Harry's Happy With Walgreen

Yesterday, Walgreen (NYSE: WAG  ) took a small page out of archrival CVS's (NYSE: CVS  ) playbook by announcing its purchase of the Happy Harry's pharmacy chain, based in Delaware. Is it just another smart acquisition, or a sign that growth for the pharmacy chain is increasingly difficult to come by?

Happy Harry's consists of 76 stores in Delaware, Pennsylvania, Maryland, and New Jersey. Walgreen purchased all the stores, the headquarters, and a distribution facility. Financial terms weren't disclosed, nor was the reason for the acquisition, beside a mention that the purchase was "a unique opportunity and is a solid strategic fit." Walgreen also noted that the two companies have similar cultures stressing customer service, were both family-founded, and continue to have family members involved in each respective company.

For now, Walgreen plans to keep the Happy Harry's name in all but eight stores in Pennsylvania, where Walgreen was deemed to have stronger brand awareness. Analysts pegged Happy Harry's 2005 sales near $500 million, with same-store sales in the 6% range. The acquisition price could amount to a couple hundred million dollars, if funded with cash on hand. Analysts predict a negligible impact to Walgreen's earnings, perhaps amounting to an additional $0.01 for this year.

According to other analysts, Happy Harry's has fewer free-standing stores than Walgreen; capital expenditure may be necessary to revitalize some of its older stores. It's also believed that Happy Harry's has lower profit margins, giving Walgreen has an opportunity to enhance sales per square foot.

Though Happy Harry's 76 stores seem minuscule in comparison to Walgreen's -- just under 1.5% of Walgreen's current 5,251 U.S. stores -- the move is bound to garner speculation. The company's last pharmacy store acquisition of 66 stores occurred back in 1986. Its return to purchasing retail stores will undoubtedly lead some investors to speculate whether it's a signal that organic growth opportunities are becoming increasingly difficult for Walgreen to find. Perhaps it will shrink the discount the market has assigned to CVS's shares because of its acquisitive nature, either through a contracted Walgreen or an expanded CVS multiple.

Whether or not the Happy Harry's acquisition is a sign of shrinking organic growth opportunities, it pales in comparison to CVS's $2.9 billion acquisition of 700 Osco/Sav-on pharmacies, which is set to close this week. The deal resulted in debt downgrades for CVS from major ratings agencies such as Fitch and Moody's (NYSE: MCO  ) .

Though the Happy Harry's acquisition is noteworthy, it probably won't change the fundamentals at Walgreen. The company has been around since 1901, has grown earnings for 31 consecutive years, and believes it can continue to grow profitably and organically through at least 2010.

Moody's is a Stock Advisor pick.

Fool contributor Ryan Fuhrmann is long shares of Walgreen but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss the company further. The Fool has a disclosure policy.