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Walgreen Disappoints in 1Q - Analyst Blog

Walgreen ( WAG ) reported earnings of 63 cents per share in the first quarter of fiscal 2012, missing the Zacks Consensus Estimate of 67 cents and but a penny higher than the year-ago earnings.

The result includes a negative impact of 1 cent per share related to the delay in the cough/cold and flu season, 1 cent in comparable pharmacy sales related to Walgreen's decision of not renewing the Express Script ( ESRX ) contract and 1 cent in related expenses. As per the decision of non-renewal of Express Script contract, effective January 1, 2012, Walgreen will no longer be a part of Express Scripts' pharmacy provider network.

The company reported total sales of $18.2 billion in the reported quarter, in line with the Zacks Consensus Estimate. Total sales increased 4.7% from $17.3 billion reported in the year-ago quarter. Comparable store sales (those open for more than a year) during the quarter climbed 2.5% while front-end comparable drugstore sales spiked 2.4%. Customer traffic in comparable stores inched down 0.2% while basket size increased 2.6%.

Prescription sales, accounting for 65.5% of sales in the quarter, swelled 4.2%, while prescription sales in comparable stores escalated 2.6%. Moreover, during the quarter, Walgreen filed 208 million prescriptions (up 2.5% year over year) while prescriptions filed at comparable stores increased 1.8%.

The company also increased its retail pharmacy market share to 19.9%. As reported by IMS Health, Walgreen exceeded the prescription growth rate of the rest of the industry by 2.3% during the quarter.

Gross profit in the quarter jumped 3.2% year over year to $5.1 billion. However, during the quarter, lower retail pharmacy margins arising from the reduction in reimbursement rates combined with flat front-end margins resulted in 40 basis points (bps) contraction in the overall gross margin to 28.1%. The LIFO provision stood at $45 million in the current year compared with $42 million in the previous year.

Selling, general and administrative (SG&A) expenses increased 5% year over year to $4.2 billion, including a 0.8% upside in operating and integration costs for drugstore.com, which was acquired in June 2011. Operating margin during the quarter contracted 47 bps to 4.95%.

At the end of the quarter, Walgreen had $1.1 billion in cash and cash equivalents, compared with $2.06 billion at the end of November 2010. The company generated cash flow from operations of $809 million at the end of first quarter 2012. Moreover, during the quarter, the company returned $803 million to shareholders through share repurchases and dividend payments.

In addition, Walgreen opened/acquired 71 new drugstores (a net gain of 51 after relocations and closings) in the reported quarter compared with 121 (89) in the year-ago quarter.

Based on Walgreen's current decision of not associating itself with Express Scripts' pharmacy networks including for clients such as Tricare and WellPoint, Walgreen claimed that it will record 97-99% of its fiscal 2011 prescription volume in fiscal 2012.

However, Walgreen has not made any statements regarding the impact of the pending Express Scripts- Medco ( MHS ) merger on its business during fiscal 2012. On the other hand, the company expects gross margin to improve in the second half of fiscal 2012 based on new generic drug introductions, including generic Lipitor.

Our Recommendation

Walgreen currently generates $5.3 billion annually from the Express Script business. Thus, non-renewal of the contract is expected to hinder Walgreen's business and affect its position in the drug and health care delivery sector.

Walgreen is presently working on winning 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).

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

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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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