Walgreen Co (WAG): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
Walgreens reported a mixed second quarter fiscal 2014 with adjusted earnings remaining below the Zacks Consensus Estimate while revenues exceeding the mark. As expected, Walgreens recorded improved revenues during the quarter on plump prescription sales. The company returned to sales growth with increasing return of Express Scripts customers following the resolution of their earlier impasse. However, sluggish front-end sales and difficult macroeconomic conditions remained looming concerns. Nonetheless, Walgreens gained a modest share in the retail pharmacy market. The higher first-year synergy from the Alliance Boots deal was another upside. We are also upbeat about the long-term three-pronged-deal with AmerisourceBergen. However, Walgreens' strategy to win back earlier clients is still to be proven. The competitive landscape also remains tough. Accordingly, we remain Neutral on Walgreens.

Overview:

Headquartered in Deerfield, Ill., Walgreen Co. (WAG), popularly known as Walgreens, is the largest national retail pharmacy chain in terms of revenue and profitability. As of Nov 30, 2013, Walgreens operated 8,681 locations in all 50 states, the District of Columbia, Puerto Rico and Guam and the U.S. Virgin Islands, including 8,200 drugstores (142 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, worksite health and wellness centers, specialty pharmacies and mail service facilities. Its Take Care Health Systems subsidiary manages more than 750 in-store convenient care clinics and worksite health and wellness centers.

The drugstores, apart from selling prescription drugs, also sell over-the-counter (OTC) medications, general merchandise, cosmetics, toiletries, household items and food and beverages. Due to carefully selected locations, the stores offer easy accessibility with many of them remaining open for 24 hours. The company ensures robust traffic in the stores by offering a broad selection of consumable merchandise backed by strong advertising programs.

In Aug 2012, Walgreens entered into a strategic partnership with a global international pharmacy-led health and beauty group Alliance Boots GmbH, in which it acquired a 45% stake for $6.7 billion. The company also has the option to obtain 100% ownership over the next three years for an approximate value of $9.5 billion in cash and stock.

Generic: The Current Scenario The ongoing introduction of prescription drugs in the generic market is changing the mode of patient care which affects the business of drug retailers like Walgreens. The generic wave hampered Walgreens' top-line in the past quarters. However, gross margin improved on account of higher generic prescription drug sales. While the introduction of generics has notably dragged sales over the last few quarters, the company expects the gross margin expansion to continue in the near term. Management asserted that the generic wave should significantly increase Walgreens' gross profit per script compared to the gross margin which it earns on brands.


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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.



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