On Aug 24, Zacks Investment Research downgraded drug retailer Walgreens (WAG) to a Zacks Rank #4 (Sell).
Why the Downgrade?
Walgreens has witnessed sharp downward estimate revisions since it reported disappointing third-quarter fiscal 2013 results on Jun 25. In the most recent quarter, Walgreens’ adjusted net earnings of 85 cents missed the Zacks Consensus Estimate by a nickel despite an 18.1% year-over-year improvement.
Furthermore, the company has delivered negative earnings surprises in 3 of the last 4 quarters with an average negative surprise of -6.17%. In the last quarter, sales of $18.31 billion lagged the Zacks Consensus Estimate of $18.46 billion despite the benefits of increasing return of Express Scripts Holding Company (ESRX) customers. Notably, Walgreens missed the Zacks Consensus Estimate for revenues for the fifth time in a row.
According to management, at least part of the reason for another dull performance was lower-than-expected front-end sales and unyielding macroeconomic conditions. Walgreens also faces a relentless decline in customer traffic in comparable stores.
While the company continued to witness higher profitability on the back of the generic wave in the pharmaceutical industry, the sustainability will be questioned as the benefits from the introduction of generics top out as the industry surmounts the ‘patent cliff.’ This adds to stock woes.
Based on these issues and the macroeconomic backdrop, estimate revision trend also appear extremely bearish for Walgreens. The Zacks Consensus Estimate for fiscal 2013 decreased 4.3% over the last 60 days to $3.13 with uncontested downward revision of all 11 estimates. For fiscal 2014, most of the estimates were revised lower over the same time frame, sinking the Zacks Consensus Estimate by 3.8% to $3.55 per share.
Stocks to Consider
While it is time to give up on Walgreens share, other players in the drug retail space such as GNC Holdings Inc. (GNC) and Herbalife Ltd. (HLF) are worth considering. These stocks carry Zacks Rank #2 (Buy).
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