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Drug retailer Walgreen Co. (WAG - Analyst Report) continued to disappoint with its monthly results as it witnessed another dull month, with December 2012 sales declining 4.0% on a year-over-year basis to $6.71 billion.

Total front-end sales edged down 1.3% compared with the year-ago period, while comparable store front-end sales declined 2.3%. Customer traffic in comparable stores was down 4.0% although basket size increased 1.7% year over year.

Prescriptions filled at comparable stores at Walgreens declined 2.3% [day-fall adjusted (DFA) flat on a year-over-year basis] in December despite a 1.4 percentage points and 0.7 percentage point positive impact from the higher incidence of flu in the month and higher flu shot administration, respectively. An additional Sunday and Monday in the month in place of a highly productive Thursday and Friday further led to a negative impact of 2.3 percentage points on Walgreens’ prescriptions.

Total sales in comparable stores declined 6.1% on a year-over-year basis in December. A decline of 3.2 percentage points was attributable to generic drug introductions during the last 12 months, while a negative impact of 1.3 percentage points was due to calendar day shifts. It led to a 4.9% decline in Walgreens’ total pharmacy sales which accounted for the lion’s share (56.7%) of total sales in December.

Moreover, comparable store pharmacy sales were down 8.9% in December. Calendar day shifts negatively impacted comparable store pharmacy sales by 2.3 percentage points. Flu shots administered at pharmacies and clinics season-to-date were 5.5 million, up approximately 3.8% year over year.

Walgreens’ Balance Rewards loyalty program (launched on September 2012) recorded roughly 49 million registrations through December. The company opened seven stores, acquired one and closed one during the month.

As of December 31, 2012, Walgreens operated 8,524 locations in 50 states, the District of Columbia, Puerto Rico and Guam, including 8,061 drugstores (243 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our Take

Over the past several months, Walgreens has been struggling to post relatively strong sales. A possible explanation could be the loss of customers due to its impasse with Express Scripts (ESRX - Analyst Report). On the upside, the company’s sluggish performance is showing signs of fading with the return of customers following its new multi-year pharmacy network agreement with Express Scripts (from September 2012).

Walgreens’ Balance Rewards customer loyalty program is also gaining traction as reflected in the increasing registrations. This should improve customer traffic for the company in future.

In addition, Walgreens acquisition of Alliance Boots should yield positive results going forward. We are optimistic about the company achieving its long-term goals (revenues of more than $130 billion through fiscal 2016) on the back of acquisition synergies.

We have a long-term ‘Neutral’ recommendation on Walgreens. The stock carries a Zacks #3 Rank (Hold) in the short term. Its peer CVS Caremark (CVS - Analyst Report) and Rite Aid Corporation (RAD - Analyst Report) carry a Zacks #1 Rank (Strong Buy).
 

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