Walgreens reported a mixed fiscal fourth quarter with in-line
earnings and a revenue beat. The company recorded improved revenues
on the back of strong prescription sales as well as the company's
gaining share in the pharmacy market. We are also looking forward
to the second step of strategic collaboration with Alliance Boots.
However, Walgreen is weighed down by pharmacy gross margin
pressures, recent changes in the environment of pharmacy business,
generic drug inflation, reimbursement pressure and a shift in
pharmacy mix toward 90-day prescription refills. Competitive
landscape also remains tough. In absence of any near-term catalyst
to drive the stock up, we downgrade Walgreens to Underperform.
Headquartered in Deerfield, IL, Walgreen Co. (WAG), popularly
known as Walgreens, is the largest national retail pharmacy chain
in terms of revenue and profitability. As of May 31, 2014,
Walgreens operated 8,683 locations in all 50 states of the U.S.,
the District of Columbia, Puerto Rico and Guam and the U.S. Virgin
Islands, including 8,217 drugstores (120 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 700 in-store
convenient care clinics and worksite health and wellness centers.
Walgreens' e-commerce business includes Walgreens.com,
drugstore.com, Beauty.com, SkinStore.com and VisionDirect.com.
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 had 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.
In Oct 2013, Walgreens and Alliance Boot arrived at a long-term
and strategic relationship with AmerisourceBergen. As per the
agreement, Walgreens and AmerisourceBergen have successfully begun
implementing their 10-year agreement for pharmaceutical
distribution from early Sep 2013. AmerisourceBergen has also teamed
up with Alliance Boots and Walgreens under a three-pronged
agreement that underlines a strategic collaboration, equity
alignment and distribution agreement.
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. This is because the retail price of generic drugs is
lower compared to that of brand name drugs. Moreover, over the past
year, inflation in generic drug cost has adversely affected
Walgreens' margin. While the introduction of generics has notably
dragged sales over the last few quarters, the company expects the
gross margin to improve in the ongoing fourth quarter. Management
expects the rate of generic drug introduction to rise in the fourth
quarter, to the point that it shall no longer have any negative
impact on Walgreens' margin.
Walgreen Co (WAG): Read the Full Research
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