The termination of the Express Scripts (ESRX - Analyst Report) contract continues to hurt Walgreen (WAG - Analyst Report) sales which led to a frail start for Walgreen’s third quarter 2012. For the month of March 2012, the company recorded a 4.3% dip in year-over-year sales to $6.02 billion. Although total front-end sales witnessed a modest increase of 2.5% with 1.2% rise in comparable store front-end sales, customer traffic in comparable stores fell 1.0%. Simultaneously the number of prescriptions filled by patients reduced drastically. On a year-over-year basis, prescriptions filled at comparable stores were down 11.4%.
The Express Script contract loss, which used to contribute a significant part of Walgreen’s total sales (12.65% of total prescriptions filled in March 2011), led to a negative impact of 10.7 percentage points on Walgreen’s prescription filled. Additionally, lower incidence of flu affected the prescriptions filled by 0.7 percentage point.
All these directed to an 8.4% decline in Walgreen’s total pharmacy sales, which attributed the lion’s share of the total sales of Walgreen (63.5%) in March. There was 11.1% drag in comparable store pharmacy sales for the month, owing to the negative impact of Express Scripts contract loss (10.6 percentage points), the introduction of generics in the last 12 months (2.5 percentage points) and lower incidence of cough, cold and flu (0.9). Further, calendar day shifts negatively impacted pharmacy sales in comparable stores by 2.1 percentage points and total comparable sales by 1.3 percentage points.
Year-to-date, total sales rose 1.6% compared to the same period last year. However, the first 4 months of the period included the result of Express Script contract that was ended effective January 1, 2012.
Amidst such a major contract loss, Walgreen remains optimistic about its front-end store sales and with Easter on April 8, the company assumes better sales performance for the next month. In March, Walgreen opened 8 new stores including 1 relocation. At March 31, Walgreens operated 8,300 locations in all 50 states, the District of Columbia, Puerto Rico and Guam.
Meanwhile, Walgreen is expanding its business with other payers and customers and implementing cost-control initiatives. The company is reassured by the fact that more than 100 of Express Scripts clients, encompassing health plans and employers, would continue with Walgreen pharmacies in 2012. The company aims to retain 10 million prescriptions annually and maintain 97-99% of the 2011 prescription volumes at fiscal 2012 end.
Earlier, in February, specialty pharmacy services provider, BioScrip (BIOS - Analyst Report) and Walgreen entered into a definitive agreement, under which the former will dispense certain community specialty pharmacies and mail service pharmacy business assets to Walgreens for $225 million. Walgreen anticipates the transaction to have no material impact on its fiscal 2012 earnings. However, the transaction will be moderately accretive in fiscal 2013.
Despite its best efforts to counter the loss of the Express Scripts contract, which accounted for 7.3% of total sales in fiscal 2011, Walgreen’s financials will continue to be affected by the loss of the contract. We remain concerned regarding Walgreen’s continuous deterioration in the number of prescription filled following the contract loss. We note that in January this year, Prescriptions filled at comparable stores decreased 8.6% with negative impact of 10.6 percentage points due to the contract loss. Again the company witnessed a 9.5% drop in prescriptions filled in February with 10.7 percentage points impact of contract loss. We are highly anxious about this and expect the negative trend to continue throughout fiscal 2012.
Under these circumstances, we currently prefer to remain on the sidelines until more visibility is obtained. Walgreen retains a Zacks #3 Rank (short-term Hold rating). We have ‘Neutral’ recommendation on the stock over the long term.