Walgreen Co.
(
WAG
) reported earnings of 43 cents per share in the first quarter of
fiscal 2013 compared with 63 cents in the year ago quarter.
However, after adjusting for certain one-time items, the adjusted
earnings came in at 58 cents per share, significantly below the
year-ago earnings per share of 71 cents as well as the Zacks
Consensus Estimate of 68 cents.
The company has already reported sales for the first quarter
fiscal 2013. Total sales came in at $17.34 billion, down 4.5%
year over year and trailing the Zacks Consensus Estimate of
$17.63 billion, missing top-line Zacks Consensus Estimate for the
third time in a row.
The reported quarter results continue to echo the loss of the
Express Scripts
(
ESRX
) contract. The company's sales figure has been dragging since
the termination of the contract. Moreover, the performance in the
first quarter reflects the negative impact associated with
hurricane Sandy. The generic wave in the pharmaceutical industry
also negatively impacted first quarter sales by $883 million in
the reported quarter.
Quarter in Detail
Front-end comparable store sales (those open for more than a
year) decreased 2% while comparable pharmacy sales dropped 10.8%
in the first quarter. Further, a decline of 4.2% in customer
traffic in comparable stores along with an increase of 2.2% in
basket size resulted in 8% dip in comparable store sales.
Prescription sales (accounting for 63.8% of sales in the quarter)
declined 7.2%, while prescription sales in comparable stores
decreased 11.3%. Moreover, during the quarter, Walgreens filled
201 million prescriptions (down 3.2% year over year).
Prescriptions filed at comparable stores dropped 4.8% compared
with a decline of 8% in the sequentially prior quarter. The
improvement was attributed to the new multi-year pharmacy network
agreement with Express Scripts under which Walgreens' pharmacy
network has started filling prescriptions from Express Scripts
customers from September 15, 2012, and should further bolster
sales.
Gross profit declined 0.1% year over year to $5.1 billion though
gross margin expanded 130 basis points (bps) to 29.4% in the
first quarter. Margin improved on account of higher generic
prescription drug sales and increased LIFO gross profit margins.
With selling, general and administrative (SG&A) expenses
increased 4.6% year over year to $4.4 billion, operating margin
during the quarter contracted 90 bps to 4.1%.
Exiting first quarter, Walgreens had $1.8 billion in cash and
cash equivalents, up 67.2% year over year. Moreover, the company
generated operating cash flow of $601 million and free cash flow
of $265 million in the reported quarter.
Walgreens' Balance Rewards loyalty program (launched in September
2012) has recorded more than 45 million registrations to date.
The company opened or acquired 218 stores in the reported quarter
compared with 71 stores in the year-ago quarter.
Our Recommendation
Despite a dull start to fiscal 2013, we believe that Walgreens
has a broad-based platform to drive growth going forward. A solid
financial footing and sizeable market share in retail pharmacy
should hasten the company's return to growth. Further, the
customer loyalty program is gaining traction as reflected in
increasing registrations. This should improve customer traffic
for Walgreens. We also expect the Alliance Boots acquisition to
be considerably accretive to the company's result for fiscal
2013.
While fiscal 2012 was a challenging year for Walgreens, we look
forward to fiscal 2013 with optimism. We currently have a
long-term 'Neutral' recommendation on the stock, which carries a
short-term Zacks # 3 Rank (Hold).
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WALGREEN CO (WAG): Free Stock Analysis Report
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