Walgreen Co
. (
WAG
) reported net earnings of $756 million or 79 cents per share in
the second quarter of fiscal 2013, higher than the year-ago net
earnings of $683 million or 78 cents per share.
However, after adjusting for certain one-time items, the
adjusted earnings came in at 96 cents per share, significantly
higher than the year-ago earnings per share of 88 cents, edging
past the Zacks Consensus Estimate by a penny. Following the
results, the stock moved up more than 6% in early trading.
Walgreens already reported sales for the second quarter of fiscal
2013. Total sales came in at $18.63 billion, down 0.1% year over
year and trailing the current Zacks Consensus Estimate of $18.91
billion. Total sales missed the Zacks Consensus Estimate for the
fourth time in a row. However, the dull results can be attributed
to one extra day of the leap year in Feb 2012.
Quarter in Detail
Front-end comparable store sales (those open for more than a
year) decreased 2.6% on a year-over-year basis. Further, a
decline of 5.2% in customer traffic in comparable stores along
with an increase of 2.8% in basket size resulted in a 2.6% dip in
comparable store sales.
Prescription sales (accounting for 61.1% of sales in the quarter)
remained flat compared with the prior-year quarter, while
prescription sales in comparable stores declined 2.7%. Moreover,
during the reported quarter, Walgreen filled 208 million
prescriptions (up 6% year over year).
Prescriptions filled at comparable stores inched up 4.3%
compared with a decline of 4.8% in the first quarter of fiscal
2013. Walgreens gained retail prescription market share by 50
basis points (bps) to 19.2% in the quarter.
The improvement can be attributed to the new multi-year
pharmacy network agreement with
Express Scripts
(
ESRX
), under which Walgreen's pharmacy network has started filling
prescriptions from Express Scripts customers from Sep 15, 2012,
and should further bolster sales.
Gross profit increase 4% year over year to $5.6 billion. As a
result, gross margin expanded 120 bps to 30.1% on the back of
higher generic prescription drug sales. With selling, general and
administrative (SG&A) expenses increasing 5% year over year
to $4.5 billion, adjusted operating margin (excluding equity
earnings in Alliance Boots and gains on sale of business) during
the quarter improved 10 bps to 6.0%.
Walgreens' cash and cash equivalents more than doubled to $2.4
billion in the quarter, a record high for the company. Moreover,
it generated operating cash flow of $1.2 billion and free cash
flow of $953 million, a massive sequential improvement from the
first quarter.
Walgreens' Balance Rewards loyalty program (launched in Sep 2012)
has recorded more than 60 million registrations to date. The
company opened/acquired 29 stores in the reported quarter
compared with 35 stores in the year-ago quarter.
As of Feb 28, 2013, the company operated 8,537 locations in 50
states, the District of Columbia, Puerto Rico and Guam, including
8,072 drugstores (231 more compared with the year-ago period).
The company also operates infusion and respiratory service
facilities, specialty pharmacies and mail service facilities.
Walgreens also disclosed a 10-year comprehensive primary
distribution agreement with
AmerisourceBergen
(
ABC
) for branded and generic products. In addition, the company will
team up with AmerisourceBergen on worldwide supply chain
opportunities. As per the agreement, Walgreens and Alliance Boots
can exercise the right to acquire a minority equity stake in
AmerisourceBergen.
Our Take
Halfway through fiscal 2013, things are looking good for
Walgreens as its earnings beat the Zacks Consensus Estimate after
two consecutive misses. However, the company missed the Zacks
Consensus Estimate on the sales front, despite the second quarter
being the first full quarter to include the benefit from the
return of Express Scripts customers.
We believe that its solid financial footing and sizeable
market share in retail pharmacy should hasten the company's
return to sales growth path. In addition, we are encouraged to
note Walgreens' timely progress to deliver first-year synergy
targets following its Alliance Boots deal. Further, the recently
announced 10-year deal with AmerisourceBergen represents another
potential upside.
The stock carries a Zacks Rank #3 (Hold). While we remain on
the sidelines for Walgreens, drug retailer
Rite Aid Corporation
(
RAD
) carries a Zacks Rank #1 (Strong Buy) and warrants a look.
AMERISOURCEBRGN (ABC): Free Stock Analysis
Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis
Report
RITE AID CORP (RAD): Free Stock Analysis
Report
WALGREEN CO (WAG): Free Stock Analysis Report
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