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Feb Sales Up at Walgreen but Q2 Revs Miss Est.

Zacks Equity Research

Drug retailer Walgreen Co. (WAG) recently reported results for the month of Feb 2014. The company posted 5.0% year-over-year sales growth to reach $6.05 billion in the month.

Total front-end sales increased 3.0% from the year-ago period, with 2.0% improvement in comparable store front-end sales. Customer traffic in comparable stores edged down 0.7% whereas basket size increased 2.7% year over year.

Prescriptions filled at comparable stores at Walgreens were up 2.2%. Walgreens experienced a negative impact of 1.0% on prescriptions filled at comparable stores owing to lower incidence of flu in February. However, year-over-year improvement in flu shots led to a nominal 0.1% positive impact on prescriptions filled at comparable stores.

Total sales in comparable stores rose 4.5% on a year-over-year basis. The generic wave in the pharmaceutical industry during the last 12 months led to an adverse impact of 0.9% on comparable store sales while lower incidence of flu negatively impacted total comparable sales by 0.4%.

Walgreens’ total pharmacy sales, which accounted for the lion’s share (62.9%) of total sales in the reported month, improved 6.7% year over year. The generic wave in the pharmaceutical industry dragged comparable store pharmacy sales by 1.4% in February. More flu shots in this month led to an increase of 0.1% in comparable store pharmacy sales. However, lower incidence of flu negatively impacted pharmacy sales by 0.7%.

The company opened 8 stores (including 5 relocations) during the reported month.

With this, the company ended its second quarter of fiscal 2014. In this quarter, although the company recorded an improvement of 5.2% year over year in total sales to $18.65 billion, it missed the Zacks Consensus Estimate of $19.54 billion. According to Walgreens, in the second quarter, comparable store sales increased 4.5% with 2.0% increase in front-end comparable store sales. Prescriptions filled at comparable stores increased 2.4% and comparable pharmacy sales increased 6.1%.

Moreover, comparable store front-end sales and prescriptions filled at comparable stores in the second quarter were negatively impacted by 0.6% and 0.8%, respectively, due to adverse weather conditions this winter. Notably, Walgreen is slated to release its second quarter and fiscal 2014 results (ending Feb 2014) on Mar 25, 2014, before the market opens.

As of Feb 28, 2014, Walgreens operates 8,681 locations in 50 U.S. states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands, including 8,209 drugstores (138 more than the year-ago period). This includes 60 net stores acquired over the last year. The company also operates infusion and respiratory service facilities, specialty pharmacies, mail service facilities and Take Care Health Systems subsidiary.

Our Take

Walgreens reported another month of year-over-year improvement in sales. The generic wave in the pharmaceutical industry is still a threat to revenues. This is also reflected in the company's quarterly sales figure which fell short of the Zacks Consensus Estimate.

Nonetheless, Walgreens is poised to generate higher profits from escalating sales of higher-margin generic drugs. The company is also positioned on a healthy dividend growth track. Further, the customer loyalty program is gaining traction as reflected in increasing registrations. This should improve customer traffic for Walgreens going forward.

We also look forward to synergies from the Alliance Boots deal. Earlier, the company estimated that accretion from Alliance Boots in the second quarter of fiscal 2014 will be an adjusted 7 to 8 cents per share.

The deal with Amerisource Bergen Corporation (ABC) – likely to create a leader in the generic and branded drug purchasing space– is another major upside. Walgreens is optimistic about financial and operational benefits from the deal for fiscal 2014, with margin expansion and bottom-line accretion. Evidently, management seems to have chalked out a number of strategic initiatives to revive growth at the company. 

Currently, the stock carries a Zacks Rank #3 (Hold). Better-placed stocks that are worth a look include Rite Aid Corporation (RAD) and Herbalife Ltd. (HLF). Both the stocks carry a Zacks Rank #2 (Buy).

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