Stock of the Day
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Walgreens (WAG)
Can Walgreens Find a Prescription for its Falling Profit?
Walgreens' investors must be struggling to deal with mixed emotions. On the one hand, the company's profit slipped 8.7% this past quarter, and has many issues to tackle in this economy. On the other hand, the company is still profitable, something which many other companies have not been able to claim recently. The company's stock has fallen in early morning trading, and yet there is reason to believe that things will eventually turn around and propel the stock upwards. What is contributing to this combination of positives and negatives, and how can we expect to see this play out in the future?
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| Daily Chart |
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| Stock Analysis |
First, a look at the numbers. Walgreens released its third quarter earnings report this morning, and as mentioned, results were mixed. The company reported a profit of $522 million, the equivalent of 53 cents per share. A year ago, the company earned a profit of $572 million, or 58 cents per share. Analysts had been expecting a decline to 56 cents per share, so the company fell short. The company did report a record profit of $16.21 billion, but also reported significant costs, money which is being spent in an effort to help make the company more efficient by 2011; the company hopes to be in a position to save $1 billion each year starting in 2011.
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Looking a little more closely, Walgreens announced the same store sales for non-pharmacy items rose only 0.9%. Prescriptions, however, accounted for 66% of the company's total sales, and same store sales rose 3.8%. The strong performance of prescriptions is likely due to successful marketing of its Prescription Savings Club. Additionally, the company noticed a significant increase in sales of its store-brand items, which customers are likely purchasing as alternatives to more expensive, name-brand items.
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Walgreens does, however, have a plan set in motion in order to reach their goal of saving $1 billion per year. The company is eliminating approximately 1,000 jobs, limiting the number of new stores that they are opening, and being more selective about the items they are selling in stores. Since non-pharmacy sales have risen slowly, this is a good area to focus on, and the company is trying to push the purchase of consumer staples, as well as continuing to promote their store brand products. Furthermore, Walgreens is also testing a new store layout, calling the program Customer Centric Retailing. This layout is currently being testing in a 35 stores, and results are promising; if all goes well, it will be implemented in hundreds of stores by the end of 2010.
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Walgreens is showing that they are really paying attention to their customers. They have noticed that consumers have changed their spending habits, not only through using less credit and more cash, but also by searching for bargains and sales. By pushing their store-brand products, Walgreens is giving the customer something they want, in a way that should profit the company as well. Their new store layout is another thing that is focused on the consumer, but if designed properly, may also lead to stronger sales and/or a more loyal consumer base. So although investors may be a little disappointed right now, the number of changes that the company has planned between now and 2011 could be the prescription that the company needs to keep the company in good health, and the investors in good spirits.
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Profile |
Click here to view a detailed profile of Walgreens.
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