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Walgreens (WAG - Analyst Report) recorded a decline of 3.3% year over year in total sales to $17.77 billion for the third quarter of fiscal 2012. Walgreens sales figure have been dragging since the termination of the company’s contract with Express Scripts Inc. (ESRX - Analyst Report) in January 2012.

Total front-end sales decreased 0.7% with a 6.5% fall in comparable store front-end sales. Prescriptions filled at comparable stores decreased 9% in the reported quarter. Comparable pharmacy sales also witnessed a decline of 9.8%.

For the month of May 2012, the company recorded a dip of 1.6% in year-over-year sales to $5.98 billion. Total front-end sales increased 0.3% year over year for the reported month, whereas comparable store front-end sales decreased 1%. The company also witnessed a 2.3% decrease in customer traffic in comparable stores.

Simultaneously, the number of prescriptions filled by patients reduced 7.6% in May. A calendar day shift in May 2012 with two additional weekdays (Wednesday and Thursday) and one less Sunday and Monday had a positive impact of 1.3% on the prescriptions filled in comparable stores. Additionally, higher incidence of the flu accounted for 0.1% of the increase in the number of prescriptions.

The termination of the Express Scripts contract continues to hurt Walgreens with a negative impact of 10.8% in May. The Express Scripts contract had contributed significantly to the number of prescriptions in comparable stores in the year-ago period, accounting for 12.7% of Walgreen prescriptions.

On the other hand, pharmacy sales, accounting for 63.1% of total sales, also decreased by 3.9% in May with an 8.5% fall in comparable stores pharmacy. The positive impact of 1.3% due to calendar day shifts on comparable stores pharmacy sales was offset by the negative impact of 3.9% by introduction of generic drugs during the last 12 months.

Also worth mentioning in this context is the negative impact of 0.3% and 10.8% due to product mix of cough and flu drugs, and the termination of the Express Scripts contract, respectively.

Comparable store sales declined 5.8% despite the positive impact of 0.8% due to calendar-day shifts.

Calendar year sales to date were $29.43 billion, down 2.2% from the same period in 2011. Fiscal year to date sales for the nine months came in at $54.57 billion, up 0.7% from the first nine months of fiscal 2011.

Walgreens opened seven new stores in May 2012, including one relocation. Currently, Walgreens operates from 8,341 locations in 50 states along with District of Columbia, Puerto Rico and Guam.

Management believes that the trend in the number of filled prescriptions has improved since the onset of calendar 2012. The company plans to initiate a number of steps such as changing prescription benefit managers and altering the language in the RFPs to boost the number of filled prescriptions.

These changes will provide patients continued access to Walgreens and its services. The company also plans to extend its multi-year agreement to strengthen its strategic alliance with the largest pharmacy benefit manager in the domestic market-OptumRx.

Walgreens continues to be adversely affected by the loss of the Express Scripts contract due to unsuccessful contract renewal negotiations. Despite its efforts, the loss of the contract continues to drag the company’s performance. With 20% market share in retail pharmacy and a solid financial footing, the company expects to overcome the negative impact.

The company earlier revealed its plan to reduce its selling, general and administrative expenses and costs of goods sold to offset almost half of the reduction in gross profit due to the contract loss in fiscal 2012. Further clarity is awaited on the successful execution of this plan.

Walgreens currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain a long-term Neutral recommendation on the stock. 

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