Walgreen (WAG) is Making a Slow Comeback
Shares of Walgreen (WAG), the largest drugstore chain in America, slid last week after the company reported weaker-than-expected third quarter earnings and revenue. The company earned $0.65 per share, or $624 million, a 16% increase from the prior year quarter. Revenue rose 3% to $18.31 million. However, analysts had expected the company to earn $0.91 per share on revenue of $18.4 million. Despite this recent setback, shares of Walgreen are still up nearly 50% over the past twelve months.
Investors probably remember Walgreen's epic battle with its long-time pharmacy-benefits manager, Express Scripts (ESRX), last year. Express Scripts is the middleman which pays drugstore chains Walgreen, CVS Caremark and Rite Aid to fill prescriptions. In 2011, Express Scripts asked Walgreen to lower these required payments, which resulted in Walgreen terminating its partnership at the beginning of 2012. This was a costly move, since prescriptions filled by Express Scripts had accounted for 7% of Walgreen's 2011 top line. Eventually, Walgreen resumed its partnership with Express Scripts by September 2012, but by then many customers had turned to CVS and Rite Aid to fill their prescriptions.
Although Walgreen is still clawing back from that grievous error, the company's gross margin expanded from 28.2% to 28.5% on higher sales of generic drugs. Generic drugs are bought and sold at a lower cost, which boosts the company's bottom line in exchange for lower revenue per sale. The increased sales of generic drugs was caused by the expiration of Big Pharma's patent exclusivity over many major medications over the past two years. Walgreen's total prescription sales, which comprised 63% of its quarterly revenue, rose 3.4% from the prior year quarter. Total prescriptions filled rose 8.7% (7.1% on a same-store basis), while same-store prescription sales rose 2%. To top of all those positive figures, Walgreen grew its U.S. retail pharmacy market share slightly from 18.4% to 19.2%, indicating that some customers that it had lost to its rivals were slowly returning.
Last but not least, Walgreen's 45% stake in Switzerland-based Alliance Boots, which it acquired for $6.7 billion last year, has proven profitable, contributing $0.10 to the company's adjusted bottom line. Alliance Boots owns 3,300 health and beauty stores across 11 countries, and delivers over 4.5 billion units of prescription drugs to health centers, pharmacies and hospitals on a yearly basis. Walgreen expects the joint venture to generate $125 million to $150 million in cost-saving synergies this year, up from its prior forecast of $100 million to $150 million.
Although Walgreen's front-end (non-pharmacy) same-store sales only grew by 0.4%, the company has been adding clinics to many of its locations in an effort to boost non-pharmacy sales as patients wait. Sales volumes for generic drugs should also continue to rise in 2013 and 2014, as the federal government expands healthcare coverage to 30 million more Americans. If the economic turmoil in Europe subsides, then its investment in Alliance Boots could also pay off handsomely. Therefore, I believe that Walgreen is a fairly solid investment in the mid $40s.
Other News About WAG
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