Encouraging June Sales for Walgreens

Zacks

Drug retailer Walgreens (WAG) recently reported results for the month of Jun 2013. The company posted the fourth consecutive month of sales growth with 2.5% year over year increase to $5.64 billion.

Total front-end sales increased 2.2% compared with the year-ago period, while comparable store front-end sales improved 0.8%. Customer traffic in comparable stores was down 2.9% whereas, basket size increased 3.7% year over year.

Prescriptions filled at comparable stores at Walgreens improved 5.0% (or 7.3% on a calendar day-shift adjusted basis) on the heels of increasing return of Express Scripts Holding Company (ESRX) customers. Alongside, flu shots had a positive impact of 0.1% in the month. According to the company, calendar shifts adversely affected prescriptions filled at its comparable stores by 2.3% as Jun 2013 had one additional Sunday and one lesser Friday compared with the prior-year month.

Total sales in comparable stores inched up 2.3% on a year-over-year basis. However, the generic wave in the pharmaceutical industry during the last 12 months led to an adverse impact of 1.8% on comparable store sales. Further, the calendar day shifts dragged comparable store sales by 1.5%. Flu shots had no impact on comparable store sales in the reported month.

Walgreens’ total pharmacy sales which accounted for the lion’s share (64.3%) of total sales in the reported month, improved 2.9% (or 5.6% on a calendar day-shift adjusted basis) year over year. Calendar day shifts had an adverse effect of 2.3% on pharmacy sales. On a calendar day shift adjusted basis, the generic wave in the pharmaceutical industry dragged comparable store pharmacy sales by 2.8% in June.

Year-to-date, Walgreens’ Balance Rewards loyalty program (launched in Sep 2012) has recorded over 75 million registrations. The company opened 10 stores (including 4 relocations) and closed 4 stores during the month.

As of Jun 30, 2013, Walgreens operated 8,563 locations in 50 states, the District of Columbia, Puerto Rico and Guam, including 8,098 drugstores (191 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our Take

As expected, Walgreens recorded plump sales with increasing return of Express Scripts customers following the resolution of the earlier impasse between the two companies. However, the generic wave in the pharmaceutical industry continues to hurt revenues. Nonetheless, Walgreens stands to generate higher profitability from escalating sales of the higher-margin generic drugs.

Last month, the company reported a disappointing third quarter as it missed the Zacks Consensus Estimate on both lines. While revenue witnessed slight growth, earnings growth of over 18% failed to meet our expectations.

The declining customer traffic despite a solid foothold across the U.S. and weaker-than-expected front-end sales are cause of concern. Unyielding macroeconomic conditions also remain an overhang.

However, we look forward to the forthcoming quarters as the company strides on the synergy track with its Alliance Boots partnership and the long-term deal with AmerisourceBergen Corporation (ABC) comes into effect in Sep 2013. We believe that the upcoming quarterly numbers will reflect whether Walgreens’ deal-making spree is paying off.

Currently, the stock carries a Zacks Rank #3 (Hold). On the other hand, Herbalife Ltd. (HLF) carrying a Zacks Rank #1 (Strong Buy) warrants a look. AmerisourceBergen is also worth considering as it holds a Zacks Rank #2 (Buy).

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