CHSI Catalyst Health Solutions, (MM)

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.

 
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