Walgreen (WAG) reported first-quarter sales Friday that just missed while earnings only met views amid fewer new generic drugs and a continued soft economy. But shares rose as the drugstore giant sees better times ahead.
Fiscal Q1 earnings rose 24% to 72 cents a share, as expected. But that included a deferred tax benefit of 7 cents from Walgreen's partnership with Alliance Boots in Europe.
"Without that one-time 7 cents, it was a clear miss," said Edward Jones' analyst Judson Clark. "Last quarter it was a 3-cent benefit from a nonrecurring litigation gain. Margins are weak. That is one of the main issues.
Gross margin fell 1.3 percentage points vs. a year ago to 28.1% due to fewer new generic drugs entering the market. Heavy promotions to boost store traffic also hurt front-end margins.
CEO Greg Wasson said in the release that the No. 1 U.S. drugstore chain would take further steps in its Q2 "to balance front-end sales and margin.
Overall pharmacy sales were relatively strong, offsetting weakness in the front end.
Total sales rose 5.9% to $18.329 billion, slightly below analysts' downwardly revised consensus. It was the fourth straight quarter of slight acceleration, though.
Walgreen made "meaningful promotional investments" to bat tle the "continued soft economy," Wasson said. Front-end same-store sales rose 2.4% while customer traffic edged up just 0.2%.
Walgreen sees the weakness in new generics persisting this quarter. But Wasson said on the post-earnings conference call that he expects the company to benefit from more generic-drug launches in the second half of fiscal 2014. Pricing is higher on generics when they are first introduced and eventually drop as new rivals enter the field.
Walgreen shares fell early, but rallied to close nearly 4% higher on Wasson's comments.
While this year's mild flu season impacted store sales, Walgreen administered 6.7 million flu shots in Q1 vs. 5 million last year.
Prescription sales grew 7.3%, with comparable sales up 7.2%. Walgreen filled a record 213 million prescriptions in the quarter, a 5.8% gain over last year.
Prescription results were up against a year-ago quarter that was still reeling from a contract dispute with pharmacy benefits manager Express Scripts (ESRX). Walgreen stopped filling members' prescriptions in January 2012 and didn't restart until mid-September, after a settlement.
Walgreen is "now coming against the end of the (Express Scripts) dispute," ISI analyst Ross Muken said in a note. Walgreen has since strengthened its ties with Express Scripts.
Walgreen, Alliance Boots and drug wholesaler AmerisourceBergen (ABC) have joined forces in a global generic-drug sourcing venture. Walgreen's Alliance partnership and the generic venture could prove positive "longer term," Clark said.
Management sees its Alliance Boots ties generating $350 million-$400 million in synergies in fiscal 2014, with 7-8 cents in Q2.
CVS Caremark (CVS), the No. 2 drugstore player, and drug distributor Cardinal Health (CAH) said earlier this month that they will form a huge U.S. generic-drug buying group.
Meanwhile, Walgreen expects ObamaCare gains as more people get insurance. Pharmacy chief Kermit Crawford said on the call that Walgreen is "positioned to service these patients," not only in filling prescriptions but by providing vaccines, immunizations and preventive services at its health clinics.
Rite Aid (RAD) on Thursday lowered guidance for its fiscal year ending March 1. The No. 3 U.S. drugstore chain's Q3 was also impacted by generic pricing pressures and heavy front-end promotions. Rite Aid fell 10% Thursday and 3.5% Friday.
CVS Caremark (CVS) on Wednesday hiked its dividend by 22% and said it will buy back another $6 billion in stock. It reaffirmed cautious guidance.
CVS shares rose more than 4% to a new high Wednesday. They fell a fraction Friday.