Dismal Feb Results for Walgreens - Analyst Blog

Drug retailer Walgreens ( WAG ) recently disclosed its sales data for the month of Feb.

Walgreens also reported sales for the second quarter of fiscal 2013, ending Feb 28. 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, missing top-line Zacks Consensus Estimate for the fourth time in a row.

Walgreens is slated to release second quarter fiscal 2013 earnings later this month.

Monthly Numbers

Walgreens suffered a setback after improving monthly results in Jan as Feb sales declined 2.2% on a year-over-year basis to $5.75 billion. However, the dull results can be attributed to one extra day of the leap year in Feb 2012. Excluding this impact, sales in Feb 2013 inched up 1.5%.

Total front-end sales edged down 3.1% (flat excluding the leap-year impact) compared with the year-ago period, while comparable store front-end sales declined 1.4%. Customer traffic in comparable stores was down 4.9% although basket size increased 3.5% year over year.

Prescriptions filled at comparable stores at Walgreens improved 6.5% in the reported month on the heels of a 0.1 percentage point positive impact from the higher incidence of flu. According to the company, flu shot administration did not affect the comparable store sales in Feb 2013.

Total sales in comparable stores dipped 0.6% on a year-over-year basis. A decline of 3.7 percentage points was attributable to generic wave in the pharmaceutical industry during the last 12 months.

The introduction of generic drugs also led to a 2.1% decline in Walgreens' total pharmacy sales which accounted for the lion's share (61.9%) of total sales in Feb. Comparable store pharmacy sales remained flat despite the adverse impact of 2.3 percentage points due to the generic wave. Flu shots administered at pharmacies and clinics season-to-date were about 7.0 million, up approximately 27% year over year.

To date, Walgreens' Balance Rewards loyalty program (launched on Sep 2012) has recorded roughly 60 million registrations. The company opened 11 stores and closed one during the month.

As of Feb 28, 2013, the company operated 8,539 locations in 50 states, the District of Columbia, Puerto Rico and Guam, including 8,071 drugstores (231 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our View

Walgreens' second quarter was the first full quarter to include the benefit from the return of Express Scripts ( ESRX ) customers following the resolution of the earlier impasse between the two companies. Despite the upside, Walgreens reported another quarter of lean sales.

Not only did the top-line result lag the year-ago mark, it failed to meet our expectations. Market sentiments also slipped due to the disappointing results as stock price declined 2.51% (or $1.05) to close at $40.72 on Mar 5, 2013.

As expected by Walgreens, the pharmacy business continues to slow down as the generic wave continues to hurt franchise revenues. In the interim, the company's strategy of reviving growth of its front-end stores is paying off. However, we believe that competitive industry conditions and tough current business environment prevail for Walgreens.

The stock carries a Zacks Rank #3 (Hold). While we remain on the sidelines for Walgreens, we are bullish on CVS Caremark ( CVS ) and Cardinal Health ( CAH ), each carrying a Zacks Rank #2 (Buy).

CARDINAL HEALTH (CAH): Free Stock Analysis Report

CVS CAREMARK CP (CVS): Free Stock Analysis Report

EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report

WALGREEN CO (WAG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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