) reported adjusted net earnings of 73 cents per share in the
fourth quarter of fiscal 2013, a 15.9% improvement from the
year-ago adjusted net earnings of 63 cents. Earnings were in line
with the Zacks Consensus Estimate.
On a reported basis, earnings came in at $657 million or 69
cents per share, better than the year-ago earnings of $353
million or 39 cents.
For fiscal 2013, adjusted net earnings rose 6.5% to $3.12 per
share from $2.93 in the year-ago period but missed the Zacks
Consensus Estimate by a penny. Reported earnings increased to
$2.5 billion or $2.56 per share for the fiscal year, compared
with $2.1 billion or $2.42 generated in fiscal 2012.
WAG's sales came in at $17,941 million in the quarter, up 5.1%
year over year and almost in line with the Zacks Consensus
Estimate of $17,948 million. For fiscal 2013, sales increased
0.8% to a record $72,217 billion, which is also in line with the
Zacks Consensus Estimate of $72,257 million.
Quarter in Detail
Front-end comparable store (those open for more than a year)
sales along with basket size grew 1.6% and 3.6%, respectively in
the fourth quarter. On the other hand, customer traffic in
comparable stores declined 1.9%. Overall, comparable store sales
improved 4.6% in the reported quarter.
Prescription sales (accounting for 63.9% of sales in the quarter)
climbed 6.1% compared with the prior-year quarter, while
prescription sales in comparable stores increased 6.4%. Moreover,
Walgreens filled 203 million prescriptions (up 8.2% year over
year) during the reported quarter. Prescriptions filled at
comparable stores grew 7.1%. Walgreens' market share in retail
pharmacy improved 40 basis points (bps) to 19.1% in the quarter.
Gross profit increased 7.4% year over year to $5.19 billion. As a
result, gross margin expanded 60 bps to 28.9% on the back of
higher generic prescription drug sales, partially offset by
slightly soft margin in front-end sales. After excluding the
benefit from LIFO, adjusted gross profit improved 4.3% to $5.18
Adjusted selling, general and administrative (SG&A) expenses
rose 1.5% to $4.19 billion, However, adjusted operating
margin (excluding equity earnings in Alliance Boots) during the
quarter expanded 60 bps to 5.5%.
Walgreens' Balance Rewards loyalty program (launched in Sep 2012)
has recorded more than 85 million registrations to date. The
company opened/acquired 33 stores in the reported quarter
compared with 54 stores in the year-ago quarter. In fiscal 2013,
it has opened 186 new drugstores, out of which 76 were acquired.
As of Aug 31, 2013, the company operated in 8,582 locations in 50
states, the District of Columbia, Puerto Rico and Guam, including
8,116 drugstores (186 more compared with the year-ago period).
The company also operates infusion and respiratory service
facilities, specialty pharmacies, mail service facilities, and
Walgreen exited the fourth quarter with cash and cash equivalents
of $2.1 billion, significantly higher than $1.3 billion as of Aug
31, 2012. Long-term debt was higher at $4.5 billion in the
reported quarter, compared with $4.1 billion as of Aug 31, 2012.
Moreover, the company has generated operating cash flow of $4.3
billion and record free cash flow of $3.1 billion in fiscal 2013.
It is worthwhile to note that the company has returned more than
$1 billion to its shareholders via dividends.
Strides on Synergy Track
Walgreens' partnership with Alliance Boots is yielding positive
results, with combined first-year synergies of $154 million,
which exceeded its expectation of $125 million-$150 million. The
Alliance Boots deal was accretive to adjusted earnings by 8 cents
in the reported quarter, in line with management's expectation.
Walgreen and Alliance Boots' strategic long-term relationship
) is also moving ahead, with Walgreens and AmerisourceBergen
implementing their 10-year agreement for pharmaceutical
distribution last month. Moreover, the three companies will
collaborate on global supply chain opportunities. Additionally,
Walgreens and Alliance Boots together have rights to buy a minor
equity stake in AmerisourceBergen.
Express Scripts Holding Co.
) together launched the Smart90 program, which is designed to
supply medication to patients with chronic diseases for 90 days
at a lower cost.
In the reported quarter, Walgreens and Theranos, Inc. entered
into a long-term partnership, whereby the new lab testing service
of the latter will be available throughout the wide network of
Further, WAG inked a definitive agreement to acquire certain
assets of privately owned regional pharmacy chain Kerr Drug,
including 76 retail drugstores and specialty pharmacy business.
The acquisition also includes a distribution center.
Despite these accretive strategies and milestone achievements,
Walgreen's moderate fourth quarter results, with in-line results
at both fronts, failed to impress us. The company has a Zacks
Rank #3 (Hold).
While we choose to remain on the sidelines regarding WAG, drug
), carrying a Zacks Rank #1 (Strong Buy), is worth
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