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Earnings Preview: Walgreen - Analyst Blog

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Walgreen Co. ( WAG ) is scheduled to release its first quarter 2012 earnings on Wednesday, December 21, 2011, before the market opens.

The Zacks Consensus Estimate for the first quarter is pegged at 67 cents per share.

The company has already reported first quarter 2012 sales of $18.16 billion, up 4.7% year over year.Comparable store sales as well as front-end comparable store sales increased 2.5% year over year in the quarter. Prescriptions filled at comparable stores increased 1.6% and total prescriptions increased 2.4% during the quarter.

Previous Quarter Highlights

Walgreen reported adjusted EPS of 57 cents in the fourth quarter of fiscal 2011, beating the Zacks Consensus Estimate of 55 cents and was 38.3% higher than the year-ago quarter. In fiscal 2011, adjusted EPS came in at $2.64, beating the Zacks Consensus Estimate by 2 cents and was above the prior-year adjusted earnings of $2.12 per share.

The company reported total sales of $18.0 billion in the fourth quarter, ahead of the Zacks Consensus Estimate of $17.8 billion. Total sales increased 6.5% from $16.9 billion reported in the year-ago period. Comparable store sales (those open for more than a year) during the quarter increased 4.4% while front-end comparable drugstore sales were up 4.6%. In fiscal 2011, total sales jumped 7.1% year over year to $72.2 billion, edging out the Zacks Consensus Estimate of $72.1 billion.

Agreement of analysts

Estimate revision trends among analysts depict a negative bias toward the company's earnings in the first quarter. Over the last 7 and 30 days, out of the 19 analysts covering the stock, one and four analysts decreased the estimates, respectively, while none moved in the opposite direction.

Estimate revision for fiscal 2012 exhibited the same trend. Over the last 7 or 30 days, out of the 22 analysts covering the stock, one and six analysts downgraded the estimates, respectively, while none raised the same.

The bearish sentiments are a reflection of the ongoing dispute between Walgreen and Express Script ( ESRX ). Walgreen currently generates $5.3 billion annually from the Express Script business. Thus, if the relation between the powerhouses does not smoothen, it may hinder Walgreen's business and affect its position in the drug and health care delivery sector. Moreover, successful completion of the proposed Express Script and Medco Health Solutions ( MHS ) merger is expected to worsen the probability of full renewal of the Walgreen-Express Script contract.

Moreover, the macro environment of U.S. and Canada is taking a toll on the consumers. Unemployment remains high at 8.9%, and food and gas prices are also rising. Rising costs coupled with unemployment make the customers more value driven. Consequently, spending on discretionary items is impacted. We are of the opinion that this situation will affect same-store sales growth. Other headwinds impacting the company are pharmacy reimbursement pressure, coupled with front-end margin pressure, which may hinder gross margin expansion.

Magnitude

The Zacks Consensus Estimate for the first quarter remained unchanged over the last 7 and 30 days at 67 cents. For fiscal 2011, estimate has moved down by a penny over the past week and month, respectively, to $2.82 a share.

Surprise

Analyzing past trends, Walgreen has exceeded estimates in three of the last four quarters and remained in line in one. The company has an average surprise of 7.76% over the trailing four quarters.

Our Recommendation

Walgreen is presently working on gaining new contracts. Earlier this month, Chinese Community Health Plan (CCHP), whose prescription drug insurance was managed by Express Script, transformed itself into a new pharmacy benefits management ( PBM ) company in order to obtain the service of Walgreen pharmacies. Walgreen also entered into a new deal with Express Scripts to provide services to Blue Cross and Blue Shield of Kansas City's prescription drug program (effective from January 2012). However, Express Scripts is yet to accept Walgreen's terms for providing similar services to the members of the Defense Department's Tricare health care program.

Walgreen currently faces intense competition from major players like CVS Caremark ( CVS ) and Rite Aid Corporation ( RAD ). Last week, Rite Aid posted an improved third quarter 2012 result with net loss of approximately $52 million, narrower than a loss of $79.1 million in the year-ago period. Quarterly loss per share of 6 cents not only improved from the prior-year loss of 9 cents but also outpaced the Zacks Consensus Estimate loss of 12 cents. Growth in same-store sales and reduced selling, general & administrative (SG&A) expenses had a positive influence on the recent results.

Walgreen currently retains a Zacks #4 Rank (short-term Sell rating). We are encouraged by the company's efforts to establish itself as a leading provider of pharmacy, health and wellness solutions and are confident about the long-term potential of the company. Currently, we are Neutral on the stock, at par with CVS Caremark and Rite Aid.

CVS CAREMARK CP ( CVS ): Free Stock Analysis Report

EXPRESS SCRIPTS ( ESRX ): Free Stock Analysis Report

MEDCO HLTH SOL ( MHS ): Free Stock Analysis Report

RITE AID CORP ( RAD ): Free Stock Analysis Report

WALGREEN CO (WAG): Free Stock Analysis Report

Zacks Investment Research

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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