) reported adjusted net earnings (excluding charges related to a
legal settlement with DEA and other one-time expenses) of 85
cents per share in the third quarter of fiscal 2013,
significantly higher than the year-ago adjusted net earnings of
Despite an 18.1% year-over-year improvement in earnings, the
result missed the Zacks Consensus Estimate of 90 cents per share.
While a possible explanation is that lower-than-expected
front-end sales and unyielding macroeconomic conditions led to
the miss, Walgreens also witnessed higher interest expense and
tax rate in the quarter along with almost 11% higher share count.
On a reported basis, earnings came in at $624 million or 65 cents
per share, better than the year-ago earnings of $537 million or
Walgreens' sales came in at $18.31 billion, up 3.2% year over
year. However, sales trailed the Zacks Consensus Estimate of
$18.46 billion, missing the Zacks Consensus Estimate for revenues
for the fifth time in a row.
Quarter in Detail
Front-end comparable store (those open for more than a year)
sales clambered 0.4% in the third quarter. This is in stark
contrast to the second-quarter result when front-end comparable
store sales decreased 2.6%. On the other hand, a decline of 3.9%
in customer traffic in comparable stores along with an increase
of 4.4% in basket size resulted in 1.4% improvement in comparable
Prescription sales (accounting for 63.1% of sales in the quarter)
inched up 3.4% compared with the prior-year quarter, while
prescription sales in comparable stores increased 2%. Moreover,
during the reported quarter, Walgreens filled 209 million
prescriptions (up 8.7% year over year).
Prescriptions filled at comparable stores inched up 7.1% compared
with an increase of 4.3% in the second quarter of fiscal 2013.
Walgreens' market share in retail pharmacy improved 80 basis
points (bps) to 19.2% in the quarter.
The improvement can be attributed to the new multi-year pharmacy
network agreement with
Express Scripts Holding Company
) under which Walgreens' pharmacy network has started filling
prescriptions from Express Scripts customers from Sep 15, 2012.
Gross profit increased 4.1% year over year to $5.2 billion. As a
result, gross margin expanded 30 bps to 28.5% on the back of
higher generic prescription drug sales and higher front-end
sales. With selling, general and administrative (SG&A)
expenses rising 5.3% year over year to $4.4 billion mainly due to
the legal settlement with the DEA, adjusted operating margin
(excluding equity earnings in Alliance Boots and gain on sale of
business) during the quarter contracted 22 bps to 4.7%.
Exiting the third quarter, Walgreens' cash and cash equivalents
were almost $3 billion, up 50.1% from the year-ago quarter.
Moreover, it generated operating cash flow of $1.4 billion and
free cash flow of $1.1 million, reflecting sequential improvement
from the second quarter.
Walgreens' Balance Rewards loyalty program (launched in Sep 2012)
has recorded more than 75 million registrations to date. The
company opened/acquired 39 stores in the reported quarter
compared with 52 stores in the year-ago quarter.
As of May 31, 2013, the company operated 8,560 locations in 50
states, the District of Columbia, Puerto Rico and Guam, including
8,097 drugstores (207 more compared with the year-ago period).
The company also operates infusion and respiratory service
facilities, specialty pharmacies and mail service facilities and
Strides on Synergy Track
Walgreens' partnership with Alliance Boots is yielding positive
results. Further, Walgreens expects to attain synergies of
$125-$150 million across joint operations in the first year
compared with the earlier estimate of $100-$150 million.
The Alliance Boots deal was accretive to adjusted earnings by 10
cents in the reported quarter. Management envisages the deal to
contribute 8 cents in the fourth quarter of fiscal 2013.
Walgreens reported a disappointing third quarter as it missed the
Zacks Consensus Estimate on both lines. Sales lagged the Zacks
Consensus Estimate despite the benefits of increasing return of
Express Scripts customers.
While we believed that the persistent lower-than-expected
sales will be remedied through the resolution of the impasse
between Walgreens and Express Scripts, another quarter of sales
miss remains a matter of concern. Nevertheless, we believe that
Walgreens' financial strength and sizeable market share in retail
pharmacy should leverage the company's sales growth.
AMERISOURCEBRGN (ABC): Free Stock Analysis
EXPRESS SCRIPTS (ESRX): Free Stock Analysis
GNC HOLDINGS (GNC): Free Stock Analysis
WALGREEN CO (WAG): Free Stock Analysis Report
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Although the company gained from the Alliance Boots deal,
Walgreens still missed the earnings mark. Nonetheless, we look
forward to synergies from the deal. Moreover, the decade long
deal (effective Sep 1, 2013) with
) is another major upside.
Currently, Walgreens carries a Zacks Rank #3 (Hold). While we
have a neutral disposition on this drug retailer,
GNC Holdings Inc.
), carrying a Zacks Rank #2 (Buy), is worth considering.