Recently, we reiterated our 'Neutral' recommendation on drug
) with a target price of $38.00.
Last Quarter Synopsis
Walgreen reported earnings of 39 cents per share in the fourth
quarter of fiscal 2012, significantly below the year-ago earnings
per share (EPS) of 57 cents. However, after considering the
negative impact of 9 cents per share related to the Alliance Boots
transaction, adjusted EPS came in at 48 cents during the quarter,
significantly below the Zacks Consensus Estimate of 55 cents. For
fiscal 2012, the company reported adjusted earnings of $2.53 per
share, missing the Zacks Consensus Estimate of $2.59 as well as the
year-ago earnings of $2.64 per share.
As expected, the termination of the
Express Scripts Holdings Company
) contract took its toll on Walgreen with a negative impact of 6
cents per share on the bottom line during the quarter and 21 cents
per share during the fiscal year. Total sales for the fourth
quarter and fiscal 2012, were $17.1 billion, (down 4.9% year over
year) and $71.64 billion, (down 0.8%), respectively. Moreover,
Walgreen has also been impacted over the past few quarters by high
unemployment levels and lower discretionary spending.
However, we are encouraged with the settlement of the 7-month
impasse between Walgreen and Express Scripts. The Express Scripts
contract loss remained a major hindrance for the company since the
beginning of 2012 as the earlier contract had contributed to a
significant part of its sales (12.6% of total prescriptions filled
in August 2011).
Although the company is leaving no stone unturned to compensate
for the losses incurred since the termination of the previous deal,
winning back clients remains crucial. However, to stimulate
customers' demand amidst a challenging macroeconomic scenario,
Walgreen has been taking a number of strategic steps. This includes
the launch of a customer loyalty program, 'Balance Rewards', in
September 2012. The company is also on an acquisition spree.
Subsequent to acquiring a 45% stake in Alliance Boots GmbH for $6.7
billion, this leading retail pharmacy chain acquired a mid-South
US-based regional drugstore chain for $438 million.
We believe these steps will help expand its business in several
key regions of the nation. Walgreen expects the Alliance
Boots partnership to be accretive to its EPS by 23 - 27 cents in
the first year. The company also expects the synergies across joint
operations to be between $100-$150 million in the first year and $1
billion by the end of 2016. This new alliance is expected to form
the world's first pharmacy driven health and wellbeing retail with
more than 11,000 stores in 12 countries. We are looking forward to
all these new ventures of Walgreen and expect it to add to the
company's growth going forward.
Moreover, leveraging on its strong cash balance, the company
rewarded its shareholders and is also well equipped to pursue
suitable acquisitions going forward. Our long-term Neutral
recommendation is backed by a Zacks #3 Rank (Hold) in the
EXPRESS SCRIPTS (ESRX): Free Stock Analysis
WALGREEN CO (WAG): Free Stock Analysis Report
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