Can Walgreen Put Shoppers in Front?

Walgreen  (NYSE: WAG  ) , the biggest drugstore chain in the United States, delivered strong results and plenty of interesting news to investors on Tuesday. The market responded by sending the stock up several points.

While the headline numbers were not entirely indicative of a runaway operating business, there was still plenty to celebrate on both a sales and profit level. The thing is, drugstore retailers are in a good position these days with a bevy of generic drugs on the horizon -- an event that spells chunkier margins for the storefronts. Here's what's keeping Walgreen's stores healthy going forward.

Earnings recap
Walgreen earned $0.67 per share in the just-ended fiscal fourth quarter on the back of $17.94 billion in sales. The bottom line represents a massive 86% increase in EPS, while sales grew 5%. Clearly, the company did not experience a massive and unexpected sales boom, though there was nothing to complain about regarding store performance, either. The earnings-per-share gain was mainly a result of two factors: a one-time $8 million inventory benefit and the addition of the company's latest M&A activity. In 2012, Walgreen bought a large stake in the United Kingdom's largest drugstore chain, Alliance Boots. The equity stake earned the company an additional $124 million for this quarter, when compared to the last.

Walgreen also recognized cost savings of $154 million from the acquisition -- above internal estimates.

Prescription sales predictably drove the company's revenue gains, with a 6.1% increase over the prior year. The rest of the store showed a gain of 1.6%. All in all, same-store sales were up 4.6%.

The one area of concern for the company is the front of the house -- the non-drug component of the drugstore. Walgreen is trying to find ways to boost traffic, whether it be through a new exercise gimmick loyalty program or standard promotions. Is it enough?

Boosting health and traffic
While the company doesn't seem to have any near-term issues raising its profits or sales figures, especially with the "patent cliff" and subsequent flood of generic drugs, management and investors have valid concerns regarding the front of the store.

One thing the company is trying is allowing customers to log distances walked/run in a given day. After 500 miles, the shopper gets a $5 coupon. Sure, it's rather ridiculous in theory that 500 miles is worthy of just $5, but it's the message that counts -- as pointed out in a recent Bloomberg Businessweek article. It's also about a push to get people through the doors. Walgreen management is working toward determining what customers want to see most on shelves, and how to increase the average transaction amount. The latter is seeing some evidence of improvement -- up 3.6% for the most recent quarter.

For investors, it is important to keep an eye on the rising profits in the back of house versus the front, as it appears that the former will have to more than compensate for the latter until management finds a more sustainable way of getting shoppers in the store.

Overall, Walgreen remains a compelling stock to own on the back of strong prescription drug sales and smart acquisition activity.

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  • Report this Comment On October 02, 2013, at 10:16 PM, neamakri wrote:

    walk 500 miles in a day?

    Anyway, if WAG already has a drive-up window for pills, they can easily best convenience stores at their own game. They should push milk-bread-cigarettes-candy-cokes-snacks-beer etcetera at the drive-up window. I can envision a string of cars after work picking up quickies for the trip home.

    I'd bet a 5% sales increase right away.

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