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Promising January Sales at Walgreens

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Drug retailer  Walgreen Co.  recently reported results for the month of Jan 2014. The company posted 3.7% year-over-year sales growth to reach $6.39 billion in the month.

Total front-end sales increased 2.4% from the year-ago period, while comparable store front-end sales improved 1.6%. Customer traffic in comparable stores decreased 2.2% whereas basket size increased 3.8% year over year.

Prescriptions filled at comparable stores at Walgreens slid 0.8% (or down 0.4% on a calendar day-shift adjusted basis). According to Walgreens, a calendar shift led to 0.4% decline in prescriptions filled at its comparable stores in January as the month had one additional Friday and one lesser Tuesday than the comparable prior-year month.

Walgreens experienced a negative impact of 0.8% on prescriptions filled at comparable stores owing to a year-over-year reduction of flu shots. Moreover, prescriptions were impacted by 1.4% due to lower incidence of flu in January.

Total sales in comparable stores rose 2.9% on a year-over-year basis. The calendar day shifts pulled down comparable store sales by 0.3% while the generic wave in the pharmaceutical industry during the last 12 months led to an adverse impact of 0.9% on comparable store sales.

Walgreens’ total pharmacy sales, which accounted for the lion’s share (65.6%) of total sales in the reported month, improved 4.6% (or 4.1% on a calendar day-shift adjusted basis) year over year. Calendar day shifts had a negative effect of 0.4% on pharmacy sales in comparable stores. On a calendar day-shift adjusted basis, the generic wave in the pharmaceutical industry dragged comparable store pharmacy sales by 1.3% in January. Fewer flu shots in this month led to a fall of 0.5% in comparable store pharmacy sales. Moreover, lower incidence of flu negatively impacted pharmacy sales by 1.1%.

The company opened 12 stores (including three relocations), and closed down three stores during the reported month.

As of Jan 31, 2014, Walgreens operates 8,678 locations in 50 U.S. states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands, including 8,206 drugstores (139 more than the year-ago period). This includes 60 net stores acquired over the last year. The company also operates infusion and respiratory service facilities, specialty pharmacies and mail service facilities.

Our Take

The generic wave in the pharmaceutical industry is still a threat to revenues. Nonetheless, Walgreens is poised to generate higher profits from escalating sales of higher-margin generic drugs. The company is also positioned on a healthy dividend growth track. Further, the customer loyalty program is gaining traction as reflected in increasing registrations. This should improve customer traffic for Walgreens going forward.

In the upcoming quarter, Walgreens plans to balance its front-end sales and margin. The company foresees the impact of the generic wave on pharmacy margin similar to what it had been in the first quarter of the fiscal. However, the company expects this effect to keep on moderating through the rest of the fiscal. Additionally, the company plans to focus on expense management to tackle the challenging environment.

We also look forward to synergies from the Alliance Boots deal. The company estimates that accretion from Alliance Boots in the second quarter of fiscal 2014will be an adjusted 7 to 8 cents per share.

The deal with Amerisource Bergen Corporation (ABC - Free Report) , likely to create a leader in the generic and branded drug purchasing space, is another major upside. Walgreens is optimistic about the potential financial and operational benefits from the deal for fiscal 2014 in the form of margin expansion and bottom-line accretion. Evidently, management seems to have chalked out a number of strategic initiatives to revive growth at the company.

Walgreens has designed three strategic growth drivers to strengthen its claim for the leading position in the drug retail market. These include creating a Well Experience, advancing community pharmacy and establishing an efficient global platform.

Walgreens operates in two dynamic industries viz. retail and healthcare. These industries are growing rapidly and Walgreens is all set to strategically strengthen its foothold in both these spaces. The company is well positioned to exploit opportunities in the $2.6 trillion healthcare market. Walgreens has also introduced 2,000 new private brand items in the previous year to attract more customers within the retail market.

Currently, the stock carries a Zacks Rank #3 (Hold). Better-placed stocks that are worth a look include Actelion Ltd.   and Herbalife Ltd (HLF - Free Report) . Actelion sports a Zacks Rank #1 (Strong Buy) and Herbalife carries a Zacks Rank #2 (Buy).

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