WAG Dec Sales Rise, ESRX Loss Felt - Analyst Blog

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The termination of the contract with Express Scripts ( ESRX ) continues to affect Walgreen ( WAG ) sales. The company recorded a modest 2.7% year-over-year growth in sales to $6.98 billion, for the month of December. Total front-end sales increased 1.4% with a 0.6% rise in comparable store front-end sales. 

Prescriptions filled at comparable stores increased 0.6% in December. Calendar day shift in December 2011 with one additional Saturday and one fewer Wednesday compared to the year-ago period had a negative impact of 1.9 percentage points on prescriptions filled in comparable stores. Additional factors affecting prescriptions filled in comparable stores were lower incidence of flu (by 1.5 percentage points) and the negative impact of the contract termination with Express Scripts (1.5 percentage points).

Pharmacy sales, accounting for 58.4% of total sales, in December, increased 2% with a 0.2% rise in comparable pharmacy sales. Comparable pharmacy sales witnessed a negative impact owing to the calendar day shifts (by 1.9 percentage points), introduction of generics in the last 12 months (1.9) and lower incidence of cough, cold and flu (1.8). The lower incidence of cough, cold and flu led to a decline in the number of flu shots administered to 5.3 million for the season-till-date compared to 6 million in the previous year.

With the intention of retaining some of Express Scripts' clients, Walgreen recently came up with its comprehensive Patient Transition Plan, which will enable the smooth transition of existing members of the Express Scripts pharmacy network to another community pharmacy. Under this plan, Walgreen is providing several discounts to the members of Walgreen Prescriptions Savings Club, which facilitates savings on over 8,000 brand names and all generic drugs.

Meanwhile, Walgreen is expanding its business with other payers and customers and implementing cost-control initiatives. The company is reassured by the fact that more than 100 of Express Scripts clients, encompassing health plans and employers, would continue with Walgreen pharmacies in 2012. The company aims to retain 10 million prescriptions annually and maintain 97-99% of the 2011 prescription volumes at fiscal 2012 end. This guidance takes into account the loss of major Express Scripts clients such as the Department of Defense Tricare plan and WellPoint ( WLP ).

Our Take

Despite its best efforts, the loss of the Express Scripts contract, which accounted for 7.3% of total sales in fiscal 2011, will dent the company's financials. Although the company is expecting to retain 75% of its business, we await further clarity regarding this.

On a long-term horizon, we are nonetheless optimistic about Walgreen. The introduction of new generics should help improve the company's gross margins in the second half of fiscal 2012. Moreover, a strong cash balance enables the company to reward its shareholders. During the last reported quarter, the company enhanced shareholders' value through dividend payments and share repurchases amounting to $803 million ($601 million in share repurchases and $202 million in dividends). In the last eight years, the company's dividend has grown at a compound annual growth rate ("CAGR") of nearly 22%.

Currently, we are Neutral on Walgreen, which corresponds to the Zacks #3 Rank (Short-term 'Hold' rating).


 
EXPRESS SCRIPTS ( ESRX ): Free Stock Analysis Report
 
WALGREEN CO ( WAG ): Free Stock Analysis Report
 
WELLPOINT INC ( WLP ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: ESRX , WAG , WLP

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