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.
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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