Walgreen Posts Encouraging Quarter - Analyst Blog
September 27 2011 - 7:52AM
Zacks
Walgreen (WAG) reported adjusted earnings of 57
cents per share in the fourth quarter of fiscal 2011, beating the
Zacks Consensus Estimate of 55 cents and were 38.3% higher than the
year-ago quarter.
Results for the quarter excluded an after-tax gain of 30 cents
per share associated with the company’s sale of pharmacy benefits
management (PBM) business, Walgreens Health Initiatives, to
Catalyst Health Solutions (CHSI). The result
includes negative impact of 2 cents per share from Walgreen’s
acquisition of drugstore.com and restructuring and
restructuring-related costs of a penny per share associated with
the company’s Rewiring for Growth initiative.
The year-ago quarter included negative impact of 4 cents per
share from costs associated with the Duane Reade acquisition and 1
cent towards costs associated with Rewiring for Growth.
For fiscal 2011, the adjusted earnings came in $2.64 per share,
beating the Zacks Consensus Estimate by 2 cents and prior-year
adjusted earnings of $2.12 per share. The full year result excluded
the after-tax gain on the sale of Walgreens Health Initiatives,
included the effect of 3 cents per share in costs associated with
Rewiring for Growth, 2 cents per share from the drugstore.com
acquisition and 1 cent per share in Duane Reade related costs.
The company reported total sales of $18.0 billion for the fourth
quarter, beating the Zacks Consensus Estimate of $17.8 billion.
Total sales increased 6.5% from $16.9 billion reported in the
year-ago period. Comparable store sales (those open for more
than a year) during the quarter increased 4.4% while front-end
comparable drugstore sales were up 4.6%. For fiscal year 2011,
total sales were up 7.1% year over year to $72.2 billion,
surpassing the Zacks Consensus Estimate of $72.1 billion.
Prescription sales, accounting for 65.4% of sales in the
quarter, leaped 5.7%, while prescription sales in comparable stores
expanded 4.4%. Moreover, during the quarter, Walgreen filled 202
million prescriptions (up 4.0% year over year) and prescriptions
filled in comparable stores jumped 3.4%. The company also increased
its retail pharmacy market share to 20.0%.
The gross profit increased 5.8% year over year to $5.1 billion.
However, during the quarter, lower front-end margins, combined with
the flat retail pharmacy margins resulted in 20 basis points (bps)
drag in the overall gross margin to 28.2%.
Selling, general and administrative (SG&A) expenses surged
4.8% year over year to $4.2 billion due to new store openings
(contributing 2.0%) and drugstore.com acquisition (1%) related
costs. Other expenses, including comparable store and headquarter
expense, accounted for 1.8% of the increase. However, operating
margin during the quarter expanded 262 bps to 7.04%.
At the end of the quarter, Walgreen had $1.5 billion in cash and
cash equivalents, compared to $1.9 billion at the end of fiscal
2010. The company generated $3.6 billion in cash flow from
operations during fiscal 2011. Moreover, during the year, the
company returned $2.4 billion to shareholders through share
repurchases and dividends. Additionally, in July, the company
announced a new $2 billion share repurchase program and increased
its quarterly dividend rate by 28.6%.
In addition, Walgreens opened/acquired 59 new in the fourth
quarter compared with 65 in the year-ago quarter. For the full
year, the company added 199 new drugstores including 32
acquisitions, based on the target of organic store growth in the
range of 2.5%-3% during 2011.
Our Recommendation
We are encouraged by Walgreen’s strategic decisions to align its
assets with core strategies. These encompass several recent
acquisitions including the takeover of drugstore.com. and selling
of its PBM business. Moreover, the company has made satisfactory
progress with respect to meeting the targeted savings under the
rewiring initiative. The benefits from these initiatives will be
experienced over a period of time. Walgreen is also aggressively
tackling this year’s flu season with its new flu shot program.
However, we are concerned based on the impact of the current
high unemployment levels and lower discretionary spending.
Moreover, the company faces intense competition from major players
like CVS Caremark (CVS) and Rite Aid
Corporation (RAD).
In addition, Walgreen decided not to renew its agreement with
Express Scripts (ESRX) citing certain
disagreements. With this move, effective January 1, 2012,
Walgreen’s 7,700 pharmacies will not be a part of Express Scripts’
pharmacy provider network. Walgreen estimates that Express Scripts,
as a pharmacy benefits manager, processes 90 million prescriptions
that are not expected to be filled by Walgreen in fiscal 2012,
representing approximately $5.3 billion in annual sales. Thus, we
believe the decision not to renew the contract will affect the
company’s future growth.
Walgreen currently retains a Zacks #4 Rank (short-term Sell
rating). However, we are encouraged by the company’s hard work
toward establishing itself as a leading provider of pharmacy,
health and wellness solutions and thus are confident about the
longer term potentiality of the company. Presently, we remain
Neutral on the stock.
CATALYST HEALTH (CHSI): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
RITE AID CORP (RAD): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
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