Walgreen ( WAG ) reported sales of$6.39 billion for July, 6.1% higher compared to the same period last year. Having lost its positive growth momentum in 2012, Walgreen's top line growth re-accelerated since the company resolved its dispute with pharmacy benefits management company Express Scripts in September 2012. Despite a soft macro environment, Walgreen started fiscal 2014 on a strong note and has retained its growth momentum so far this year. Higher daily living sales, strong performance in prescriptions filled, and increasing pharmacy market share have all helped Walgreen post continuous improvement in its top line growth.
The company's comparable store sales increased by 5.2% in July. Pharmacy sales for the month, which accounted for 66.5% of the total sales, grew 9.5%. Comparable store pharmacy sales and prescriptions filled at comparable stores increased by 7.6% and 3.7%, respectively. Total front-end sales increased 1.4% while comparable store front-end sales grew 1.1%. Though customer traffic in comparable stores continued to decline in June (2.6% lower), basket size expanded by 3.7%. Calendar 2014 year-to-date sales stand at $44.51 billion, an increase of 5.9% compared to the same period in 2013. Fiscal 2014 year-to-date sales for the first 11 month are $70.03 billion, 6% higher than last year.
Walgreen's stock price has declined by approximately 15% since the company announced earlier this week its plan to complete the acquisition of Europe-based Alliance Boots. Driving this sharp decrease was the board's decision to retain its US tax domicile, rather than opting for an "inverted" structure that would shift its headquarters overseas to escape high US and state corporate tax regimes. The company also lowered its guidance, further adding to the downward pressure. It now expects its fiscal 2016 revenue in the range of $126 billion to $130 billion (its initial estimate was $130 billion) and adjusted earnings per share of $4.25 to $4.60. Earnings prior to the deduction of interest, tax and amortization expenses is expected to be "flat to a little up" through 2016.
We believe that the market overreacted to the news and that Walgreen stands to gain a lot from the Alliance Boots acquisition. (Read: The Market May Have Overreacted To Walgreen's Decision Against Tax Aversion ) Walgreen's acquisition of Alliance Boots, subject to shareholder and various regulatory approvals, will help form the first global pharmacy-led, health and well-being enterprise. The large scale and global operations will help the two companies address the rising cost of prescription drugs in America and worldwide.
As of July end, Walgreen operated 8,295 stores across 50 states in the U.S., the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. The largest footprint in the U.S. places the company in a strong position to benefit, both from an aging U.S. population and from the Affordable Care Act expansion of insurance to millions of Americans.
Our price estimate of $64 for Walgreens is marginally higher than the current market price.
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