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Walgreen's August Sales Disappoint

Zacks Equity Research

The termination of the Express Scripts (ESRX) contract in January 2012 continues to adversely affect Walgreen's(WAG) sales. The company, posted dismal sales results for the month of August 2012 and recorded a decline of 4.5% in year-over-year sales.

Total front-end sales were up 0.9%, while comparable store front-end sales slipped 0.6%. Customer traffic in comparable stores fell 2.2% but basket size increased 1.6% year over year. Simultaneously, the number of prescriptions filled by patients reduced drastically.

Prescriptions filled at comparable stores of Walgreen decreased 6.8% for the month even with a 0.4 percentage point of positive impact due to higher incidence of flu in the month. The termination of the Express Script contract, a significant contributor to Walgreen's total sales (12.6% of total prescriptions filled in August 2011), led to a negative impact of 10.7 percentage points on Walgreen’s prescriptions filled.

Total sales in comparable stores decreased 8.2% in August, 5.1 percentage points of which were due to generic drug introductions in the last 12 months. All these led to a 7.2% decline in Walgreen’s total pharmacy sales which made up the lion’s share (64.1%) of Walgreen’s total sales in August.

Moreover, there was a 12.4% decline in comparable store pharmacy sales, 7.9 percentage points of which were due to the introduction of generic drugs in the last one year and a 10.7 percentage point impact from to its separation from the Express Scripts network in August.

With this, the company recorded a decline of 4.9% year over year in total sales to $17.08 billion for the fourth quarter of fiscal 2012, missing the Zacks Consensus Estimate of $17.21 billion. For fiscal 2012, total sales came in at $71.64 billion, down marginally by 0.8% and missing the Zacks Consensus Estimate of $71.76 billion.

Calendar year-to-date sales were $46.49 billion, down 3.2% compared to the same period last year. Notably, Walgreen is slated to release its fourth quarter and fiscal 2012 results (ending August 2012) on September 28, 2012, before the market opens.

At the end of August 2012, Walgreen operated 8,386 locations in 50 states, the District of Columbia, Puerto Rico and Guam which includes 7,929 drugstores, including 42 stores acquired over the last one year. The company also operates infusion and respiratory services facilities, specialty pharmacies and mail service facilities.

Our Take

As expected, the loss of the Express Scripts contract continued to affect Walgreen’s financials throughout fiscal 2012 (ending in August 2012). However, we note that in July 2012 both the companies entered into another multi-year pharmacy network agreement in order to settle their long-standing dispute.

Per the settlement, September 15, 2012 onwards, the pharmacy network of Walgreen will go back to filling prescriptions from Express Scripts customers.

The scenario is expected to improve radically with this deal between the two stalwarts. Following the recent agreement, we believe that Walgreen is poised to compensate for the losses incurred since the termination of the previous deal in January 2012. The agreement indicates that both the PBM giants will gain, so we expect their association to continue in the future.

Walgreen currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We maintain a long-term Neutral recommendation on the stock, similar to Express Scripts.

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