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Looking beyond Walgreen’s Quarter

July 21, 2014 | About:
Suravi Thacker

Suravi Thacker

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Drugstores are expected to witness good days at any point of time because medicines have become a crucial part of our life. However, there has been a shift to new trends which is leading to continued difficulties for all the drugstore retailers. Each of them is facing problems of shrinking margins and lower bottom line. Walgreen (WAG), one of the popular drugstore retailers, has undergone a similar situation. This hampered its third quarter numbers which failed to meet the Street’s estimates. Let us get into the details.

The picture gets better

Though the results were below the expectations, both the top line and the bottom line surged. Revenue grew 6% to $19.4 million, over last year’s quarter, as against the estimate of $19.48 million. The top line was driven by comparable store sales growth of 4.8%. Front-end comparable store sales increased by 2.2% and the basket size grew by 2.9% over last year’s quarter. However, customer traffic declined 0.7%.

Prescription sales make the most of Walgreen’s revenue (64.4%) and rose 8.4% during the quarter, leading to the higher top line. In fact, prescriptions filled at comparable stores jumped 4.1% over last year. Number of prescriptions filled by Walgreen inched up by 4.5%, clocking in at 218 million prescriptions.

Further, the company’s market share expanded 20 basis points to 19%, in the retail industry. This show that the drugstore retailer is strengthening its position and is growing.

Adjusted earnings surged to $0.91 per share, an increase of 7% over last year. However, gross margin shrank 48 basis points to 28% as various factors such as generic drug price inflation, decrease in third party reimbursements as well as a decline in brand to generic drug conversions. Nonetheless, the deal with Alliance Boots provided purchasing synergies and boosted the bottom line by $0.15 per share.

On the other side

Walgreen’s peer Rite Aid Corporation (RAD) is also facing similar problems. Its bottom line plunged 55% to $0.04 per share in its last reported quarter. Even Rite Aid declared that factors such as lower third party reimbursements and an increase in drug costs have been taking a toll on its earnings.

The much awaited deal

Walgreen’s deal with Alliance-Boots, two years back, was much talked about. This deal has helped the company lower its tax implications as well as increase its bottom line. Hence, it has played a crucial role in the third quarter. Further, it is expected to continue in future as the company reaches the second stage of the acquisition.

Also, the retailer’s loyalty program is also one of the key drivers which are helping Walgreen attract more customers. It provides an added advantage to the company in driving customers to its stores. However, Walgreen is not the only company to provide this sort of an incentive. Even Rite Aid Corporation has undertaken a similar program to lure customers.

Key takeaway

Walgreen is indeed doing well, though its recent quarter could not live up to analysts’ expectations. Its numbers grew, its recent deal is yielding gains and its loyalty program looks good to go. Moreover, its gift cards along with loyalty program are working well. However, the company’s move to withdraw its guidance disheartened its investors. I hope to see the retailer fare well after it declares its revised outlook next month. Till then, keep tracking this drugstore retailer.


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