Walgreen Grows Online - Analyst Blog
June 06 2011 - 11:45AM
Zacks
Walgreen (WAG) has
completed the acquisition of drugstore.com for a total enterprise
value of $409 million.
Earlier in March, the retail
pharmacy giant had announced its decision to acquire the online
retailer, which had more than $456 million in sales in 2010.
Walgreen said the deal would be dilutive to its earnings in the
fourth quarter of fiscal 2011 by 3 cents, in fiscal 2012 by 3-4
cents and in 2013 by 2 cents.
Through this deal, Walgreen’s reach
in the online arena will increase as it will be able to access more
than 3 million online customers. Moreover, the company with 7,700
drugstores will be able to add its already strong online offering
by almost 60,000 products. Walgreen’s President of E-commerce Sona
Chawla will lead the combined e-commerce business.
Walgreen’s objective has been to
use its cash balance strategically to enhance its business
prospects. With this aim, it recently decided to divest its
pharmacy benefit management (PBM) business to Catalyst
Health (CHSI) for $525 million in cash, so that it could
better focus on its drug stores.
Walgreen also announced its sales
figures for May, 2011. Total front-end sales increased 5.5%, while
comparable store front-end sales increased 3.6%. Moreover,
prescriptions filled at comparable stores increased 7.1%, which was
positively impacted by calendar day shifts.
Sales in comparable stores (those
open at least a year) increased 5.6%. Total sales for the third
quarter of fiscal 2011 were $18.38 billion, up 6.8% from the
year-ago period. Comparable store sales for the quarter increased
4.1%, while front-end comparable store sales increased 3.9%.
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 benefits from the CCR
rollout and rewiring initiative will be experienced gradually.
Leveraging on its strong cash balance, the company is well equipped
to pursue suitable acquisitions in future.
In order to make the best use of
available funds, Walgreen has scaled down its plan of opening
stores. We believe this decision will benefit the company as the
new stores take 2 to 3 years to break even. However, Walgreen has
been impacted over the past few quarters by high unemployment
levels and lower discretionary spending.
We have a ‘Neutral’ recommendation
on Walgreen, which also corresponds to the Zacks #3 Rank (hold) in
the short-term.
CATALYST HEALTH (CHSI): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
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