Walgreen's Scaling Back

Walgreen Company, or Walgreen's (WAG - Analyst Report) reported $0.41 for the first quarter of fiscal 2009 (August fiscal year). Earnings were $0.06 below our expectations and sales came in $200 million short. The difficult retail environment negatively impacted front-end (general merchandise) same-store sales, which were flat for the quarter.

After experiencing robust same-store sales growth of 7.7% and 8.1% in fiscal 2006 and 2007, respectively, total sales in comparable stores increased 4.3% in fiscal 2008. Here, in the first quarter of fiscal 2009, same-store sales increased only 1.7%. As a result, management is reducing the organic store expansion target almost in half, from a rate of 6.6% to a range of 4.0% to 4.5% for 2010.

Our concern stems from a change in strategy that began in 2006, when management began implementing a more aggressive strategy that includes acquisitions of existing drug stores and clinics. In addition, pharmacy profits continue to be pressured from lower reimbursements on generic drugs and from Wal-Mart (WMT) entering the retail generic marketplace two years ago.

However, Walgreen is the premier national retail pharmacy chain, and our rating remains a Hold due to the stock’s low valuation.

Read the full analyst report on WAG

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