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ESRX Loss Hurts Walgreen Again

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The termination of the Express Scripts (ESRX - Free Report) contract continues to hurt Walgreen's sales, which once again disappointed in the month of April 2012. The company recorded a 3.7% and 3.9% dip in year-over-year and sequential sales, respectively, to $5.78 billion for the month.

Total front-end sales inched down 0.5% with a 2.2% reduction in comparable store front-end sales. Customer traffic in comparable stores fell 3.0% but basket size increased 0.8% year over year. Simultaneously, the number of prescriptions filled by patients reduced drastically. On a year-over-year basis, prescriptions filled at comparable stores were down 7.8%.

The termination of the Express Script contract, which used to contribute a significant part of Walgreen’s total sales (12.6% of total prescriptions filled in April 2011), led to a negative impact of 10.7 percentage points on Walgreen’s prescription filled. Additionally, lower incidence of flu affected the prescriptions filled by 0.2 percentage point.

All these directed to a 6.3% decline in Walgreen’s total pharmacy sales,which attributed the lion’s share of the total sales of Walgreen (62.5%) in April. Moreover, there was ahuge 8.9% decline in comparable store pharmacy sales impacted by Express Scripts contract loss (10.7 percentage points), the introduction of generics in the last 12 months (3.4) and lower incidence of cough, cold and flu (0.5).

However, this was somewhat offset by the calendar day shifts in April, which positively impacted comparable store pharmacy sales by 0.6 percentage point. 

Comparable stores sales of Walgreens decreased 6.4% year over year with 0.4 percentage point of positive impact from calendar day shifts. Calendar year-to-date, total sales declined 2.2% to $23.46 billion compared with the same period last year. However, year-to-date fiscal sales were up 1% to $48.61 billion.

Our Take

The termination of the Express Scripts contract continues to affect Walgreen’s performance. Walgreen’s financials will continue to be affected by the loss of the contract. Also, high unemployment levels and lower discretionary spending have emerged as headwinds for Walgreen over the past few quarters.

However, Walgreen is currently working toward establishing itself as a leading provider of pharmacy and health and wellness solutions. The company has been taking steps over the last few years to align its assets. We are encouraged by Walgreen’s recent strategic decisions, the latest being the acquisition of certain assets of specialty pharmacy services provider BioScrip (BIOS - Free Report) .

With this transaction ( completed in May 2012), Walgreen got hold of BioScrip’s community specialty pharmacy business in 30 locations across 16 states in the US and the District of Columbia, primarily serving HIV, oncology and transplant patients. Walgreen anticipates the transaction to have no material impact on its fiscal 2012 earnings. However, the transaction will be moderately accretive in fiscal 2013.

Meanwhile, Walgreen is expanding its business with other payers and customers and implementing cost-control initiatives. The company is reassured by the fact that more than 100 of Express Scripts clients, encompassing health plans and employers, would continue with Walgreen pharmacies in 2012. The company aims to retain 10 million prescriptions annually and maintain 97-99% of the 2011 prescription volumes at fiscal 2012 end.

The company is experiencing a growth in prescription filing in its comparable stores, consecutively in the last three months. In April the company registered a sequential growth in its comparable store prescription filled. Also in April, Walgreen opened 7 stores including one relocation and 2 acquisitions. As of April 30, Walgreens operated 8,307 locations in all 50 states, the District of Columbia, Puerto Rico and Guam.

Under these circumstances, we currently prefer to remain on the sidelines until more visibility is obtained. Walgreen retains a Zacks #3 Rank (short-term Hold rating). We have Neutral recommendation on the stock over the long term.

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