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Article by DailyStocks_admin    (08-15-08 05:28 AM)

Filed with the SEC from July 31 to Aug 6:

Longs Drug Stores (LDG)
William Ackman's Pershing Square Capital Management reported ownership of 3,137,650 shares (8.8%). Pershing Square may meet with Longs' management, shareholders or other relevant parties to discuss the company's strategy, assets, operations, capital structure, governance, management or strategic plans.

BUSINESS OVERVIEW

Overview



Longs Drug Stores Corporation was founded in 1938 in Oakland, California by two brothers, Tom and Joe Long. Today, we operate in two business segments: retail drug stores and, through our RxAmerica subsidiary, pharmacy benefit services. For financial information about these segments, see Note 13, “Segment Information” in the accompanying notes to our consolidated financial statements. We operate on a 52/53-week fiscal year ending on the last Thursday in January. Our 2008 fiscal year contained 53 weeks of operations and ended on January 31, 2008. Our 2009 fiscal year will contain 52 weeks of operations and will end on January 29, 2009.



Through our retail drug store segment, we are one of the most recognized retail drug store chains on the West Coast of the United States and in Hawaii, with 510 stores as of January 31, 2008. Our retail drug stores have a long history of serving the health and well-being needs of customers through customer-oriented pharmacy services and convenient product offerings that focus on health and wellness, beauty and convenience. Our retail drug store segment also operates a mail order pharmacy business.



Our pharmacy benefit services segment provides a range of services related to pharmacy benefit management, including plan design and implementation, claims administration and formulary management to third-party health plans and other organizations. In addition, effective January 1, 2006, our pharmacy benefit services segment began offering prescription drug plans under Medicare Part D as established by the Medicare Prescription Drug, Improvement and Modernization Act of 2003. These plans will provide prescription drug benefits to an estimated 440,000 to 450,000 Medicare beneficiaries in all 50 states and the District of Columbia in the calendar 2008 plan year. RxAmerica has extensive experience in managed state plans and an established reputation for reducing health care costs. Fiscal 2007 was the first full year of results for our Medicare prescription drug plans.



Our corporate offices are located at 141 North Civic Drive, Walnut Creek, California 94596, telephone (925) 937-1170. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the stock symbol “LDG.” General information, financial news releases and filings with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports are available free of charge on our website at www.longs.com as soon as reasonably practicable after we file them with the Securities and Exchange Commission. We have submitted our 2007 annual Section 12(a) CEO certification to the NYSE. The certification was not qualified in any respect. Additionally, we filed with the Securities and Exchange Commission as exhibits to our Form 10-K for the year ended January 25, 2007 the CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.



Initiatives



More than five years ago, we began working on the following broad categories of strategic initiatives designed to make Longs a stronger competitor and more profitable company:




Pharmacy profitability —The pharmacy industry is undergoing significant structural changes, including Medicare prescription drug benefits, declining third-party reimbursement levels, and mandatory mail order fulfillment of prescriptions by certain health plans. In this environment, we continue to make progress on improving our pharmacy efficiency and productivity through technology enhancements, streamlining our prescription fill processes, increasing our utilization of central fill and providing more management training opportunities. We will continue to pursue additional opportunities to improve our efficiencies in the pharmacy by increasing the amount of time our pharmacists have to educate and counsel their patients by decreasing their administrative burden. We believe this will help us improve patient service, control costs and increase our prescription volumes and market share.



Front-end sales —We have implemented merchandise and marketing strategies that include enhanced and expanded assortments in our core categories focusing on health, wellness, beauty and convenience in an effort to emphasize our competitive differentiation. We have a larger, more developed front-end business than typical drug store chains and we believe this is a competitive advantage that can be further developed. We have increased the quality and assortment of our private brand merchandise and improved our in-stock positions and product adjacencies through better inventory management. We plan to make continued progress toward full realization of all of the benefits of our merchandising strategy through improved store execution, self-distribution and inventory management.




Supply Chain —The upgrade of our supply chain systems and processes has included centralization of our merchandise procurement and replenishment, increased self-distribution, implementation of new technology and improvements to many business processes. Our upgraded supply chain technology includes a distribution management system in our California and Hawaii front-end distribution centers, a retail merchandise system, a store ordering, receiving and inventory management system in all of our mainland stores (with installation in our Hawaii stores scheduled for fiscal 2009), and procurement and allocation systems that are more tightly integrated with one another than the systems they replaced. We plan to implement an integrated demand forecasting and replenishment system for front-end merchandise during fiscal 2009. We also completed construction of an 800,000 square foot front-end distribution center in Patterson, California in the summer of fiscal 2007, which has enabled us to increase our self-distribution to approximately 80% of our front-end merchandise on the mainland from 40% previously. We have reduced our distribution costs as a percent of shipments and expect to make continued progress on efficiency and productivity. We expect these changes to continue to yield benefits in the form of lower cost of sales and expenses related to procurement and distribution, improved merchandise replenishment, and increased real-time visibility into our in-stock position, merchandise mix, product movement and gross profit for our retail drug store segment.




Operational processes —We have developed new and more efficient operational processes to help us reduce expenses and increase our focus on superior customer service. These improvements include more efficient workflow processes, optimizing our labor, improved safety practices and increased training hours for store managers. Our supply chain systems improvements and increased self-distribution of front-end merchandise are well aligned with our goals to achieve improved control over our merchandise inventory and in-stock position. We continue to work toward faster replenishment of self-distributed goods and better alignment of our front-end distribution capabilities with our retail merchandise adjacencies for greater workflow efficiencies. We plan to install a labor scheduling and forecasting system in our stores and expect to complete this installation in all stores by the end of fiscal 2009. We are also streamlining our store remodeling process to cause less disruption both for our customers and our store operations.




Pharmacy benefit services —We have achieved significant growth in RxAmerica, our pharmacy benefit services subsidiary. RxAmerica began offering prescription drug plans for Medicare beneficiaries effective January 1, 2006. These plans will provide prescription drug benefits to an estimated 440,000 to 450,000 Medicare beneficiaries in all 50 states and the District of Columbia during the calendar 2008 plan year. During fiscal 2008, RxAmerica acquired a registered insurance company, subsequently renamed Accendo Insurance Company, with licenses to operate as an insurance company in 46 states. This will allow us to continue to offer prescription drug plans for Medicare through Accendo after the expiration of our insurance waivers from the Centers for Medicare and Medicaid Services (“CMS”) on January 1, 2009. RxAmerica has extensive experience in managed state plans and an established reputation for reducing health care costs. RxAmerica’s pharmacy benefit management business has also continued to grow.

Our retail drug stores sell prescription drugs and a wide assortment of nationally advertised brand name and private brand general merchandise, which we refer to as “front-end” merchandise. Our core front-end categories include over-the-counter medications, health and beauty products, cosmetics, photo and photo processing, convenience food and beverage items and greeting cards. In addition, we sell merchandise in non-core front-end categories such as housewares, automotive and sporting goods. Our private brand offerings include over-the-counter, health and beauty, photo and other merchandise offered under various proprietary names, including “Longs,” “Bayside Basics,” “Pacific Living,” “Walnut Grove,” “Holiday Place,” and others. To enhance customer service and build customer loyalty, we seek to consistently maintain in-stock positions in all of our merchandise categories. We will continue to develop our mix of front-end merchandise in our stores in response to the changing needs and preferences of our customers. For enhanced customer convenience, 52 of our stores have drive-through pharmacies as of the end of fiscal 2008. We also offer a variety of immunizations and health screening services in many of our stores, such as blood, glucose, osteoporosis, stroke and cholesterol testing, and leased space to outside providers of in-store medical clinics or diagnostic labs in seventeen stores as of January 31, 2008. In addition, we offer educational information to our customers about their health and well-being concerns through the Wellness Center section of our website, www.longs.com.



Our RxAmerica subsidiary provides comprehensive pharmacy benefit management services nationwide including prescription benefit plan design and implementation, claims administration and formulary management to third-party health plans and other organizations. We have designed these services to help lower prescription benefit costs for plan providers while improving healthcare access, service and treatment for covered members. We manage prescription benefit plans covering approximately 8.7 million lives with a network of pharmacies in all 50 states as well as Puerto Rico and the Virgin Islands. Effective January 1, 2006, RxAmerica began offering prescription drug plans under Medicare Part D as established by the Medicare Prescription Drug, Improvement and Modernization Act of 2003. These plans will provide prescription drug benefits to an estimated 440,000 to 450,000 Medicare participants in all 50 states and the District of Columbia during the calendar 2008 plan year.



Purchasing and Distribution



As part of our supply chain initiative we have made significant progress in centralizing our merchandise procurement and replenishment over the past several years in order to achieve greater efficiencies and economies of scale. We now have a centralized purchasing and replenishment structure for a significant portion of our front-end merchandise.



We distribute centrally procured merchandise to our stores through our distribution centers in California and Hawaii, and other merchandise is delivered directly to our stores by our vendors. Store deliveries from our distribution centers take place primarily through a leased fleet and contract drivers.



As a result of our more centralized purchasing approach, we have substantially increased the volume of merchandise received and delivered through our distribution centers. During fiscal 2007 we completed construction of an 800,000 square-foot front-end distribution center in Patterson, California and transitioned distribution operations from our Lathrop distribution center to the new facility. The Patterson distribution center has allowed us to increase our self-distribution to approximately 80% of our mainland front-end merchandise.



Advertising



We advertise primarily through promotional advertisements and circulars in major daily newspapers and, to a lesser extent, advertisements on radio and television. We centrally manage the majority of our advertising efforts. Our approach is to regionalize our advertising and use the most efficient media mix within a geographic area. Vendors fund a significant portion of our total advertising spending.



Technology



We are upgrading technology throughout our company in an effort to improve our efficiency, productivity and profitability. All of our stores utilize pharmacy systems to facilitate filling prescriptions, analyze drug interactions and adjudicate third-party claims, which allows our pharmacists to fill prescriptions accurately and efficiently with reduced risk of error or adverse drug interaction. We route some of the prescriptions that we receive to our central prescription fill centers, which provide increased productivity and reduced prescription fill costs. We have also installed advanced pill-dispensing robotics in many of our high-volume pharmacies. The fill centers and robotic technology enable our pharmacists to spend more time with customers while maintaining high quality customer service standards.



Our stores also utilize computer-assisted ordering and replenishment systems for certain goods that track sales and merchandise on hand and plan orders as necessary, and point-of-sale systems that facilitate customer check-out and allow us to process a high volume of transactions efficiently. We also have digital photo technology systems in over 90% of our stores.



We are making extensive system changes as part of our efforts to upgrade our supply chain, including a distribution management system in our California and Hawaii front-end distribution centers, a retail merchandise system, a store ordering, receiving and inventory management system in all of our mainland stores (with installation in our Hawaii stores scheduled for fiscal 2009), and procurement and allocation systems that are more tightly integrated with one another than the systems they replaced. We also plan to implement an integrated demand forecasting and replenishment system for front-end merchandise during fiscal 2009.



Mail Order



We provide prescription drug mail order services to our retail drug store and pharmacy benefit services customers. We continue to develop our mail order capabilities to complement our in-store pharmacies as well as our pharmacy benefit services offerings.



Internet



Through our website, www.longs.com, our customers can access our company information and extensive health and wellness information, refill prescriptions, order digital photos, and purchase certain over-the-counter medications 24 hours a day, 7 days a week. Customers may have items mailed to them or may pick them up at their local store. We believe that this sales channel provides customers with added flexibility and convenience.



Our RxAmerica subsidiary’s website, www.rxamerica.com, provides information about our pharmacy benefit management services and prescription drug plans for members, plan sponsors, pharmacies and physicians.



Trademarks



We hold various trademarks, trade names (including, but not limited to, Longs, Longs Drugs, Longs Pharmacy, E-fills, RxAmerica and our various private label brands) and business licenses that are essential to the operation of our business. These trademarks and licenses have varying terms and are generally renewable indefinitely.

Employees



As of January 31, 2008, we had approximately 21,900 employees, of which approximately 55% were part-time. We hire additional temporary employees as needed, especially during peak seasons. All of our employees are non-union, and we believe that our relationship with our employees is good.



Regulation



Our pharmacies and pharmacists are licensed by their respective state boards of pharmacy. Our pharmacies and distribution centers are also subject to the regulations of the Federal Drug Enforcement Administration. Applicable licensing and registration requirements necessitate our compliance with various state statutes, rules and regulations. We are also subject to numerous federal and state laws and regulations concerning the protection of confidential patient medical records and information, including the federal Health Insurance Portability and Accountability Act (“HIPAA”).



Our retail business is also subject to other laws and regulations including, but not limited to, regulations governing the sale of alcohol and tobacco, minimum wage requirements, working condition requirements, public accessibility requirements, citizenship requirements, gaming laws and other laws and regulations. The construction and maintenance of our stores is also subject to regulations relating to environmental matters, building construction, and zoning requirements.



As a provider of Medicare prescription drug plan benefits, RxAmerica is subject to various federal regulations promulgated by the Center for Medicare and Medicaid Services (“CMS”) under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. In addition, with the fiscal 2008 acquisition of Nutmeg Life Insurance Company, later renamed Accendo Insurance Company (see Note 4 to our consolidated financial statements), we are also subject to various state insurance laws and regulations in connection with our prescription drug plan business.



As a publicly traded corporation, we are subject to numerous federal securities laws and regulations, including the Securities Act of 1933 and the Securities Exchange Act of 1934, and related rules and regulations promulgated by the SEC, and the Sarbanes-Oxley Act of 2002. These laws and regulations impose significant requirements in the areas of accounting and financial reporting, corporate governance and insider trading, among others.



Competition



The retail drug store industry is highly competitive. We face intense competition with local, regional and national retailers, including other drug store chains, independent drug stores, on-line retailers, supermarket chains and mass merchandisers, many of which are aggressively expanding in markets we serve. In addition, competition from mail-order pharmacies is growing, and some third-party health plans require mail order fulfillment of certain medications. We compete on the basis of inclusion of our pharmacies in third-party health plan networks, quality of pharmacy services, price, front-end merchandise quality, product mix, convenience and customer service.



In the pharmacy benefit services industry, our competitors include large national and regional pharmacy benefit managers and insurance companies and managed care providers, some of which are owned by or have affiliations with our retail drug store competitors. We compete on the basis of our ability to facilitate the management of prescription drug costs for our customers and to provide low cost, high quality care for their members, as well as our experience in supporting managed state and other government programs.



Concentrations



All of our revenues are generated within the United States. We do not derive revenues from operations in foreign countries or exports. No single customer accounts for 10% or more of our total revenues. We do not believe that the loss of any one customer or group of customers under common control would have a material effect on our business.

Over 90% of our pharmacy sales are covered by third-party health plans. Medicare and Medicaid together represented approximately 24% of our fiscal 2008 pharmacy sales. Any significant loss of third-party business, including Medicare and Medicaid, could have a material adverse effect on our revenues and profitability.



We purchase over 90% of our pharmaceuticals from a single supplier, AmerisourceBergen Drug Corporation (“AmerisourceBergen”), with whom we have a long-term supply contract. Any significant disruptions in our relationship with AmerisourceBergen could have a material adverse effect on us.



Our pharmacy benefit services segment offers prescription drug plans under Medicare Part D as established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. These plans are subject to annual bidding and regulatory approval, and the majority of our enrollees are “dual-eligible” (qualified for both Medicare and Medicaid) who are automatically assigned to providers based on the outcome of the annual bidding process. If there are changes in legislative, regulatory or competitive conditions, or if we were to lose our contract with the Centers for Medicare and Medicaid Services (“CMS”), our ability to continue to offer prescription drug plans or to generate profitable prescription drug plan revenues could be adversely affected.



Our stores, mail order pharmacy operations, distribution centers and corporate offices are located in the western United States, with the majority of our stores in California. Risks prevalent in this region include, but are not limited to, the adverse economic effects of significant state budget deficits, legislative or other governmental actions reducing prescription reimbursement payments to us or increasing our liability with respect to workers’ compensation, major earthquakes, volatility in energy supplies and costs, and shipping and other transportation-related disruptions. Because of our geographic concentration, these risks could result in significant disruptions to our business or increased operating expenses.



Seasonality



Our retail drug store business is seasonal, peaking in the fourth fiscal quarter when front-end sales benefit from the holiday season. Pharmacy sales and over-the-counter medications also benefit in the fourth fiscal quarter from the winter cold and flu season.



The profitability of our Medicare prescription drug plan business is also seasonal, peaking in the second half of our fiscal year as a result of the Medicare Part D benefit design.

CEO BACKGROUND

Leroy T. Barnes, Jr. served as Vice President and Treasurer of PG&E Corporation, an energy-based holding company, from 2001 to 2005. He was Vice President and Treasurer of Gap, Inc., a retail clothing company, from 1997 to 2001. Mr. Barnes is a director of The McClatchy Company, Herbalife Ltd. and Citizens Communications Co. Mr. Barnes chairs the Audit and Finance Committee and is a member of the Governance and Nominating Committee. He has been designated by our board as an “audit committee financial expert,” as defined by the SEC, and he has been one of our directors since 2002.

Murray H. Dashe served as the Chairman of the Board, Chief Executive Officer, and President of Cost Plus, Inc., a specialty retailer of casual home living and entertaining products, from February 1998 to March 2005. Mr. Dashe is a director of UnionBanCal Corporation. Mr. Dashe is our Lead Director and a member of the Compensation Committee, the Audit and Finance Committee, and the Governance and Nominating Committee.

He has been designated by our board as an “audit committee financial expert,” as defined by the SEC, and he has been one of our directors since 2002.

Evelyn S. Dilsaver was President and Chief Executive Officer of Charles Schwab Investment Management, Inc., and Executive Vice President of The Charles Schwab Corporation from July 2004 until July 2007. Previously she served as Senior Vice President of the Asset Management Products and Services group of The Charles Schwab Corporation, from July 2003 to July 2004. From October 2000 to July 2003, she was Executive Vice President, Chief Financial Officer, Chief Administrative Officer and a member of the Management Committee of U.S. Trust Company, a subsidiary of The Charles Schwab Corporation. Ms. Dilsaver is a director of Aéropostale, Inc. She is a member of our Audit and Finance Committee and our Governance and Nominating Committee. Ms. Dilsaver has been designated by our board as an “audit committee financial expert,” as defined by the SEC, and she has been one of our directors since 2007.

Donna A. Tanoue has been Vice Chairman of Bank of Hawaii Corporation since April 2002. From April 2004 to January 2007, Ms. Tanoue also served as Chief Administrative Officer of Bank of Hawaii. From April 2002 to April 2004, Ms. Tanoue was Vice Chairman of the Investment Services Group, and has served on the Board of Directors of Bank of Hawaii since October 2001. Since June 2004, Ms. Tanoue has also served as President of Bank of Hawaii Charitable Foundation. Ms. Tanoue is a member of the Compensation Committee and the Audit and Finance Committee. She has been one of our directors since 2005.

Warren F. Bryant has been our President and Chief Executive Officer since 2002 and our Chairman of the Board since 2003. He was Senior Vice President of The Kroger Co., a retail grocery chain, from 1999 to 2002. Mr. Bryant is a director of OfficeMax Incorporated. He has been one of our directors since 2002.

Mary S. Metz, Ph.D., served as President of S. H. Cowell Foundation, a California non-profit public benefit corporation, from 1999 to 2005. Dr. Metz is a director of PG&E Corporation, UnionBanCal Corporation and AT&T Corporation. Dr. Metz chairs the Governance and Nominating Committee and is a member of the Audit and Finance Committee. She has been one of our directors since 1991.

Anthony G. Wagner was Vice President of Kaiser Foundation Health Plan, Inc. from January 2005 until his retirement in January 2007. Mr. Wagner served as the Chief Executive Officer of Hospital Systems of the San Francisco Department of Public Health from 2001 to 2003. Mr. Wagner chairs the Compensation Committee and is a member of the Governance and Nominating Committee. He has been one of our directors since 1999.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW



Our fiscal 2008 financial results reflect the progress we have made on our initiatives to make Longs a stronger competitor and more profitable company. We successfully realigned and upgraded our store base, increased our self-distribution of front-end merchandise, built a strong foundation for the continued growth of our pharmacy benefit services segment, and made continued progress on our long-term strategic initiatives.



In February 2007, we announced a plan to dispose of 31 stores during fiscal 2008, including all of our 23 stores located in Washington, Oregon and Colorado and eight stores in California. Most of the stores were located in markets we entered in the 1980s and 1990s that remained underdeveloped. Sufficiently developing our presence in these markets would have required significant investment that we believed would be better directed toward markets that offer greater opportunities for more satisfactory returns. We therefore decided to close the stores and market the assets. As of the end of fiscal 2008, we have closed 30 of these stores. One California store previously included in this disposition plan will remain open. Twenty-four of the store locations have been sold or sub-leased and the remainder are being actively marketed. This realignment has allowed us to direct more attention to the growth of our retail drug store and pharmacy benefit services segments.



Our store opening activities resulted in a net addition of 24 stores within continuing operations. We opened 20 new stores, relocated three stores and closed nine stores. We also acquired seven retail pharmacies during the year, which increased our portfolio of smaller retail pharmacies, many of which are close to the point of care, such as hospitals, clinics and medical office buildings. We also acquired six stores in the Reno, Nevada area from Rite Aid Corporation, further increasing our presence in the Reno area. Our future growth plans incorporate a mix of smaller pharmacies as well as our traditionally larger full-service retail drug stores.



We remodeled 43 additional stores during fiscal 2008, achieving our goal of bringing our new, updated look to 50% of our full-service retail drug stores as of the end of fiscal 2008. We plan to remodel up to an additional 40 stores in fiscal 2009.



We completed construction of an 800,000 square foot distribution center in Patterson, California during the summer of fiscal 2007, which has enabled us to increase our self-distribution to 80% of our mainland front-end merchandise during fiscal 2008, up from 40% previously. We have already reduced our distribution costs as a percent of shipments and expect to make continued progress on efficiency and productivity.



We achieved continued growth at RxAmerica during fiscal 2008, both in our prescription drug plans for Medicare beneficiaries as well as our pharmacy benefit management business. Our prescription drug plans will serve an estimated 440,000 to 450,000 beneficiaries in the calendar 2008 plan year, up from enrollment last year of approximately 240,000. During fiscal 2008, RxAmerica acquired a registered insurance company, subsequently renamed Accendo Insurance Company, with licenses to operate as an insurance company in 46 states. This will allow us to continue to offer prescription drug plans for Medicare through Accendo after the expiration of our insurance waivers from the Centers for Medicare and Medicaid Services (“CMS”) on January 1, 2009. Pharmacy benefit management revenues also increased in fiscal 2008 due to growth in our existing client base and the addition of new clients. RxAmerica managed prescription drug plans covering 8.7 million lives as of the end of fiscal 2008, up from 7.3 million lives as of a year ago.

We have continued to work on the broad categories of strategic initiatives established more than five years ago to make Longs a stronger competitor and more profitable company: pharmacy profitability, front-end sales, supply chain, operational processes and pharmacy benefit services. The progress we have made on these initiatives to date has enabled us to improve our operating performance, develop the organizational competence for change and improvement, and build a foundation for more profitable growth.



We plan to make continued enhancements to our supply chain and distribution capabilities in an effort to improve our inventory management and in-stock position. During fiscal 2009, we plan to complete the installation of our system for store ordering, receiving and inventory management in our Hawaii stores, and to implement an integrated demand forecasting and replenishment system for front-end merchandise in our mainland stores. Our increased self-distribution of front-end merchandise gives us the opportunity to optimize our merchandise assortments, take further advantage of faster replenishment and increase our use of technology to improve our efficiency.



We also plan to make continued progress on improving our productivity through operational initiatives focused on performance measurements, standardized processes and technologies and growing our business to better leverage our costs. We plan to install a labor scheduling and forecasting system in all of our stores by the end of fiscal 2009. We are also streamlining our remodeling process in an effort to reduce disruption for our customers and store operations. We are also working to improve the profitability of our new stores at a faster rate.



We remain focused on our longer-term goal to reduce the gap between our operating margin and those of our largest competitors, and plan to continue our efforts to become a stronger competitor and more profitable company.

Fiscal 2008 versus Fiscal 2007



Total revenues increased 5.8% in fiscal 2008 over fiscal 2007. On a comparable 52-week basis (excluding the last week of fiscal 2008), total revenue increased 3.8% in fiscal 2008 over fiscal 2007.



Retail Drug Store Sales



Retail drug store sales were $4.9 billion, a 4.9% increase over fiscal 2007. On a comparable 52-week basis, total retail drug store sales increased 3.0% in fiscal 2008 over fiscal 2007. Same-store sales increased 0.9% on a comparable 52-week basis. Growth in the number of stores and higher mail order sales also contributed to total retail drug store sales growth.



Pharmacy sales increased 7.0% in fiscal 2008 over fiscal 2007, partially due to the impact of the 53 rd week in fiscal 2008, with same-store pharmacy sales increasing 1.8% on a comparable 52-week basis. The increase in same-store pharmacy sales was primarily due to continued increases in average retail prescription prices. Average prescription prices increased due to pharmaceutical cost inflation and the continued introduction and utilization of newer and more expensive drugs. The increase in average prescription prices was mitigated in part by the increased utilization of lower-priced, high-volume generic drugs. We estimate that generic utilization negatively impacted our same-store pharmacy sales by approximately 4.5 to 4.7 percentage points. We expect that average retail prices for prescription drugs will continue to rise due to pharmaceutical cost inflation and the continued introduction and utilization of newer and more expensive drugs. We expect that the utilization of generic drugs will continue to increase through the first half of fiscal 2009.



Prescription volumes were relatively flat in fiscal 2008 compared with fiscal 2007 due in part to a weaker cold and flu season. We expect that several favorable industry trends will positively impact our prescription volumes over the long term. These trends include an aging U.S. population consuming a greater number of prescription drugs, the growing use of prescription drugs as preventive therapy by healthcare providers and the introduction of new drugs. Factors that could offset these favorable trends include increasing competition, including the growth of mail order pharmacies, and rising prescription drug costs, which could cause consumers to reduce their purchases of prescription drugs or third-party health plans to reduce their coverage of prescription drug costs for their members.



Pharmacy sales were 51.4% of total drug store sales in fiscal 2008, compared to 50.4% in fiscal 2007. We expect pharmacy sales to continue to increase as a percentage of total drug store sales as pharmacy sales continue to increase faster than front-end sales.



Third-party health plans covered 95.0% of our pharmacy sales in fiscal 2008, compared to 94.4% in fiscal 2007. We expect third-party sales to remain over 90% of our total pharmacy sales for the foreseeable future due to significant consumer participation in managed care and other third-party plans, including Medicare prescription drug plans.



Front-end sales increased 2.8% in fiscal 2008 from fiscal 2007, partially due to the impact of the 53 rd week in fiscal 2008, with same-store front-end sales increasing 0.1% on a comparable 52-week basis. Our core categories of health, wellness, beauty and convenience continued to outperform our non-core categories as a result of our continuing merchandise strategy to improve our profitability by focusing on our core categories. More than 85% of our front-end sales were in our core categories during fiscal 2008.



Our front-end sales performance is affected by overall economic conditions, including growth and unemployment, especially in California, our primary market. We expect these factors to contribute to a difficult sales environment in the short term. Longer term, we expect our front-end sales to increase as a result of growth in the number of our stores and our continued efforts to expand and enhance our assortments of merchandise in our core categories.



Pharmacy Benefit Services Revenues



Pharmacy benefit services revenues were $379.8 million in fiscal 2008, an 18.5% increase over fiscal 2007. Pharmacy benefit management revenues increased $29.3 million, or 73.9%, while prescription drug plan revenues increased $30.1 million, or 10.7%. On a comparable 52-week basis, total pharmacy benefit services revenue increased 15.1% in fiscal 2008 over fiscal 2007.



RxAmerica’s Medicare prescription drug plan revenues increased $30.1 million, or 10.7% compared to fiscal 2007 due to an increase in the number of beneficiaries covered by our prescription drug plans. These plans will provide prescription drug benefits to an estimated 440,000 to 450,000 Medicare beneficiaries in all 50 states and the District of Columbia during the calendar 2008 plan year.



Revenues under the prescription drug plans include fixed monthly premiums paid by beneficiaries and by the federal Centers for Medicare & Medicaid Services (“CMS”), as well as a CMS risk share component. If the ultimate per member per month benefit costs of any Medicare Part D regional plan varies more than a certain amount (2.5 percentage points for the calendar 2006 and 2007 plan years and 5.0 percentage points for the calendar 2008 plan year) above or below the level estimated in the original bid submitted by the Company and approved by CMS, there is a risk share settlement with CMS subsequent to the end of the plan year. The risk share adjustment, if any, is recorded as an adjustment to premium revenues and accounts receivable or accounts payable.



Pharmacy benefit management revenues increased 73.9% to $68.9 million due to growth in our existing client base and the addition of new clients. The Medicare prescription drug benefit also contributed to the increase in our pharmacy benefit management revenues in fiscal 2008 over fiscal 2007, partially as a result of RxAmerica providing pharmacy benefit management services to Medicare Advantage prescription drug plans.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Retail Drug Store Sales

Retail drug store sales were $1.22 billion, a 2.9% increase over the first quarter of fiscal 2008, with same-store sales increasing 1.0%. Growth in the number of stores also contributed to total retail drug store sales growth.

Pharmacy sales increased 3.0% in the first quarter of fiscal 2009 over the first quarter of fiscal 2008, with same-store pharmacy sales increasing 0.5%. The increase in same-store pharmacy sales was primarily due to continued increases in average prescription prices, mitigated in part by the increased utilization of lower-priced generic drugs. We estimate that generic utilization negatively impacted our same-store pharmacy sales by approximately 4.9 to 5.1 percentage points in the first quarter of fiscal 2009 compared with 5.1 to 5.3 percentage points for the same period a year ago. We expect that generic utilization will continue to significantly impact our pharmacy sales through the second quarter of fiscal 2009, then have a reduced effect in the second half of the year as the rate of new generic introductions declines and we begin to cycle some of last year’s introductions. The switch of the allergy drug Zyrtec to over-the-counter status in March of this year and a mild conclusion to the cold and flu season also unfavorably impacted pharmacy same-store sales in the first quarter of fiscal 2009.

Front-end sales increased 2.8% in the first quarter of fiscal 2009 from the same quarter last year, with same-store front-end sales increasing 1.5%. The increase was primarily due to the performance of our core categories of health, wellness, beauty and convenience as a result of our ongoing merchandise strategy. These categories now represent over 90% of our front-end sales.

Our front-end sales performance is affected by overall economic conditions, including growth and unemployment, especially in California, our primary market. We expect these factors to contribute to a difficult sales environment in the short term. Longer term, we expect our front-end sales to increase as a result of growth in the number of our stores and our continued efforts to expand and enhance our assortments of merchandise in our core categories.

Pharmacy Benefit Services Revenues

Pharmacy benefit services revenues were $187.3 million in the first quarter of fiscal 2009, a 67.3% increase over the first quarter of fiscal 2008. Pharmacy benefit management revenues increased 30.9% to $20.2 million in the first quarter of fiscal 2009 due to growth in our existing client base and the addition of new clients. Prescription drug plan revenues increased 73.1% to $167.1 million in the first quarter of fiscal 2009 primarily due to growth in the number of Medicare beneficiaries served to 450,000 in this plan year, almost double the number served in the first quarter of fiscal 2008. Prescription drug plan revenues include fixed monthly premiums paid by beneficiaries and CMS, as well as a CMS risk share component. The fixed monthly premiums are recognized on a straight-line basis over the coverage period. The risk share component is variable, depending on drug costs, and can cause revenues to fluctuate from period to period.

Gross Profit

Retail Drug Stores

Retail drug store gross profit was 26.7% of retail drug store sales in the first quarter of fiscal 2009, compared with 25.6% in the first quarter of fiscal 2008. The increase was primarily due to increased utilization of generic drugs, which have higher gross profit margins than brand-name drugs, increased self-distribution of front-end merchandise and improved inventory management.

Our LIFO provision, which is included in the cost of retail drug store sales, was $3.5 million and $3.0 million in the first quarter of fiscal 2009 and fiscal 2008, respectively. The increase was primarily due to higher net inflation compared with last year, especially on front-end merchandise. The LIFO provision fluctuates with inflation rates, inventory levels and merchandise mix. We estimate LIFO costs for interim financial statements based on projected annual inflation rates, inventory levels and merchandise mix. We calculate actual LIFO costs during the fourth quarter of the fiscal year when we determine final inflation rates, inventory levels and merchandise mix.

Prescription Drug Plans (Pharmacy Benefit Services Segment)

Prescription drug plan benefit costs relate only to prescription drug plan revenues. Revenues generated from pharmacy benefit management services are reported net of reimbursements to participating pharmacies.

Prescription drug plan gross profit was 2.4% of prescription drug plan revenues in the first quarter of fiscal 2008, compared with 4.2% in the same period last year. The decrease was primarily due to more competitive bidding for the calendar 2008 plan year. We expect to serve approximately 450,000 Medicare beneficiaries during the 2008 plan year, which is almost double the number served last year, and we expect our revenues and operating income to increase from the additional business. However, due to margin compression associated with our bids to increase enrollment, we expect our gross profit and operating margins will be lower in fiscal 2009 than last year.

As a result of the Medicare Part D benefit design, the Company incurs a disproportionate amount of prescription drug plan benefit costs early in the contract year. For example, as of January 1, 2008, for most of its plans the Company is responsible for approximately 67% of a Medicare beneficiary’s drug costs up to $2,510, while the beneficiary is responsible for 100% of their drug costs from $2,510 up to $5,726. The Company is responsible for 15% of a beneficiary’s drug costs above $5,726. As a result of this program design, we expect prescription drug plan gross profit to be greater in the second half of our fiscal year as compared with the first half of the year.

Operating and Administrative Expenses

Operating and administrative expenses were $309.7 million, or 22.0% of revenues in the first quarter of fiscal 2009 compared with $286.3 million, or 22.1% of revenues in the first quarter of fiscal 2008. The decrease in the expense rate reflects increased leverage on higher revenues.

Provision for Store Closures and Asset Impairments

The provision for store closures and asset impairments of $0.2 million and $9.2 million in the first quarter of fiscal 2009 and 2008, respectively, primarily includes lease-related costs, net of estimated sublease income, related to the disposition of seven stores in California initiated in fiscal 2008. Five of the store locations have been sold or sub-leased and the remaining two are being actively marketed. Additional charges or gains related to this disposition of stores may be incurred as a result of changes to management’s current estimates and assumptions regarding the disposition of the remaining store locations. The timing of future charges and gains related to this disposition are subject to significant uncertainty including the variability in future vacancy periods and sublease income. Costs related to the disposition of 23 stores in Washington, Oregon and Colorado are included in discontinued operations. See “Discontinued Operations” below for further information.

Net Interest Expense

Net interest expense was $2.5 million in the first quarter of fiscal 2009 compared with $1.5 million in the comparable period last year due to higher average borrowings.

Income Taxes

Our effective income tax rate was 37.6% and 39.5% in first quarter of fiscal 2009 and 2008, respectively. We expect that our effective income tax rate for the full 2009 fiscal year will be approximately 38%.

Discontinued Operations

In fiscal 2008, we closed all of the 23 stores located in Washington, Oregon and Colorado pursuant to a plan approved by the Company’s board of directors. These stores are reported in discontinued operations in the Company’s statements of consolidated income in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets .

During the first quarter of fiscal 2009, we recorded after-tax income from discontinued operations of $0.5 million, compared with an after-tax loss from discontinued operations of $3.0 million for the first quarter of last year. Results from discontinued operations for the first quarter of fiscal 2009 primarily included adjustments to our reserve for closed stores as a result of changes to our estimates and assumptions regarding the disposition of closed store locations. During the first quarter of fiscal 2008, we incurred pre-tax costs of $6.3 million for lease-related costs net of estimated sublease rental income and $2.6 million for employee severance, offset by pre-tax gains of $7.8 million on the sale of store properties and related assets, related to the 23 stores located in Washington, Oregon and Colorado. Net operating losses related to these stores for the 13 weeks ended April 26, 2007, were $3.9 million pre-tax, for a total net loss from discontinued operations of $5.0 million pre-tax ($3.0 million after tax).

Twenty of the store locations reported in discontinued operations have been sold or sub-leased and the remainder are being actively marketed. Additional charges or gains related to this disposition of stores may be incurred as a result of sales of property or changes to management’s current estimates and assumptions regarding the disposition of the remaining store locations. The timing of future transactions and charges related to this disposition are subject to significant uncertainty including the variability in future vacancy periods, sublease income and the timing of property sales.

General

Our primary sources of liquidity are operating cash flows and availability on our line of credit. We use cash to provide working capital for our operations, finance capital expenditures and acquisitions, repay debt, repurchase shares of our common stock and pay dividends.

We have a secured $400 million revolving line of credit with a syndication of banks, which expires in January 2012 and accrues interest at LIBOR-based rates. Borrowings on this line of credit are secured by inventory, accounts receivable and certain intangible assets. As of May 1, 2008, borrowings of $184 million with a weighted average interest rate of 4.04% were outstanding on the secured line of credit. The secured revolving line of credit agreement contains customary restrictions but no financial covenants and no limitations on capital expenditures or share repurchases if availability of credit remains above a minimum level. Borrowings on the line of credit do not require repayment until the expiration date but may be prepaid without penalty. We pay a commitment fee of 0.25% per annum on the unused portion of the line of credit.

Additionally, as of May 1, 2008, we had $50.4 million in outstanding privately placed promissory notes. These notes, which mature at various dates through 2014, bear interest at fixed rates ranging from 6.19% to 6.71%, and are secured on the same basis as the secured revolving line of credit. The notes include penalties for repayment prior to their scheduled maturities. Current maturities of $36.7 million as of May 1, 2008 constitute regularly scheduled principal payments due in the next twelve months, the majority of which will be paid in the third quarter of fiscal 2009.

The privately placed promissory notes contain various customary financial covenants and restrictions. Failure to comply with these covenants and restrictions, or with the restrictions included in our secured revolving line of credit, could result in higher interest costs and potentially accelerated repayment requirements, and could affect our liquidity. As of May 1, 2008, we were in compliance with the restrictions and limitations included in these provisions.

We believe that cash on hand, together with cash provided by operating activities and financing capacity, will be sufficient to meet our working capital, capital expenditure and debt service requirements beyond the next 12 months.

Operating Cash Flows

Net cash used in operating activities was $4.2 million in the first quarter of fiscal 2009, compared with net cash provided by operating activities of $21.2 million in the same period in fiscal 2008. The decrease in our net operating cash flows in fiscal 2009 from fiscal 2008 was primarily due to the calendar shift in the timing of our fiscal quarter. The first quarter of fiscal 2009 ended on May 1 versus April 26 last year, causing certain calendar-based monthly payments to fall into our first quarter this year versus our second quarter last year.

Investing Cash Flows

Net cash used in investing activities was $30.9 million in the first quarter of fiscal 2009, compared with $33.2 million in the same period last year. We expect capital expenditures in fiscal 2009 to be between $150 million and $200 million, primarily for new store investments, remodels and improvements to existing stores, technology and supply chain improvements. During the first quarter of fiscal 2009 we opened or acquired seven new stores, including six small pharmacies and one full-service retail drug store, and closed one store. For the full fiscal year, we plan to open or relocate 20 to 30 stores and remodel up to 40 stores. In addition, in the ordinary course of business we may acquire additional stores, store-related assets including pharmacy prescription files, or other complementary businesses.

Financing Cash Flows

Net cash provided by financing activities was $46.0 million in the first quarter of fiscal 2009, compared with $9.1 million in the same period in fiscal 2008. Our financing activities primarily consist of long-term borrowings and repayments, repurchases of common stock, dividend payments, proceeds from the exercise of stock options, and Medicare Part D subsidy receipts and disbursements.

Financing cash flows include prescription drug plan disbursements covered by CMS, including reinsurance payments and low-income cost subsidies, net of amounts received from CMS for these payments. Differences between receipts and payments for these amounts depend on the timing and extent of the related claims from beneficiaries. In the first quarter of fiscal 2009, our reimbursements from CMS for these claims exceeded our disbursements by $74.5 million, compared with $14.7 million in the first quarter of fiscal 2008. The increase in CMS reimbursements was due to the growth in enrollment in our prescription drug plans, and the calendar shift in the timing of our fiscal quarter which resulted in four monthly payments received from CMS in the first quarter of fiscal 2009 versus three in the first quarter of fiscal 2008. Final settlement of the outstanding balance with CMS is made subsequent to the end of the plan year.

Our borrowing levels on our revolving line of credit fluctuate based largely on the levels of our cash flows from operations, capital expenditures, Medicare Part D subsidy receipts and disbursements, and stock repurchases. There were net borrowings of $17.0 million on our revolving line of credit during the first quarter of fiscal 2009, compared with net repayments of $3.0 million in the same period last year. We also made regularly scheduled principal payments of $2.7 million on our private placement notes in the first quarter of both fiscal 2009 and 2008. We are scheduled to make additional principal payments of $36.7 million on our private placement notes in the next twelve months, the majority of which will be paid in the third quarter of fiscal 2009.

We repurchased 1,000,000 shares of our outstanding common stock in the first quarter of fiscal 2009 at a total cost of $39.3 million. In the first quarter of fiscal 2008, we repurchased 56,000 shares at a total cost of $2.8 million. We repurchased these shares under various programs authorized by our board of directors, the most recent of which was authorized in November 2007. Under this program, we are authorized to repurchase additional shares of our outstanding common stock for a maximum additional expenditure of approximately $117.1 million through February 2011. Any future repurchase of our common stock will be made in open market transactions from time-to-time depending on market conditions and the availability of funds.

Our board of directors makes decisions about the declaration of quarterly dividends based on, among other things, our results of operations and financial position. We paid regular quarterly dividends totaling $5.1 million and $5.3 million in the first quarter of 2009 and 2008, respectively.

CONF CALL

Steven F. McCann

Thanks to all of you for joining us today to discuss our performance for the first quarter of fiscal 2009. In a moment Warren Bryant, our Chairman, President and Chief Executive Officer will discuss our operating performance and update you on our continued progress with our key initiatives. I will then come back to discuss our financial results for the quarter and outlook for the current fiscal year.

During the call today we will be making forward-looking statements within the meaning of the federal securities laws. Such statements relate to, among other things, our management outlook for fiscal 2009. We believe that our expectations are reasonable and are based on reasonable assumptions however, certain risks and uncertainties relating to future events could cause actual results to differ materially from our expectations. For discussions of these risks and uncertainties, please refer to our recent SEC filings and today’s new release. Longs’ assumes no obligation to update any forward-looking statements.

Now, let me introduce Warren Bryant.

Warren F. Bryant

Today we reported first quarter income from continuing operations of $23.1 million or $0.63 per diluted share. Income from continuing operations for the first quarter of last year was $16 million or $0.42 per diluted share including $0.14 of charges related to the disposition of stores. We’re pleased that we were able to increase our earnings and improve our retail operating margin in a difficult economic environment while we managed to increase growth both in our retail and pharmacy benefit services segments. This reflects the progress we are continuing to make on our strategic initiatives to make Longs a stronger and more profitable company.

During my comments today, I will review key components of our revenues, update you on the success of our initiatives to enhance the performance of both retail and pharmacy benefit services businesses and outline our perspectives on the current market environment. Before doing so however, I’d like to note that this month marks the 70th anniversary of the opening of our very first store in Oakland California by our founders Joe and Tom Long.

Over the past 70 years we’ve grown from that single store to become one of the most recognized retail drug store chains on the west coast and in Hawaii. While much has changed about our company, our industry and our communities during that time, one thing has remained constant and that’s our commitment to our customers, employees and shareholders and our mission to be the best drug store in town.

Now, on to our first quarter results; total revenues increased 8.5% in the first quarter. Retail sales increased 2.9% and pharmacy benefit service revenues increased 67.3%. Same store sales increased 1% during the first quarter compared with last year. Pharmacy same store sales increased .5% primarily due to higher average prescription prices. We estimate that generic utilization unfavorably impacted our pharmacy same store sales by approximately 490 to 510 basis points in the first quarter this year compared with 510 to 530 basis points for the same period a year ago. We expect that generic utilization will continue to significantly impact our pharmacy sales through our second fiscal quarter and then taper off in the second half of the year as the rate of new generic introductions declines and we begin to cycle some of last year’s launches.

As noted in both our March and April monthly sales releases, the switch of the allergy drug zyrtec to over-the-counter status in March of this year and a mild conclusion of cold and flu season also unfavorably impacted our pharmacy same store sales in the first quarter. However, our front end sales benefited from the change in zyrtec status. The 2007 and 2008 flu season had a slow start on the west coast, began to pick up a bit in February but ended with spring flu levels below the prior year. The full season finished below last year with the western region of the US below the national average. According to data published by the flu advisory network as well as FluSTAR. Medicaid and Medicare sales in the first quarter represented approximately 24% of our pharmacy sales and that’s consistent with last year.

As you are aware, a 10% cut in California Medicaid reimbursements is scheduled to take effect on July 1 and that’s subject to the outcome of pending lawsuits. Ultimately CMS also has to weigh in on the proposed cuts. Given the controversy surrounding this proposal, the exact nature and timing of the cuts are uncertain. The medical community including pharmacy has expressed its strong opposition to the proposed cuts which will reduce patient’s access to care. We also firmly believe that reducing patient prescription drug utilization may have adverse consequences for patient health which ultimately will increase healthcare costs. We’re engaged in the debate and we’re closely monitoring this issue.

Now, on to front end sales; front end same store sales increased 1.5% in the first quarter compared with the same period last year. Easter came very early this year. As expected, Easter sales were slightly lower year-over-year due to the compressed selling season. However, we prepared well for these adjustments in our seasonal buying plan and our merchandise sets and we experienced a very effective sell through on our Easter seasonal merchandise and we were pleased we were able to maintain sales in this tough environment. We continue to see good performance in our core categories of health, wellness, beauty and convenience. These categories now represent over 90% of our front end sales and continue to outperform our non-core categories. We remain confident in the ability of our merchandise strategy that focuses on these core categories to improve our profitability.

During the first quarter we opened or acquired seven new stores including six small pharmacies and one full service retail drug store. We also closed one store. We plan to open or relocate approximately 20 to 30 stores this fiscal year. Some of the new stores will be small pharmacy stores which, as a reminder, are stores with less than 4,000 selling square feet. As a result, we expect to grow our selling square footage by 1.5% to 2% this fiscal year. We also plan to remodel up to 40 stores during the year.

We continue to grow in Hawaii where we currently operate 38 stores up from 32 stores just over a year ago. Over the last year we opened two stores and acquired four small pharmacies. We have served the great customers of Hawaii for over 50 years and plan to continue increasing our presence in Hawaii by opening new stores this year including a much anticipated full size store in up country Maui. Opening new stores in Hawaii is not an overnight process. However, despite the relatively small number of available sites, we’ve had a great deal of success doing so through our long established relationships and our experience on the islands. We’re pleased with our market presence and we’re excited about our growth opportunities in Hawaii.

Now, let’s talk about the performance of our pharmacy benefit services segment. RxAmerica generated revenues of $187 million during the first quarter up 67.3% from the $112 million reported for the first quarter last year. Prescription drug plan revenues increased 73.1% and PBM revenues increased 30.9%. Our prescription drug plans generated revenues of $167 million during the first quarter compared with $97 million for the same period last year due to increased premium revenues on a higher number of enrollees. We estimate that our prescription drug plans will serve about 450,000 Medicare beneficiaries this plan year, almost double the number we served in the 2007 plan year.

In addition to our dual eligible members, we are serving about 65,000 standard members. We are managing this business carefully and its performance is on track with our expectations. We’re currently in the midst of the bid process for calendar 2009 plan year which Steve will tell you more about later.

RxAmerica is an important part of our company, it has significantly grown the PBM business while managing through rapid growth in the prescription drug plan business. Over the past couple of years we’ve increased management depth and experience, added a number of new and dedicated associates and invested in infrastructure and purchased an insurance company that will be used to operate the PDP business. We are now licensed for this business is all 50 states. I’m delighted with our progress and am optimistic about what we can accomplish in the future.

As those of you who have been following our progress know, we’ve made many changes in our company over the past five years in order to make us a stronger and better competitor and to improve operating results. These changes have been significant and have occurred in both the retail and the pharmacy benefit services segments of our business. They include revenue growth strategies and technological and operational process improvements in both segments. In the pharmacy benefits segments you have seen us grow from 4 million lives in our PBM to more than 8 million lives and today you have seen us become a prescription drug plan covering 450,000 lives. Our talent management team at RxAmerica has done a superior job building the team and infrastructure needed to achieve this remarkable growth story.

On the retail side, you’ve seen us transform from a completely decentralized autonomous store structure with inferior supply chain, merchandising procurement, distribution and pharmacy technology to a centralized company that has successfully installed and implemented all of these complex technologies over the past five years. At the same time we’ve implemented numerous store operating processes to improve the effectiveness and efficiency of our store operation.

Additionally, we have systematically and measurably improved our customer service performance in both customer contact and service recovery elements and we have done this in both the pharmacy and the front end. We’ve analyzed our merchandise offerings, focused on core categories, improved our private label offerings and presentation and we find out pricing and promotional competitiveness. There’s been more and you’ve seen the benefit of these initiatives in our improved operating margins.

More importantly, not all the benefits of these changes have been fully realized. They will continue to accrue to our company as we get better at using our new technologies, distribution centers and operational processes. We will also use them as platforms for future growth. There’s a lot more to do and we’re not done. Our key efforts this year include pursuing additional improvements to our pharmacy profitability through continued increases in generic utilization by our customers as well as increasing our utilization of central fill and other operational and technology enhancements. We will continue to make improvements to our supply chain, technology and operational processes.

During the first quarter we began the installation of an in store system for ordering, receiving and inventory management in Hawaii and plan to complete its roll out later this year. Also during this fiscal year we plan to implement an integrated demand forecasting and replenishment system for front end merchandise on the mainland and workflow systems for improved efficiencies and distribution and handling.

We’re installing a labor scheduling and forecasting system at all of our mainland stores by the end of the year. This will help us manage labor and we expect to see the primary benefits from this new system over the next few years. We remain focused on long term profitable front end sales growth through merchandising strategies focused on our core categories of health, wellness, beauty and convenience including additional emphasis on natural cosmetics and beauty products and a better selection of healthy food offerings, continued development of the quality and assortment of our private brand merchandise and increased self distribution. These efforts complement our ongoing store design and merchandise display enhancement programs. Additionally, we’ve increased the number of in store medical clinics and diagnostic labs to increase the value of our offering to consumers.

We’re also focused on building upon our high levels of customer service which we believe is an important differentiator. We continue to enhance our already strong customer service culture and have incorporated new training programs and customer service measurement tools to serve [inaudible]. We’re also streamlining our remodeling process that should cause less disruption for our customers as well as store operations. We also have several initiatives focused on improving the profitability of our new stores faster. These include changes to our grand opening process, new stores marketing programs and inventory and labor management. Given that we’ve only started to accelerate our store growth a couple of years ago we have the opportunity to improve our new store performance.

In summary, we’re encouraged by our financial results and remain focused on our goal to close the gap between our consolidated operating margin and those of our two largest peers. We plan to make continued progress on our strategic initiatives to improve the profitability of our retail drugstores by improving our efficiency and productivity while we pursue our goal to grow our number of stores at a compound annual growth rate of 7% over the next five years. We plan to make continued progress at RxAmerica by growing both the PBM and prescription drug plans. Our goal is to grow our consolidated income from continuing operations at a compound annual growth rate of 10% to 15% over the next three years.

For our outlook for the rest of the year, the economy remains uncertain and we continue to anticipate a difficult sales environment. In California unemployment is rising, our customers have become more focused on value and we expect this trend to continue throughout the year. We are a strong competitor and believe we are well positioned to address the changing need to our customers as a result of the improvements we’ve made to our business over the last several years. We will continue to focus on our core categories and expect the strategies I have outlined today and our store expansion plans to generate long term profitable sales growth.

Before I turn the cal over to Steve, I’d like to briefly comment on some recent changes in our executive management team. As we announced shortly after our last conference call Todd Vasos was named our Executive Vice President and Chief Operating Officer in early March. Todd succeeds Karen Stout who has left the company. Todd joined Longs in 2001 and prior to this promotion was serving as chief merchandising officer. Todd brings with him more than 25 years of retail experience and we are delighted he’s taken on this roll. Larry Gatta was promoted to Senior Vice President and Chief Merchandising Officer. Larry joined Longs in 2002 and most recently was serving as group vice president of marketing. Larry also has over 25 years of retail experience. We congratulate both Todd and Larry on their promotions and we look forward to their continued contribution and success with Longs.

Now, let me turn the call over to Steve for an analysis of our first quarter financial results as well as our business outlook for the rest of this fiscal year.

Steven F. McCann

Income from continuing operations for the first quarter ended May 1, 2008 was $23.1 million or $0.63 per diluted share. Income from continuing operations for the first quarter ended last year was $16 million or $0.42 per diluted share including $0.14 of charges related to the disposition of stores. Total revenues of $1.4 billion for the 13 weeks ended May 1, 2008 were 8.5% higher than the $1.3 billion for the comparable period last year. Total retail drugstore sales increased 2.9% and pharmacy benefit services revenue increased 67.3%. Our retail drug store gross profit margin increased to 26.7% for the first quarter compared with 25.6% last year primarily to higher generic utilization, increased self distribution of front end merchandise and improved inventory management.

The LIFO charge was $3.5 million for the first quarter compared with $ million for last year. There are continued indications of upward pressure on inflation especially on front end merchandise and we expect that trend to continue. We believe with merchandising in store systems we’ve installed over the past five years position us well to adapt and compete in this environment.

Our prescription drug plan gross profit margin in the first quarter was 2.4% of revenues compared with 4.2% in the first quarter last year. We anticipated a lower margin due to more competitive bidding for the calendar 2008 plan year for our PDP. As noted on our last call for the current 2008 plan year RxAmerica was successfully below the benchmark in 48 of the 50 states. We are serving about 450,000 Medicare beneficiaries this 2008 plan year almost double the number we served last year and we expect our revenues and operating income to increase from the additional business. However due to the margin compression associated with our bids to increase our enrollment our operating margin for the PDP business in the 2008 plan year will be lower than last year.

Further as a result of the Medicare Part D benefit design we incur a disproportionate amount of the prescription drug plan benefit cost earlier in the contract year when we’re responsible for more of the beneficiary drug cost. For the 2008 plan year we are responsible for approximately 67% of a Medicare beneficiary’s drug cost up to $2,510 while the beneficiary is responsible for 100% of their drug cost from $2,510 up to $5,726. We are responsible for 15% of the beneficiary’s drug cost above $5,726. As a result of this program design and the accounting treatment for the business year-over-year gross profit and operating income growth for the PDP is expected to be greater in the second half of our fiscal year as compared with the first half of the year as we previously mentioned.

That seasonality will be magnified this year due to the significant growth in the number of our plan participants. In fact due to the seasonality our prescription drug plan business actually had a negative impact on our first quarter earnings. As expected our loss on an operating income basis was double that of a year ago. We’re now four months into the plan year and our PDP results are in line with our expectations. RxAmerica has a history of successfully managing drug costs in their PBM business and they continue to demonstrate their ability to control costs for the prescription drug plans as well.

The bid process for the calendar 2009 plan year is underway and we will submit our bid in early June. As you are aware this is an annual bid process which by its very nature contains risk. However we hope to successfully a large portion of our dual eligible beneficiaries. There are new waiting factors in the bid process that are designed to help more of these participants to remain in their existing plans. The final participant allocation will come from CMS before the end of the calendar year.

Now, on to our consolidated operating and administrative expenses. O&A as a percent of revenues was 22% for the first quarter compared to 22.1% a year ago. The decrease in the expense rate reflects increased leverage on higher revenues. Consolidated operating income for the first quarter was $39.5 million or 2.8% of revenues compared with $28 million or 2.2% last year. The first quarter last year included a $9.2 million pre-tax net charge related to our disposition of California stores.

Our retail operating margin was 2.9% of sales compared with 2% last year. We were able to increase our retail operating margins over the prior year despite a soft economy. Even after adding back the impact of last year’s charge related to store dispositions, the progress we are continuing to make on our strategic initiatives enabled us to improve retail operating margin in a difficult economy while managing increased growth.

As we have previously discussed, several years ago we slowed our store growth to focus on our core operations and began to resume significant expansion activities only in the last two years. Our newer stores put pressure on our operating margins because they’re fixed operating expenses are leveraged against lower sales during the first few years of operations. We estimate that the new stores will adversely affect our retail operating margins by approximately 50 basis points throughout fiscal 2009 which is comparable to last year. Our pharmacy benefit services operating margins is 2.4% of revenues for the first quarter compared with 4.1% a year ago. As previously discussed we expect to see this decrease as a result of the bids we submitted for the 2008 plan year especially in the first half of the fiscal year due to the seasonal nature of the Medicare Part D benefit program design.

We expect a continued year-over-year decrease in RxAmerica’s operating margin rate as a percent of revenues with higher annual operating income. We would expect RxAmerica’s operating income to be much more significant in the second half of the fiscal year than the first half of the fiscal year. Our goal is to continue to increase RxAmerica’s annual operating income by continuing to grow our prescription drug plans and the PDM business.

The 37.6% tax rate for the quarter compared with a 39.5% tax rate for the first quarter a year ago, we are estimating an effective tax rate for the full year of approximately 38%. Now, let’s move on to the balance sheet. Accounts receivable increased $31 million over last year primarily due to the growth of RxAmerica, especially in the prescription drug plan business. This growth also accounts for the $38 million increase in pharmacy benefits payable.

Merchandise inventories decreased $26 million primarily due to planned reductions of inventories in our distribution centers. We’ve continued to improve supply chain efficiencies since we opened our Patterson distribution center in the summer of 2006. The $36 million decrease in trade accounts payable reflects this reduction in inventory levels. Our net debt which is short and long term borrowings less cash on hand at the end of the first quarter was approximately $196 million compared to $94 million last year. The increase was primarily due to the growth of our businesses and the continued investments in our share repurchase program.

During the first quarter we repurchased one million shares for a total investment of $39.3 million. In the last four quarters we have repurchased over $156 million of our outstanding common stock and we’ve approximately $117 million remaining under the current board authorization for additional share repurchases. Over the same period our net capital expenditures were $163 million.

On our cash flow statement operating cash flows were -$4 million compared with a positive $21 million last year due to the calendar shift and the timing of our fiscal quarter. This year’s first quarter ended May 1 versus April 26 last year causing certain calendar based monthly payments to full under our first quarter this year versus or second quarter last year. This is a timing matter and we expect it to reverse itself later this year.

Total depreciation and amortization expenses were $26.3 million for the first quarter compared with $22.6 million in the same period a year ago. As we shared with you on our last call, we estimate the depreciation and amortization expenses for fiscal 2009 will be in the range of $100 to $105 million. CapEx and acquisitions for the first quarter totaled $31.4 million and our outlook for the year remains unchanged at $150 to $200 million. We plan to open or relocate 20 to 30 stores this year and we plan to remodel up to 40 stores.

Here’s some of the assumptions we’ve incorporated in to our outlook for the fiscal year ending January 29, 2009. We will return to a 52 week fiscal year so we will lose that additional week in the fiscal month of January and the fourth quarter. We plan to make continued progress in our initiatives.

RxAmerica will continue to grow and we expect its operating income to increase for the full year with the growth over the prior year occurring in the third and fourth quarters. The impact of increases in generic utilization will continue at roughly the level of the first quarter until about midyear and then begin to decline somewhat until we anniversary some of last year’s generic launches. We’ve incorporated our estimate of the potential impact of lower Medicaid reimbursements in to our outlook for the year.

We plan to manage O&A expenses as a percent of revenues on a consolidated basis with leverage on higher revenues at RxAmerica offsetting continued pressure on our O&A rate from new store openings as we cycle through the increased expansion activities that we began a couple of years ago.

We expect our new store openings to negatively impact our retail operating margins by about 50 basis points in fiscal 2009 which is comparable to last year. We are reiterating our outlook for the 52 weeks ending January 29, 2009. We estimate the total revenues will increase 5% to 7% and total retail drug store sales will increase 1% to 3% compared with the 53 weeks ended January 31, 2008. We estimate that same stores sales on a comparable 52 week basis will increase 1% to 3% compared with last year.

Given these revenue assumptions and our continued progress on previously stated initiatives our goal is to achieve income from continuing operations of $3.02 to $3.13 per diluted share in fiscal 2009. Income from continuing operations for the 53 weeks ended January 31, 2008 was $2.59 per diluted share including a net charge of $0.13 per diluted share related to the disposition of stores. As a reminder, we estimated that the 53rd week add approximately $0.05 per diluted share to our income from continuing operations last year.

Since this is the first year that we are not providing a quarterly outlook and in light of the significant growth in our PDP I thought it would be helpful to provide some additional detail around the seasonality of our earnings over the course of the year. Because of the planned design and the accounting treatment of the Medicare Part D benefit, our year-over-year earnings growth in this segment will be higher in the second half of the fiscal year. We expect year-over-year earnings growth in the second quarter to be roughly comparable to the first quarter after adjusting for the $0.14 charge in last year’s first quarter earnings. We expect the PDP to generate its largest operating income on a quarterly basis in the third quarter.

I want to again point out a holiday shift that could impact our retail drug store sales in the second quarter. Memorial Day will fall in to our fiscal month of May this year. Last year, Memorial Day fell in our fiscal June. As a reminder our 4/5/4 calendar is presented on our IR website for your reference as well. As Warren indicated in his remarks, we are very mindful of the economic conditions in our markets. We will continue to monitor the business climate carefully and adapt as needed. We’re in a strong position and have a solid balance sheet with a modest level of debt for a company of our size. We will make adjustments as circumstances warrant to our investment spending or to take advantage of opportunities if they arise. We remain confident about our outlook for this fiscal year while remaining focused on our long term goals.

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