Lean 1Q13 Sales; Tepid Nov for WAG

Drug retailer Walgreen Co. ( WAG - Analyst Report ) recently announced select financial results for first quarter fiscal 2013 along with results for the month of November.

Glimpse of First Quarter Results

Walgreens reported selected results for the first quarter fiscal 2013, ending November 30. Total sales came in at $17.34 billion, down 4.5% year over year and trailing the Zacks Consensus Estimate of $17.63 billion, missing top-line Zacks Consensus Estimate for the third time in a row.

Comparable store sales dipped 7.7% with prescriptions filled at comparable stores declining 3% on a year-over-year basis. Total prescriptions were also down 4.6% year over year. Front-end comparable store sales decreased 2% while comparable pharmacy sales dropped 10.8% in the first quarter.

Walgreens is slated to release first quarter fiscal 2013 earnings on December 21, 2012.

Dismal November Results

Walgreens witnessed another dull month with November 2012 sales declining 3.9% on a year-over-year basis to gross $5.85 billion.

Total front-end sales edged down 0.3% from November 2011 while comparable store front-end sales decreased 1.7%. Customer traffic in comparable stores was down 4.9% but basket size increased 3.2% year over year.

Prescriptions filled at comparable stores at Walgreens declined 2.9% [day-fall adjusted (DFA) 2.6%] in November despite a 0.2 percentage point positive impact from the higher incidence of flu in the month. One extra Thursday and Friday in the month with one less Tuesday and Wednesday, led to a negative impact of 0.3 percentage points on Walgreen’s prescriptions filled in November.

Total sales in comparable stores decreased 6.2% on a year-over-year basis in November. A decline of 5.7 percentage points due to generic drug introductions during the last 12 months as well as the negative impact of 0.2 percentage point due to calendar day shifts were responsible for the decrease in total comparable stores sales. It led to a 4.7% decline in Walgreens’ total pharmacy sales which accounted for the lion’s share (63.2%) of total sales in November.

Moreover, comparable store pharmacy sales were down 8.8% in November, 9.0 percentage points of which was due to the introduction of generic drugs in the last one year, with a 0.3 percentage point negative impact from calendar day shifts. Flu shots administered at pharmacies and clinics season-to-date were 4.6 million, down approximately 8% year over year.

Walgreens’ Balance Rewards loyalty program recorded more than 38 million registrations in the reported month. The company opened 39 stores (including 10 relocations) and closed one store in November.

At the end of November 2012, Walgreens operated 8,516 locations in 50 states, the District of Columbia, Puerto Rico and Guam including 8,057 drugstores (246 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our Take

We note the company’s efforts to improve the retail sale of its mainstay prescription drugs at its stores. This is reflected in the lower year-over-year decline of prescriptions filled at comparable stores since June 2012. The company’s new multi-year pharmacy network agreement with Express Scripts ( ESRX - Analyst Report ) under which Walgreen’s pharmacy network has started filling prescriptions from Express Scripts customers from September 15, 2012, should further bolster sales.

Walgreens’ Balance Rewards customer loyalty program (launched in September 2012) is gaining traction as reflected in increasing registrations. This should improve customer traffic for Walgreens.

We have a long-term ‘Neutral’ recommendation on Walgreens, which carries a short-term Zacks #3 Rank (Hold). Its peer CVS Caremark ( CVS - Analyst Report ) carries a Zacks #2 Rank (Buy).