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Walgreen Co. (WAG - Analyst Report) reported earnings of 43 cents per share in the first quarter of fiscal 2013 compared with 63 cents in the year ago quarter. However, after adjusting for certain one-time items, the adjusted earnings came in at 58 cents per share, significantly below the year-ago earnings per share of 71 cents as well as the Zacks Consensus Estimate of 68 cents.
The company has already reported sales for the first quarter fiscal 2013. 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.
The reported quarter results continue to echo the loss of the Express Scripts (ESRX - Analyst Report) contract. The company’s sales figure has been dragging since the termination of the contract. Moreover, the performance in the first quarter reflects the negative impact associated with hurricane Sandy. The generic wave in the pharmaceutical industry also negatively impacted first quarter sales by $883 million in the reported quarter.
Quarter in Detail
Front-end comparable store sales (those open for more than a year) decreased 2% while comparable pharmacy sales dropped 10.8% in the first quarter. Further, a decline of 4.2% in customer traffic in comparable stores along with an increase of 2.2% in basket size resulted in 8% dip in comparable store sales.
Prescription sales (accounting for 63.8% of sales in the quarter) declined 7.2%, while prescription sales in comparable stores decreased 11.3%. Moreover, during the quarter, Walgreens filled 201 million prescriptions (down 3.2% year over year). Prescriptions filed at comparable stores dropped 4.8% compared with a decline of 8% in the sequentially prior quarter. The improvement was attributed to the new multi-year pharmacy network agreement with Express Scripts under which Walgreens' pharmacy network has started filling prescriptions from Express Scripts customers from September 15, 2012, and should further bolster sales.
Gross profit declined 0.1% year over year to $5.1 billion though gross margin expanded 130 basis points (bps) to 29.4% in the first quarter. Margin improved on account of higher generic prescription drug sales and increased LIFO gross profit margins. With selling, general and administrative (SG&A) expenses increased 4.6% year over year to $4.4 billion, operating margin during the quarter contracted 90 bps to 4.1%.
Exiting first quarter, Walgreens had $1.8 billion in cash and cash equivalents, up 67.2% year over year. Moreover, the company generated operating cash flow of $601 million and free cash flow of $265 million in the reported quarter.
Walgreens’ Balance Rewards loyalty program (launched in September 2012) has recorded more than 45 million registrations to date. The company opened or acquired 218 stores in the reported quarter compared with 71 stores in the year-ago quarter.
Despite a dull start to fiscal 2013, we believe that Walgreens has a broad-based platform to drive growth going forward. A solid financial footing and sizeable market share in retail pharmacy should hasten the company’s return to growth. Further, the customer loyalty program is gaining traction as reflected in increasing registrations. This should improve customer traffic for Walgreens. We also expect the Alliance Boots acquisition to be considerably accretive to the company’s result for fiscal 2013.
While fiscal 2012 was a challenging year for Walgreens, we look forward to fiscal 2013 with optimism. We currently have a long-term ‘Neutral’ recommendation on the stock, which carries a short-term Zacks # 3 Rank (Hold).