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Drug retailer Walgreen Co. (WAG - Analyst Report) recently reported results for the month of Dec 2013. The company posted 7.2% year-over-year sales growth with the figure coming in at $6.72 billion.

Total front-end sales increased 4.0% from the year-ago period, while comparable store front-end sales improved 2.5%. Customer traffic in comparable stores decreased 1.3% whereas basket size increased 3.8% year over year.

Prescriptions filled at comparable stores at Walgreens improved 5.3% (or up 2.4% on a calendar day-shift adjusted basis). According to Walgreens, a calendar shift led to 2.9% improvement in prescriptions filled at its comparable stores in Dec 2013 as the month had one additional Tuesday and one lesser Saturday than the comparable prior-year month.

Walgreens experienced a negative impact of 0.4% on prescriptions filled at comparable stores owing to a year-over-year reduction of flu shots. Moreover, prescriptions were impacted by 0.8% due to lower incidence of flu in December.

Total sales in comparable stores surged 6.1% on a year-over-year basis. The calendar day shifts pulled down comparable store sales by 1.7% while the generic wave in the pharmaceutical industry during the last 12 months led to an adverse impact of 0.7% on comparable store sales.

Walgreens’ total pharmacy sales, which accounted for the lion’s share (58.3%) of total sales in the reported month, improved 10.2% (or 6.1% on a calendar day-shift adjusted basis) year over year. Calendar day shifts had a positive effect of 2.9% on pharmacy salesin comparable stores. On a calendar day-shift adjusted basis, the generic wave in the pharmaceutical industry dragged comparable store pharmacy sales by 1.2% in December. Fewer flu shots in this month led to a fall of 0.2% in comparable store pharmacy sales. Besides, lower incidence of flu negatively impacted pharmacy sales by 0.4%.

The company opened 5 stores (including one relocation), undertook three acquisitions and closed down six stores during the reported month.

As of Dec 31, 2013, Walgreens operates 8,674 locations in 50 U.S. states, the District of Columbia, Puerto Rico, Guamand the U.S. Virgin Islands, including 8,200 drugstores (139 more than the year-ago period). This includes 62 net stores acquired over the last year. The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our Take

Walgreens continued to record plump monthly sales with increasing return of Express Scripts (ESRX - Analyst Report) customers. 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 going forward.

In the upcoming quarter, Walgreens plans to balance its front-end sales and margin. The company foresees the impact of the generic wave on pharmacy margin similar to what it had been in the first quarter of the fiscal. However, the company expects this effect to keep on moderating through the rest of the fiscal. Additionally, the company plans to focus on expense management to tackle the challenging environment.

We also look forward to synergies from the Alliance Boots deal.The company estimates that accretion from Alliance Boots in the next quarter will be an adjusted 7 to 8 cents per share.

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 the potential financial and operational benefits from the deal for fiscal 2014 in the form of 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 at present, drug retailer Herbalife Ltd. (HLF - Snapshot Report), carrying a Zacks Rank #2 (Buy), is worth considering.

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