Walgreen Co. (WAG) reported net earnings of $756 million or 79 cents per share in the second quarter of fiscal 2013, higher than the year-ago net earnings of $683 million or 78 cents per share.
However, after adjusting for certain one-time items, the adjusted earnings came in at 96 cents per share, significantly higher than the year-ago earnings per share of 88 cents, edging past the Zacks Consensus Estimate by a penny. Following the results, the stock moved up more than 6% in early trading.
Walgreens already reported sales for the second quarter of fiscal 2013. Total sales came in at $18.63 billion, down 0.1% year over year and trailing the current Zacks Consensus Estimate of $18.91 billion. Total sales missed the Zacks Consensus Estimate for the fourth time in a row. However, the dull results can be attributed to one extra day of the leap year in Feb 2012.
Quarter in Detail
Front-end comparable store sales (those open for more than a year) decreased 2.6% on a year-over-year basis. Further, a decline of 5.2% in customer traffic in comparable stores along with an increase of 2.8% in basket size resulted in a 2.6% dip in comparable store sales.
Prescription sales (accounting for 61.1% of sales in the quarter) remained flat compared with the prior-year quarter, while prescription sales in comparable stores declined 2.7%. Moreover, during the reported quarter, Walgreen filled 208 million prescriptions (up 6% year over year).
Prescriptions filled at comparable stores inched up 4.3% compared with a decline of 4.8% in the first quarter of fiscal 2013. Walgreens gained retail prescription market share by 50 basis points (bps) to 19.2% in the quarter.
The improvement can be attributed to the new multi-year pharmacy network agreement with Express Scripts (ESRX), under which Walgreen’s pharmacy network has started filling prescriptions from Express Scripts customers from Sep 15, 2012, and should further bolster sales.
Gross profit increase 4% year over year to $5.6 billion. As a result, gross margin expanded 120 bps to 30.1% on the back of higher generic prescription drug sales. With selling, general and administrative (SG&A) expenses increasing 5% year over year to $4.5 billion, adjusted operating margin (excluding equity earnings in Alliance Boots and gains on sale of business) during the quarter improved 10 bps to 6.0%.
Walgreens’ cash and cash equivalents more than doubled to $2.4 billion in the quarter, a record high for the company. Moreover, it generated operating cash flow of $1.2 billion and free cash flow of $953 million, a massive sequential improvement from the first quarter.
Walgreens’ Balance Rewards loyalty program (launched in Sep 2012) has recorded more than 60 million registrations to date. The company opened/acquired 29 stores in the reported quarter compared with 35 stores in the year-ago quarter.
As of Feb 28, 2013, the company operated 8,537 locations in 50 states, the District of Columbia, Puerto Rico and Guam, including 8,072 drugstores (231 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.
Walgreens also disclosed a 10-year comprehensive primary distribution agreement with AmerisourceBergen (ABC) for branded and generic products. In addition, the company will team up with AmerisourceBergen on worldwide supply chain opportunities. As per the agreement, Walgreens and Alliance Boots can exercise the right to acquire a minority equity stake in AmerisourceBergen.
Halfway through fiscal 2013, things are looking good for Walgreens as its earnings beat the Zacks Consensus Estimate after two consecutive misses. However, the company missed the Zacks Consensus Estimate on the sales front, despite the second quarter being the first full quarter to include the benefit from the return of Express Scripts customers.
We believe that its solid financial footing and sizeable market share in retail pharmacy should hasten the company’s return to sales growth path. In addition, we are encouraged to note Walgreens’ timely progress to deliver first-year synergy targets following its Alliance Boots deal. Further, the recently announced 10-year deal with AmerisourceBergen represents another potential upside.
The stock carries a Zacks Rank #3 (Hold). While we remain on the sidelines for Walgreens, drug retailer Rite Aid Corporation (RAD) carries a Zacks Rank #1 (Strong Buy) and warrants a look.
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