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The termination of the Express Scripts (ESRX - Analyst Report) contract in January 2012 continues to hurt Walgreen (WAG - Analyst Report) sales, which once again posted disappointing sales results in July, 2012. The company recorded a 3.7% dip in year-over-year sales to $5.81 billion for the month.

Total front-end sales slipped 0.8%, with 2.4% reduction in comparable store front-end sales. Customer traffic in comparable stores fell 3.8% but basket size increased 1.4% year over year. Simultaneously, the number of prescriptions filled by patients reduced drastically.

Prescriptions filled at comparable stores of Walgreen decreased 5.2% year over year even with 2.2 percentage point of positive impact from calendar day shifts (one extra Monday and Tuesday with one less Friday and Saturday compared with July 2011) and 0.3 percentage point of positive impact due to higher incidence of flu in the month.

The termination of the Express Script contract, which used to contribute a significant part of Walgreen’s total sales (12.7% of total prescriptions filled in April 2011), led to a negative impact of 10.8 percentage points on Walgreen’s prescriptions filled.

Total sales in comparable stores in July 2012 declined 7.0% year over year. While the calendar day shifts had a positive impact of 1.4 percentage points on total comparable store sales, this was more than offset by 4.5 percentage points of negative impact due to generic drug introductions in the last one year.

Calendar year-to-date sales were $40.65 billion, down 3.0% compared to the year-ago period. However, year-to-date fiscal sales were down 0.4% marginally to $65.79 billion.

All these led to a 5.0% decline in Walgreen’s total pharmacy sales which made up the lion’s share (63.7%) of Walgreen’s total sales in July. Moreover, there was a 9.7% decline in comparable store pharmacy sales, impacted by the Express Scripts contract loss (10.8 percentage points), the introduction of generics in the last 12 months (7.1) and lower incidence of cough, cold and flu (0.2).

However, this was somewhat offset by the calendar day shifts in July, which positively impacted comparable store pharmacy sales by 2.2 percentage points.   

Our Take

Walgreen’s financials will continue to be affected by the loss of the Express Scripts contract throughout fiscal 2012 (ending in August 2012). However, we note that in July 2012 both the companies entered into another multi-year pharmacy network agreement in order to settle their long-standing dispute. Per the settlement, September 15, 2012 onward the pharmacy network of Walgreen will go back to filling prescriptions from Express Scripts customers.

The scenario is expected to improve radically with this deal between the two stalwarts. Following the recent agreement, we believe that Walgreen is poised to compensate for the losses incurred since the termination of the previous deal in January 2012. The agreement indicates that both of the PBM giants will gain, so we expect their association to continue in the future.

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

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