Tuesday, June 21, 2011


Walgreen (WAG - Analyst Report) reported earnings of 65 cents per share in the third quarter of fiscal 2011, beating the Zacks Consensus Estimate of 62 cents and were 38.3% higher than the year-ago quarter earnings 47 cents.
Results for the quarter included restructuring and restructuring-related costs of a penny per share associated with the company’s Rewiring for Growth initiative.
The year-ago quarter included a negative impact of 4 cents per share from the elimination of the tax benefit for the Medicare Part D subsidy for retiree benefits, 2 cents from costs associated with the Duane Reade acquisition and 1 cent towards costs associated with Rewiring for Growth.
The company reported total sales of $18.4 billion for the third quarter, marginally beating the Zacks Consensus Estimate of $18.3 billion. Total sales increased 6.8% from $17.2 billion reported in the year-ago period.  Comparable store sales (those open for more than a year) during the quarter increased 4.1%, front-end comparable drugstore sales spiked 3.9%.
Prescription sales, accounting for 65.1% of sales in the quarter, leaped 6.4%, while prescription sales in comparable stores expanded 4.1%. Moreover, during the quarter, prescriptions filled in comparable stores jumped  4.6%. The company also increased its retail pharmacy market share to 20.1%.
The gross profit increased by 8.5% year over year to $5.2 billion out of which 1.5 % was attributable to Duane Reade acquisition. Gross margin expanded 50 basis points (bps) to 28.1% compared with the year-ago quarter.
The overall margin growth aided by the positive impact of generic drug sales and higher front end margins. However, this was partially offset by continued pharmacy reimbursement pressures and an increased LIFO provision of $50 million during the quarter compared with the year-ago quarter level of $18 million.
Selling, general and administrative (SG&A) expenses surged 7.2% year over year to $4.2 billion due to Duane Reade acquisition related costs (contributing 0.9%) and new store openings ( 1.5%). Selling, general and administrative (SG&A) expenses surged 7.2% year over year to $4.2 billion. Other expenses, including comparable store and headquarter expense, accounted for 4.9% of the increase. However, operating margin during the quarter increased 57 bps to 5.17%.
At the end of the quarter, Walgreen had $2.7 billion in cash and cash equivalents, up from $1.7 billion at the end of May 2010. The company generated $1.2 billion in cash flow from operations during the quarter. Moreover, during the quarter, the company returned $535 million to shareholders through share repurchases and dividends.
In addition, Walgreens opened/acquired 41 new drugstores (a net gain of 25 after relocations and closings) in the third quarter compared with 361, including 258 Duane Reade drugstores (or a net gain of 342) in the year-ago quarter. Walgreens expects organic store growth in the range of 2.5%-3% in fiscal 2011.
Our Recommendation
We are encouraged by Walgreen’s strategic decisions, including the sale of the PBM business and the acquisition of drugstore.com. Moreover, the company has made satisfactory progress with respect to the CCR rollout and meeting the targeted savings under the rewiring initiative. The benefits from these initiatives will be experienced over a period of time.
Leveraging on its strong cash balance, the company is well equipped to pursue suitable acquisitions in future. However, Walgreen has been impacted over the past few quarters by high unemployment levels and lower discretionary spending.
We have a ‘Neutral’ recommendation on the stock.

No comments:

Post a Comment