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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended April 29, 2004

For the transition period from              to             

Commission file number 1-8978

LONGS DRUG STORES CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (925) 937-1170

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

There were 37,310,044 shares of common stock outstanding as of May 27, 2004.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains certain 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, pharmacy and front-end sales and gross profits, cost reductions, changes in supply chain practices, workers’ compensation costs, income tax rates, liquidity and cash requirements, working capital reductions, the number of store openings, closures and remodels, the level of capital expenditures, contractual commitments, third-party sales as a percentage of total pharmacy sales, and our effective tax rate and are indicated by words or phrases such as “continuing,” “expects,” “estimates,” “believes,” “plans,” “anticipates,” “will” and other similar words or phrases.

These forward-looking statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual events and results to vary materially from those included in or contemplated by forward-looking statements we make. These risks and uncertainties include, but are not limited to, those set forth below:

In addition, because we lack a perpetual inventory system, our ability to accurately forecast and track our gross profits and inventory levels during periods between our quarterly physical inventories is limited. Therefore, our actual gross profits and inventory levels may vary materially from the gross profits and inventory levels included in or contemplated by forward-looking statements we make.

We assume no obligation to update our forward-looking statements to reflect subsequent events or circumstances.

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PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

LONGS DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED INCOME (unaudited)

See notes to condensed consolidated financial statements.

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LONGS DRUG STORES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

See notes to condensed consolidated financial statements.

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LONGS DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)

See notes to condensed consolidated financial statements.

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LONGS DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY (unaudited)

For the 52 weeks ended January 29, 2004 and the 13 weeks ended April 29, 2004

See notes to condensed consolidated financial statements.

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LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying interim condensed consolidated financial statements include the financial statements of Longs Drug Stores Corporation (“Longs” or the “Company”) and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. The interim condensed consolidated financial statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in the Annual Report of the Company on Form 10-K for the fiscal year ended January 29, 2004, and reflect all adjustments which are, in management’s opinion, necessary for a fair presentation of the results for the periods presented. The condensed consolidated financial statements as of and for the periods ended April 29, 2004 and May 1, 2003 are unaudited. The condensed consolidated balance sheet as of January 29, 2004, and condensed consolidated statement of stockholders’ equity for the year then ended, presented herein, have been derived from the audited consolidated financial statements of the Company included in the Form 10-K for the fiscal year ended January 29, 2004. The interim condensed consolidated financial statements should be read in connection with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2004.

2. Stock-Based Compensation

The Company accounts for stock-based employee compensation using the intrinsic value method in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, as allowed by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Stock awards are valued at fair market value at the date of grant, and are recorded as compensation expense over the vesting period. No compensation expense is recognized for employee stock options, because it is the Company’s practice to grant stock options with an exercise price equal to the market price of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to all stock-based employee compensation, including stock options:

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LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares and dilutive common equivalent shares (restricted stock awards and stock options) outstanding during the period. The following is a reconciliation of the number of shares used in the Company’s basic and diluted earnings per share computations:

The computations of diluted earnings per share in the quarters ended April 29, 2004 and May 1, 2003 excluded 3,111,625 and 3,544,550 stock options, respectively, because the exercise prices of the stock options were greater than or equal to the average share price for the respective quarters, and therefore their inclusion would have been anti-dilutive.

4. Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market value. Cost is determined using the last-in, first-out (LIFO) method. The excess of specific cost over LIFO values was $174.8 million as of April 29, 2004, $173.4 million as of May 1, 2003 and $172.8 million as of January 29, 2004. LIFO costs for interim financial statements are estimated based on projected annual inflation rates, inventory levels, and merchandise mix. Actual LIFO costs are calculated during the fourth quarter of the fiscal year when final inflation rates, inventory levels and merchandise mix are determined.

5. Goodwill and Intangible Assets

All of the Company’s goodwill and other intangible assets are included in the retail drug store segment. Goodwill and other intangible assets with indefinite useful lives are not amortized, but are subject to annual impairment testing. The Company’s intangible assets other than goodwill include the following:

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LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Amortization expense for intangible assets with finite useful lives was $223 thousand and $75 thousand for the 13-week periods ended April 29, 2004 and May 1, 2003. Estimated annual amortization expense on these intangibles for fiscal 2005 and each of the succeeding five fiscal years is as follows (in thousands):

6. Debt

Debt at April 29, 2004 and January 29, 2004 consisted of the following:

The unsecured revolving line of credit has a total capacity (borrowings and letters of credit) of $195 million. The Company intends to renew or replace the line of credit prior to expiration; nevertheless all amounts are classified as current liabilities because of the October 2004 expiration date.

The Company’s debt agreements contain limits on borrowings and repurchases of the Company’s stock, and various quarterly financial covenants that set maximum leverage ratios and minimum fixed charge and asset coverage ratios. The unsecured private placement notes may be redeemed prior to their scheduled maturity, subject to an early payment premium, and require securitization on the same basis as any secured borrowings the Company may enter into in the future. As of April 29, 2004, the Company was in compliance with the restrictions and limitations included in these provisions.

7. Store Closure Reserves

The Company periodically reviews store operating results and projections and makes decisions to close stores in the normal course of business. The Company recognizes costs associated with store closures when the related liabilities are incurred. Such costs are included in the provision for store closures and asset impairment, a component of operating income.

The following is a summary of the Company’s store closure reserves, which are included in long-term liabilities:

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LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Commitments and Contingencies

On February 17, 2004 and March 23, 2004, two purported class action lawsuits entitled Darien Goddard, et al v. Longs Drug Stores Corporation, et al and David Robotnick v. Longs Drug Stores California, Inc. were filed in the Superior Court of California, Alameda County and the Superior Court of California, Los Angeles County, respectively. The lawsuits were filed by plaintiffs who are current or former store managers or assistant managers on behalf of themselves and other similarly situated California store managers and assistant store managers. The lawsuits allege that the Company improperly classified such employees as exempt under California’s wage and hour and unfair business practice laws and seek damages, penalties under California’s wage and hour laws, restitution, reclassification and attorneys’ fees and costs. The Company is vigorously investigating and defending this litigation while pursuing alternative dispute resolution possibilities with the plaintiffs. The parties are scheduled to begin a mediation process during the second quarter of fiscal 2005. The outcome of such mediation and the financial impact of settlement or continued litigation of the case to the Company, if any, cannot be predicted.

In addition to the lawsuits described above, the Company is subject to various lawsuits and claims arising in the normal course of its businesses. In the opinion of management, after consultation with counsel, the disposition of these matters arising in the normal course of business is not likely to have a material adverse effect, individually or in the aggregate, on the Company’s consolidated financial statements taken as a whole.

9. Stockholders’ Equity

In the first quarter of fiscal 2005, the Company repurchased 382,600 shares of its common stock at a total cost of $7.2 million under a share repurchase program authorized by the Board of Directors in March 2003. In the first quarter of fiscal 2004, the Company repurchased 509,100 shares at a total cost of $8.0 million under this authorization, in addition to 853,100 shares at a total cost of $12.0 million to complete a previously authorized share repurchase program. Under the March 2003 program, the Company is authorized to repurchase up to 1,108,200 additional shares of its common stock through January 2008, for a maximum additional expenditure of $34.8 million.

10. Segment Information

The Company operates in two business segments, retail drug stores and pharmacy benefit management (“PBM”). These segments were identified based on their separate and distinct products and services, technology, marketing strategies and management reporting. Management evaluates the segments’ operating performance separately and allocates resources based on their respective financial condition, results of operations and cash flows. Inter-segment transactions and balances are eliminated in consolidation.

Pharmacy is the cornerstone of the retail drug store segment, complemented by such core front-end categories as cosmetics, over-the-counter medications, photo and photo processing, food and beverage items and health and beauty products. As of April 29, 2004, the retail drug store segment operated 471 retail stores in six western states under the names Longs, Longs Drugs, Longs Drug Stores and Longs Pharmacy; and one mail order pharmacy, acquired in April 2003, under the name American Diversified Pharmacies.

The PBM segment, operated through the Company’s RxAmerica subsidiary, contracts with drug manufacturers, third-party health plans and retail pharmacies to provide a range of services to third-party health plan members, including pharmacy benefit plan design and implementation, formulary management and claims administration.

The following table summarizes significant financial information by segment:

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LONGS DRUG STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Consolidated total sales include the following product and service types:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and the related notes. This discussion contains forward-looking statements based upon our current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions, as set forth under “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth in the following discussion and under “Risk Factors” and elsewhere in this Form 10-Q.

RESULTS OF OPERATIONS

Sales

Sales increased 5.1% in the first quarter of fiscal 2005 over the same quarter of fiscal 2004. Growth in the number of stores accounted for a 2.3% increase in total sales, and same-store sales increased 2.7%. Growth in revenues at RxAmerica, our pharmacy benefit management (PBM) subsidiary, contributed the remaining 0.1% of total sales growth.

Pharmacy sales increased 7.0% in the first quarter of fiscal 2005 over the same quarter last year, with same-store pharmacy sales increasing 3.7%. Pharmacy sales were 47.8% of total drug store sales in the first quarter of fiscal 2005, compared to 46.9% in the first quarter of fiscal 2004. 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. We expect our pharmacy sales to continue to increase as a result of continuing pharmaceutical inflation and favorable industry trends, such as an aging U.S. population consuming a greater number of prescription drugs, the increased usage of newer and more expensive drugs and increasing consumer awareness of the introduction of new drugs due to pharmaceutical manufacturers’ direct-to-consumer marketing efforts.

The increase in same-store pharmacy sales was primarily driven by a 5.0% increase in the average retail price per prescription over the same quarter last year, partially offset by a decline in same-store prescription volume. We expect that average retail prices for prescription drugs will continue to rise due to pharmaceutical cost inflation and the continued introduction and usage of newer and more expensive drugs. This has been offset in part by the increased utilization of low-priced, high-volume generic drugs.

Third-party health plans covered 91.7% of our pharmacy sales in the first quarter of fiscal 2005, compared to 91.0% in the same quarter last year. 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. The scheduled addition of a prescription drug benefit to Medicare in 2006 could further increase third-party sales as a percentage of total pharmacy sales.

Front-end sales increased 3.3% in the first quarter of fiscal 2005 from the same quarter last year, with same-store front-end sales increasing 1.9%. Our front-end sales benefited in part from an improving economy. Over the past year, U.S. economic growth has improved and unemployment has declined. While it appears that the nationwide economy is continuing to improve, the recovery in California, our primary market, has been slower, and the state’s unemployment rate remains above the national average. Further, a significant state budget deficit has helped create an environment of economic uncertainty in California.

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Promotional activities continue to be a significant driver of our front-end sales, as the markets in which we operate remain highly competitive. Promotional sales were a significant percentage of our total front-end sales, and we increased our advertising spending in the first quarter of fiscal 2005 over the same quarter last year. In addition, during the second half of fiscal 2004, we reduced prices on over 2,000 high-volume items in core categories such as over-the-counter medications, health and beauty care and convenience grocery items in order to better align our pricing and improve our competitive position. These reductions improved our sales in the first quarter of fiscal 2005 over the same quarter last year. We will continue to make decisions about promotional efforts, advertising spending and price changes based on competitive and economic conditions, but we expect that our promotional activities will continue to be a driver of our total front-end sales in an intensely competitive market.

In addition, the war in Iraq adversely affected consumer spending in the first quarter of fiscal 2004, resulting in a negative impact on our front-end sales last year and a more favorable comparison in the first quarter of fiscal 2005.

Sales in some of our Southern California stores also benefited from the strike against three major grocery chains in that region that began in October 2003 and ended in February 2004. We estimate that the strike increased our same-store sales by 0.60 to 0.70 percentage points in the first quarter of fiscal 2005.

Gross Profit

Gross profit was 25.3% of sales in the first quarter of fiscal 2005, compared to 25.8% in the first quarter of fiscal 2004. Several factors contributed to the decline in our gross profit percentage: