percent and front-end same-store sales decreasing 0.9 percent. Pharmacy sales were 50.4 percent of total drug store sales during the period, compared with 48.3 percent a year ago.

Pharmacy benefit services generated revenues during the second quarter of $75.3 million compared with the $9.6 million reported last year. The prescription drug plans generated $68.8 million in revenues during the quarter. Pharmacy benefit management revenues declined $3.0 million, due to adjustments to certain rebate accruals recorded in the quarter.

Retail Drug Stores Gross Profit

Retail drug stores gross profit for the second quarter ended July 27, 2006 was $300.5 million, or 25.2 percent of sales. Last year, Longs reported retail drug stores gross profit of $299.3 million, or 26.1 percent of sales. The decline in gross profit as a percent of sales was primarily due to the negative impact of the new Medicare drug benefit and the sales mix.

The LIFO provision for the second quarter ended July 27, 2006 was $3.3 million compared with $2.0 million reported in the second quarter last year.

Prescription Drug Plan Gross Profit

During the second quarter ended July 27, 2006, the Company incurred benefit costs for its prescription drug plans of $58.7 million, resulting in a gross profit for the quarter of $10.0 million, or 14.6 percent of prescription drug plan revenues.

Operating and Administrative Expenses

Consolidated operating and administrative expenses for the second quarter ended July 27, 2006 were $265.2 million, or 20.9 percent of revenues, including $1.4 million in stock option expense. Last year, Longs reported operating and administrative expenses of $258.7 million, or 22.4 percent of revenues. The decline in the operating and administrative expense rate this year compared with last year is primarily due to increased revenues and expense control.

Operating Income

Operating income for the second quarter ended July 27, 2006 was $29.9 million, or 2.4 percent of revenues, compared with operating income for the second quarter last year of $29.0 million, or 2.5 percent of revenues.

First Six Months Net Income

Net income for the 26 weeks ended July 27, 2006, was $34.8 million, or $0.91 per diluted share. This compared with net income for the 26 weeks ended July 28, 2005, of $29.5 million, or $0.77 per diluted share, including the adjustment for the retrospective application of FSP FAS 13-1. The Company adopted this new standard in the first quarter of Fiscal 2007.

Revenues

Total revenues of $2.53 billion for the 26 weeks ended July 27, 2006, were 9.5 percent higher than the $2.31 billion reported in the comparable period last year. Total retail drug store sales were $2.36 billion, a 3.1 percent increase from $2.29 billion in the comparable period last year. Same-store sales increased 2.0 percent with pharmacy same-store sales increasing 5.7 percent and front-end same-store sales decreasing 1.4 percent. Pharmacy sales were 50.8 percent of total drug store sales during the period, compared with 48.9 percent a year ago.

Pharmacy benefit services generated revenues during the 26 weeks ended July 27, 2006 of $168.7 million compared with the $19.2 million reported last year. The prescription drug plans generated $151.1 million in revenues during the first half of the year.

Retail Drug Stores Gross Profit

The retail drug store gross profit for the 26 weeks ended July 27, 2006 was $590.5 million, or 25.0 percent of sales compared with a gross profit for the 26 weeks ended July 28, 2005 of $592.7 million, or 25.9 percent of sales. The decline in gross profit as a percent of sales was primarily due to the negative impact of the new Medicare drug benefit and the sales mix. Year to date, Medicare and Medicaid represented approximately 20 percent of Longs Drugs retail pharmacy sales.

The LIFO provision for the 26 weeks ended July 27, 2006 was a charge of $5.3 million compared with $4.0 million reported for the same period last year.

Prescription Drug Plan Gross Profit

During the 26 weeks ended July 27, 2006, the Company incurred benefit costs for its prescription drug plans of $136.0 million, resulting in a gross profit of $15.1 million, or 10.0 percent of prescription drug plan revenues.

Operating and Administrative Expenses

Consolidated operating and administrative expenses for the 26 weeks ended July 27, 2006 were $523.8 million, or 20.7 percent of revenues, including $2.7 million in stock option expense. Last year, Longs reported operating and administrative expenses of $517.5 million, or 22.4 percent of revenues. The decline in the operating and administrative expense rate this year compared with last year is primarily due to increased revenues and expense control.

Operating Income

Operating income for the 26 weeks ended July 27, 2006 was $56.2 million, or 2.2 percent of revenues compared with operating income for the 26 weeks ended July 28, 2005 of $51.8 million, or 2.2 percent of revenues.

Management Outlook

Longs' management is raising its outlook on net income for the 52 weeks ending January 25, 2007 to reflect the financial results reported for the first six months of the year. Longs estimates that total revenues for the year will increase 8 to 10 percent. It estimates that total retail drug store sales will increase 3 to 5 percent and same-store sales will increase 1 to 3 percent compared with last year. Given these revenue assumptions and the Company's continued progress on previously stated initiatives, Longs' goal is to achieve net income of $1.84 to $1.94 per diluted share in Fiscal 2007. The outlook for Fiscal 2007 reflects option expenses and a change in accounting for leases. The Company reported Fiscal 2006 net income of $1.93 per diluted share, including a $6.6 million after-tax gain on the sale of its Lathrop distribution facility.

For the third quarter ending October 26, 2006, Longs estimates that total revenues will increase 9 to 11 percent. It estimates that total retail drug store sales will increase 3 to 5 percent and same-store sales will increase 1 to 3 percent compared with the third quarter of last year. Given these revenue assumptions and the Company's continued progress on previously stated initiatives, Longs' goal is to achieve net income in the range of $0.27 to $0.32 per diluted share in the third quarter. By comparison, Longs reported net income of $0.23 per diluted share for the third quarter last year.

Teleconference and Webcast

Longs has scheduled a conference call at 4:30 p.m. EDT/1:30 p.m. PDT today to discuss its second quarter performance and business outlook. The call will be broadcast live on the Company's Web Site at http://www.longs.com/; Company Information; Investor Relations. A replay of the conference call will be available approximately two hours after the call and available through Wednesday, August 23, 2006 by dialing 412-317-0088 or toll free 877-344-7529 and using the account number 394373 followed by the # sign. The audio Webcast of the conference call will also be archived for one full quarter on Longs Drug Stores' Investor Relations Web Site.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, financial results for the third quarter and full fiscal year (including revenues, same-store sales and net income), capital expenditures, goals for self-distribution, expansion and remodeling of stores, profits from prescription drug plans and leveraging of investments in RxAmerica, and are indicated by such words as "will", "expects", "estimates", "goals", "plans" or similar words. These statements are based on the Company's current plans and expectations and involve risks and uncertainties that could cause actual events and results to vary materially from those contemplated by such statements. Risks and uncertainties relate to, among other things, changing market conditions in the overall and regional economy and in the retail industry, the new Medicare Drug Benefit, transitioning to the Patterson distribution facility and greater self-distribution, opening and closing of stores, labor unrest, generic drug pricing, natural or manmade disasters, maintaining satisfactory relationships with vendors, changes in applicable law or in the interpretation of applicable law by regulatory agencies or by legal, accounting or other professional advisors, or by the Company, the Company's ability to achieve greater visibility into its inventories and gross profits on a short and long term basis, and other factors described from time to time in the Company's news releases and in its annual, quarterly and other reports filed with the Securities and Exchange Commission. Please refer to such filings for a further discussion of these risks and uncertainties. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of this news release.

About the Company

Headquartered in Walnut Creek, California, Longs Drug Stores Corporation is one of the most recognized retail drug store chains on the West Coast and in Hawaii. The Company operates 501 retail pharmacies and offers a wide assortment of merchandise focusing on health, wellness, beauty and convenience. Longs also provides pharmacy benefit management services and Medicare beneficiary prescription drug plans through its wholly-owned subsidiary, RxAmerica, LLC. Additional information about Longs and its services is available at http://www.longs.com/ and more information about RxAmerica is available at http://www.rxamerica.com/.

Condensed Consolidated Income Statements (unaudited) For the 13 weeks ended For the 26 weeks ended July 27, July 28, July 27, July 28, 2006 2005 2006 2005 Thousands Except Thousands Except Per Share Amounts Per Share Amounts Revenues: Retail drug store sales $1,192,617 $1,147,895 $2,358,578 $2,288,715 Pharmacy benefit services revenues 75,343 9,576 168,743 19,184 Total revenues 1,267,960 1,157,471 2,527,321 2,307,899 Costs and expenses: Cost of retail drug store sales 892,134 848,546 1,768,089 1,696,030 Prescription drug plan benefit costs 58,744 - 136,022 - Operating and administrative expenses 265,159 258,708 523,766 517,478 Depreciation and amortization 22,445 21,192 43,724 42,605 Legal settlements and other disputes, net (430) - (430) - Operating income 29,908 29,025 56,150 51,786 Interest expense 1,480 2,299 2,842 4,749 Interest income (726) (276) (1,637) (575) Income before income taxes 29,154 27,002 54,945 47,612 Income taxes 10,122 10,259 20,129 18,070 Net income $19,032 $16,743 $34,816 $29,542 Earnings per common share: Basic $0.51 $0.45 $0.93 $0.79 Diluted 0.50 0.43 0.91 0.77 Dividends per common share $0.14 $0.14 $0.28 $0.28 Weighted average number of shares outstanding: Basic 37,223 37,507 37,344 37,336 Diluted 38,224 38,565 38,351 38,224 Financial Highlights Pharmacy benefit services revenues (thousands): Pharmacy benefit management revenues $6,579 $9,576 $17,660 $19,184 Prescription drug plan revenues 68,764 - 151,083 - Total $75,343 $9,576 $168,743 $19,184 Gross profit: Retail drug store gross profit margin 25.2% 26.1% 25.0% 25.9% Prescription drug plan gross profit margin 14.6% N/A 10.0% N/A Operating income as a % of revenues: Retail drug store segment 2.2% 2.3% 2.1% 2.0% Pharmacy benefit services segment 4.9% 29.8% 4.5% 30.0% Number of stores, beginning of period 471 477 472 476 472 Stores opened 0 4 1 5 1 Stores acquired (Network Pharmaceuticals) 21 - 21 - Stores closed (1) (2) - (2) - Number of stores, end of period 470 500 473 500 473 Store relocations - - - - Condensed Consolidated Balance Sheets (unaudited) July 27, July 28, January 26, 2006 2005 2006 Thousands Except Share Information Assets Current Assets: Cash and cash equivalents $21,237 $55,309 $74,662 Pharmacy and other receivables, net 276,588 164,300 183,213 Merchandise inventories, net 479,793 445,618 462,030 Deferred income taxes 42,485 43,009 42,258 Prepaid expenses and other current assets 21,725 21,194 21,204 Total current assets 841,828 729,430 783,367 Property: Land 114,606 106,788 111,097 Buildings and leasehold improvements 623,734 571,312 578,158 Equipment and fixtures 615,551 582,219 601,247 Total 1,353,891 1,260,319 1,290,502 Less accumulated depreciation 704,195 654,581 674,517 Property, net 649,696 605,738 615,985 Goodwill 84,383 82,085 82,085 Intangible assets, net 12,711 6,055 6,060 Other non-current assets 6,243 3,489 7,832 Total $1,594,861 $1,426,797 $1,495,329 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses $444,884 $319,330 $349,888 Employee compensation and benefits 124,249 139,421 138,202 Taxes payable 52,490 56,153 58,493 Current maturities of debt 43,727 8,870 45,870 Total current liabilities 665,350 523,774 592,453 Long-term debt 73,091 100,818 59,818 Deferred income taxes and other long-term liabilities 75,908 62,018 80,469 Commitments and Contingencies Stockholders' Equity: Common stock: par value $0.50 per share, 120,000,000 shares authorized, 37,404,000, 37,527,000 and 37,216,000 shares outstanding 18,702 18,763 18,608 Additional capital 232,844 201,681 213,374 Retained earnings 528,966 519,743 530,607 Total stockholders' equity 780,512 740,187 762,589 Total $1,594,861 $1,426,797 $1,495,329 Condensed Statements of Consolidated Cash Flows (unaudited) For the 26 weeks ended July 27, July 28, 2006 2005 Thousands Operating Activities: Net income $34,816 $29,542 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,724 42,605 Deferred income taxes and other (4,867) (7,385) Stock awards and options, net 5,619 7,557 Common stock contribution to benefit plan 8,381 5,960 Changes in assets and liabilities: Pharmacy and other receivables (52,716) (5,955) Merchandise inventories (14,912) (12,338) Other assets (2,005) 1,774 Current liabilities and other 75,710 48,577 Net cash provided by operating activities 93,750 110,337 Investing Activities: Capital expenditures (71,025) (44,965) Acquisitions (16,366) - Proceeds from property dispositions 683 5,634 Net cash used in investing activities (86,708) (39,331) Financing Activities: Proceeds from (repayments of) line of credit borrowings, net 16,000 (40,000) Repayments of private placement borrowings (4,870) (4,870) Repurchase of common stock (30,520) (27,866) Proceeds from exercise of stock options 7,216 13,643 Dividend payments (10,550) (10,494) Medicare Part D subsidy deposits (withdrawals), net (40,659) - Other 2,916 - Net cash used in financing activities (60,467) (69,587) Increase (decrease) in cash and cash equivalents (53,425) 1,419 Cash and cash equivalents at beginning of period 74,662 53,890 Cash and cash equivalents at end of period $21,237 $55,309 Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized $2,771 $4,590 Cash paid for income taxes 19,458 10,043

Longs Drug Stores Corporation

CONTACT: Phyllis Proffer, +1-925-979-3979

Web site: http://www.longs.com/

Source: PRNewswire-FirstCall

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