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Drug retailer Walgreen Co. (WAG - Analyst Report) recently reported exhaustive results for the month of May 2013.

Walgreens also reported sales for the third quarter of fiscal 2013, ending May 31. Total sales came in at $18.34 billion, up 3.3% year over year and trailing the current Zacks Consensus Estimate of $18.54 billion, missing top-line Zacks Consensus Estimate for the fifth time in a row.

Comparable store sales inched up 1.3% year over year. Prescriptions filled at Walgreens’ comparable store increased 7% year over year. On the other hand, comparable pharmacy sales increased 2% year over year.

Front-end comparable store (those open for more than a year) sales clambered 0.3% in the third quarter. This is a stark contrast from the second quarter result when front-end comparable store sales decreased 2.6%

Monthly Numbers

Walgreens posted another month of sales improvement as May sales rose 4.3% year over year to $6.22 billion. This marks the third consecutive month of sales growth for the company.

Total front-end sales increased 3.4% compared with the year-ago period, while comparable store front-end sales improved 1.2%. Customer traffic in comparable stores was down 3.5% although basket size increased 4.7% year over year.

Prescriptions filled at comparable stores at Walgreens improved 7.1% (or 7.5% on a calendar day-shift adjusted basis) on the heels of increasing return of Express Scripts Holding Company (ESRX - Analyst Report) customers along with a 0.2% positive impact from flu shots. According to the company, calendar shifts adversely affected prescriptions filled at its comparable stores by 0.4% as May 2013 had one additional Friday and one lesser Tuesday compared with the prior-year month.

Total sales in comparable stores increased 2.8% on a year-over-year basis. However, the generic wave in the pharmaceutical industry during the last 12 months led to an adverse impact of 2.3% on comparable store sales. The calendar day shifts dragged comparable store sales by 0.3%. Flu shots had a positive impact of 0.1% on comparable store sales in the month.

Walgreens’ total pharmacy sales which accounted for the lion’s share (63.1%) of total sales in May improved 4.4% year over year. Comparable store pharmacy sales increased 3.8% despite the adverse impact of 0.4% due to calendar day shifts. On a calendar day shift adjusted basis, the generic wave in the pharmaceutical industry dragged comparable store pharmacy sales by 3.7% in May.

To date, Walgreens’ Balance Rewards loyalty program (launched on Sep 2012) has recorded over 72 million registrations. The company opened 13 stores (including 2 relocations) and closed one during the month.

As of May 31, 2013, Walgreens operated 8,560 locations in 50 states, the District of Columbia, Puerto Rico and Guam, including 8,096 drugstores (207 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our Take

Walgreens continued its positive monthly sales momentum in May. However, the quarterly sales lagged the Zacks Consensus Estimate despite the benefits of increasing return of Express Scripts customers.

Although the third quarter was the second full quarter to include the benefits of the resolution of the impasse between the two companies, Walgreens’ sales trailed expectations. Generic wave also continues to hurt revenues.

The company also faces tough industry conditions and competitive headwinds. The tussle to gain market share continues as CVS Caremark (CVS - Analyst Report) still retains 60% of the scripts gained during the impasse. This puts Walgreens in a tight spot.

Walgreens is slated to release third-quarter fiscal 2013 earnings later this month. However, estimate revision trend for quarter reflect bearish sentiment. As a result, the stock carries a Zacks Rank #4 (Sell).

While we prefer to avoid Walgreens, CVS Caremark, carrying a Zacks Rank #2 (Buy) warrants a look. Drug retailer Rite Aid Corporation (RAD - Analyst Report) also holds a Zacks Rank #2 and is worth considering.

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