Recently, Walgreens ( WAG ) discussed the
current business environment and provided valuable insight into its
future operations.
According to the company's conference call, while its pharmacy
business continues to gain a strong foothold, the revenue
contribution of the franchise might slowdown on account of the
generic wave in the pharmaceutical industry. In the interim,
Walgreens plans to revive growth of its front-end stores to achieve
balanced growth.
Walgreens recorded robust gross margin expansion in the first
quarter of fiscal 2013. The company expects the trend to continue
in the near term on the back of introduction of generics.
Management asserted that the generic wave should significantly
increase Walgreens' gross profit per script compared to the gross
margin, which it earns on brands.
Despite the efforts of its competitors, Walgreens is winning back
new Express Scripts ( ESRX ) customers.
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. Walgreens is optimistic about
further client wins in the near-term. We also note that the plan to
achieve synergies from the Alliance Boost deal is on track.
Walgreens' Balance Rewards loyalty program is gaining traction and
has recorded more than 50 million registrations to date. As per
management, it is generating approximately 50% of the company's
sales.
Walgreens does not expect capital expenditure in the medium-term
to be materialistically different from the recent past. Moreover,
the company plans to review its capital deployment strategies
instead of using its cash to repurchase shares. Meanwhile,
Walgreens will continue to reward its shareholders with dividends
as it is positioned on a dividend growth track. These efforts
underline the company's focus to attain a healthy investment grade
rating.
Our Recommendation
While the generic wave is expected to improve gross margin for
Walgreens, it continues to hurt sales. Despite a broad-based
platform to support growth, macroeconomic headwinds remain a
looming concern.
However, we are encouraged by Walgreens' efforts to establish
itself as a leading provider of pharmacy, and health and wellness
solutions. In the long term, we prefer to remain on the sidelines
and maintain our long-term Neutral recommendation on the stock,
which carries a Zacks Rank #3 (Hold). Its peer, Rite Aid
Corporation ( RAD ) carries a Zacks
Rank #1 (Strong Buy), while CVS Caremark ( CVS ) carries a Zacks
Rank #2 (Buy).
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