Longs Drugs Has a Nice Niche

Like Rodney Dangerfield, regional drugstore chain Longs (NYSE: LDG  ) doesn't get much respect (or attention, for that matter) from Wall Street. Perhaps it's because most of the shares are held by institutions, or maybe it's that regional players just aren't going to get the limelight that national powerhouses like CVS Caremark (NYSE: CVS  ) and Walgreen (NYSE: WAG  ) do.

Regardless of the reason, the company continues to exploit a successful West Coast niche. Its fourth quarter continued the company's streak of exceeding analyst expectations by a wide margin.

Sales growth was modest, increasing 11%, helped by an additional week compared to 2006. Without that benefit, total sales advanced just 3%. That was 2% in the stores but a handy 26% in the pharmacy benefits management business.

Gross margin improvement was where Longs buttered its bread this quarter. Margins on a rate basis expanded 70 basis points at store level thanks to a more favorable mix of generic-drug business. The company has also been enjoying cost synergies from a distribution center opened last year to handle front-end merchandise.

Earnings per share of $1.00 for the quarter were 25% better than the prior year, though $0.05 was earned in the extra week. This trounced analyst estimates by $0.03.

Guidance for 2008 was cautious, with management suggesting EPS of $3.02-$3.12 on same-store sales growth of 1% to 3%. But this looks more like fine-tuning the top end than reduced expectations. The range still indicates 15% to 20% EPS growth, which most retailers would kill for these days.

I haven't been a cheerleader for Longs in the past. I've wondered whether the company can keep the growth engine running, and I worry that a West Coast niche makes it more susceptible to regional economic conditions than CVS or Walgreen, with their national footprints.

But after several quarters of better-than-expected results, I'm (slowly) gaining confidence in management's ability to deliver double-digit EPS growth on a slow-moving top line. Not the most exciting stock story I've heard recently, but certainly a solid play. 

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