WAG Ticks Higher on Monthly Numbers - Analyst Blog

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Drug retailer Walgreens ( WAG ) recently disclosed exhaustive results for the month of Mar 2013. The company improved its monthly sales after a disappointing February as March sales inched up 2.3% year over year to $6.16 billion.

Total front-end sales improved 5.4% compared with the year-ago period, while comparable store front-end sales increased 4.2%. Customer traffic in comparable stores was down 1.3% although basket size increased 5.5% year over year. These numbers are a stark contrast from the Feb 2013 lean sales results. Investors viewed the results in positive light as the stock reached a new 52-week high of $48.18 on the day of the results.

Prescriptions filled at Walgreens' comparable stores increased 4% in the reported month on the heels of return of Express Scripts ( ESRX ) customers to pharmacies. The calendar shifts of an additional Sunday and one less Thursday led to an adverse impact of 3.4 percentage points despite the inclusion of Easter holiday (Mar 31) in the month. After accounting for these calendar shifts, prescriptions filled shot up 7.4%.

Total sales in comparable stores rose 0.7% on a year-over-year basis. A decline of 3.0 percentage points was attributable to generic introduction in the pharmaceutical industry during the last 12 months while calendar day shifts hampered comparable store sales by 2.1 percentage points.

Walgreens' total pharmacy sales which accounted for the lion's share (62.2%) of total sales in the reported month improved 0.4% year over year. However, comparable store pharmacy sales declined 1.5% due to the adverse impact of 3.4 percentage points from calendar shifts. The generic wave in the pharmaceutical industry had a negative impact of 4.8 percentage points on calendar day-shift adjusted comparable store pharmacy sales. Adjusting for calendar shifts, comparable store pharmacy sales increased 1.9%.

To date, Walgreens' Balance Rewards loyalty program (launched in Sep 2012) has recorded over 64 million registrations. The company opened 12 stores (including 4 relocations) and closed one during Mar 2013.

As of Mar 31, 2013, Walgreens operated 8,541 locations in all 50 states, the District of Columbia, Puerto Rico and Guam, including 8,077 drugstores (230 more compared with the year-ago period with 101 net stores acquired during the last 12 months). The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our View

After it crossed the halfway mark for fiscal 2013, things began to look up for Walgreens. As expected, the company recorded plump sales with increasing return of Express Scripts customers following the resolution of the earlier impasse between the two companies. Meanwhile, Walgreens strategy of reviving growth of its front-end stores paid off. This should also help the company to improve sales results for the ongoing quarter.

On the tepid side, pharmacy business continues to slow down as the generic wave continues to hurt franchise revenues. We also believe that industry conditions and market share tussle with CVS Caremark ( CVS ) is not likely to wane in the near-term for Walgreens.

As a result, the stock carries a Zacks Rank #3 (Hold). While we have a neutral stance on Walgreens, drug retailer Rite Aid Corporation ( RAD ), carrying a Zacks Rank #1 (Strong Buy) warrants a look. CVS Caremark is also worth considering as it carries a Zacks Rank #2 (Buy).

CVS CAREMARK CP (CVS): 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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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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