) reported adjusted net earnings of 91 cents per share in the
second quarter of fiscal 2014, down 5.2% from the year-ago
adjusted net earnings. The adjusted earnings also remained below
the Zacks Consensus Estimate of 93 cents. On a reported basis,
earnings came in at $754 million or 78 cents per share, down 0.2%
or down 1.2% year over year, respectively.
Walgreens' sales came in at $19,605 million in the quarter, up
5.1% year over year and marginally ahead of the Zacks Consensus
Estimate of $19,547 million.
Quarter in Detail
Front-end comparable store (those open for at least a year)
sales and basket size grew 2.0% and 3.4%, respectively, in the
quarter. On the other hand, customer traffic in comparable stores
was down 1.4%. Overall, comparable store sales improved 4.3%.
Prescription sales (accounting for 62.2% of total sales in the
quarter) climbed 7.0% over the prior-year quarter, while
prescription sales in comparable stores increased 5.8%. Moreover,
Walgreens filled 214 million prescriptions (up 2.8% year over
year) during the reported quarter.
Prescriptions filled at comparable stores rose 2.2%. As
reported by IMS Health, Walgreens' market share in retail
pharmacy improved 20 basis points (bps) to 19.0% at the end of
The company's Balance Rewards loyalty program reached a
milestone with approximately 100 million enrollees and 80 million
active members at the end of the second quarter.
Gross profit increased a mere 0.8% year over year to $5.65
billion. However, gross margin contracted 125 bps to 28.8% due to
fewer new generic drugs introduction, a less severe flu season
and soft margin in front-end sales as the company made meaningful
promotional investments to drive store traffic. The LIFO
provision was $51 million in this year's second quarter versus
$72 million last year.
Selling, general and administrative (SG&A) expenses scaled
up 1.6% to $4.6 billion. Operating margin contracted 44 bps to
The company opened/acquired 28 stores in the reported quarter
compared with 29 in the year-ago quarter. As of Feb 28, 2014, the
company operated in 8,681 locations in 50 states, the District of
Columbia, Puerto Rico and Guam and the U.S. Virgin Islands,
including 8,210 drugstores (138 more compared with the year-ago
period). The company also operates worksite health and wellness
centers, infusion and respiratory service facilities, specialty
pharmacies, mail service facilities, e-commerce business and Take
Care Health Systems.
Walgreens exited the second quarter with cash and cash
equivalents of $1.77 billion, significantly lower than $2.4
billion as of Feb 28, 2013. Long-term debt was higher at $4.49
billion in the reported quarter, compared with $5.1 billion as of
Feb 28, 2013.
Moreover, the company has generated year-to-date operating
cash flow of $1.47 billion in the quarter compared with $1.17
billion in the same period last year.
Striding Ahead on Synergy Track
Walgreens' partnership with Alliance Boots is yielding
positive results, with combined first half of fiscal 2014
synergies of $236 million. In the second quarter, the Alliance
Boots deal was accretive to adjusted earnings by 8 cents. The
company estimates that accretion from Alliance Boots in the third
quarter will be an adjusted 13 to 14 cents per share. Moreover,
the company expects second-year combined synergy programin the
range of$375-$425 million, an increase from the previous
second-year estimate of $350-$400 million.
Walgreens reported a mixed fiscal second quarter with a bottom
line miss and a marginal beat on the top-line front.The generic
wave in the pharmaceutical industry is still a threat to
revenues. This is also reflected in the company's quarterly sales
Nonetheless, Walgreens is poised to generate higher profits
from escalating sales of higher-margin generic drugs. The company
is also positioned on a healthy dividend growth track. Further,
the customer loyalty program is gaining traction as reflected in
increasing registrations. This should improve customer traffic
for Walgreens going forward. Moving on, the deal with
Amerisource Bergen Corp.
) - likely to create a leader in the generic and branded drug
purchasing space- is another major upside.
Walgreens currently has a Zacks Rank #3 (Hold). While we
choose to remain on the sidelines regarding WAG at present, drug
Rite Aid Corp.
CVS Caremark Corp.
) carrying a Zacks Rank #2 (Buy) are worth considering.
AMERISOURCEBRGN (ABC): Free Stock Analysis
CVS CAREMARK CP (CVS): Free Stock Analysis
RITE AID CORP (RAD): Free Stock Analysis
WALGREEN CO (WAG): Free Stock Analysis Report
To read this article on Zacks.com click here.