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Drug retailer Walgreen Co. (WAG - Analyst Report), or Walgreens, recently reported results for the month of Nov 2013. The company posted 4.1% year-over-year sales growth to reach $6.07 billion.

Total front-end sales increased 3.2% from the year-ago period, while comparable store front-end sales improved 1.9%. Customer traffic in comparable stores was up 0.8% whereas, basket size increased 1.1% year over year.

Prescriptions filled at comparable stores at Walgreens improved 1.4% (or up 3.7% on a calendar day-shift adjusted basis). According to Walgreens, a calendar shift led to 2.3% decline in prescriptions filled at its comparable stores in Nov 2013 as the month had one additional Saturday and one lesser Thursday than the comparable prior-year month.

Walgreens experienced a positive impact of 0.4% on prescriptions filled at comparable stores owing to a year-over-year increase of flu shots. On the other hand, prescriptions were impacted by 0.7% due to lower incidence of flu in Nov 2013.

Total sales in comparable stores surged 3.2% on a year-over-year basis. The calendar day shifts pulled down comparable store sales by 1.5% while the generic wave in the pharmaceutical industry during the last 12 months led to an adverse impact of 0.6% on comparable store sales.

Walgreens’ total pharmacy sales, which accounted for the lion’s share (63.5%) of total sales in the reported month, improved 4.7% (or 6.3% on a calendar day-shift adjusted basis) year over year. Calendar day shifts had a negative effect of 2.3% on pharmacy sales. On a calendar day-shift adjusted basis, the generic wave in the pharmaceutical industry dragged comparable store pharmacy sales by 1.0% in November. However, more flu shots in this month led to a rise of 0.2% in comparable store pharmacy sales.

The company opened 22 stores (including 9 relocations) and closed one during the reported month.

As of Nov 30, 2013, Walgreens operates 8,677 locations in 50 U.S. states, the District of Columbia, Puerto Rico and Guam, including 8,197 drugstores (140 more than the year-ago period). This includes 59 net stores acquired over the last year. The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our Take

As expected, Walgreens recorded plump sales with increasing return of Express Scripts (ESRX - Analyst Report) customers following the resolution of the earlier impasse between the two companies. However, the generic wave in the pharmaceutical industry continues to hurt revenues. Nonetheless, Walgreens is poised to generate higher profits from escalating sales of higher-margin generic drugs. Walgreens is also positioned on a healthy dividend growth track. Further, the customer loyalty program is gaining traction as reflected in increasing registrations. This should improve customer traffic for Walgreens.

We also look forward to synergies from the Alliance Boots deal. The deal with AmerisourceBergen Corporation (ABC - Analyst Report), likely to create a leader in the generic and branded drug purchasing space, is another major upside. Walgreens is optimistic about financial and operational benefits from the deal for fiscal 2014, with margin expansion and bottom-line accretion. Evidently, management seems to have chalked out a number of strategic initiatives to revive growth for the company.

Currently, the stock carries a Zacks Rank #3 (Hold). While we choose to remain on the sidelines regarding WAG, drug retailer Herbalife Ltd. (HLF - Snapshot Report), carrying a Zacks Rank #2 (Buy), is worth considering.

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