The U.S. has been hit by an unusual flu season this winter. There have been far more flu-related fatalities in 2014 than in a typical year, yet fewer people are actually coming down with the flu, perhaps due to increasing vaccination rates.
Flu season usually leads to a big windfall for drugstores like Walgreen (NYSE: WAG) and Rite Aid (NYSE: RAD). But with fewer people getting the flu this year, both drugstores are at risk of reporting year-over-year earnings declines next month.
Fewer cases of flu
Last year, U.S. drugstore chains saw strong sales of both prescriptions and over-the-counter medication during the winter quarter due to a big flu outbreak. By early December 2012, flu incidence was already tracking ahead of typical levels. This sent Americans running for the doctor and the pharmacy.
By contrast, fewer people are coming down with the flu this year, and it shows in drugstores' recent sales results. For December, Rite Aid reported that its same-store prescription count fell by 2%, due to fewer people getting late flu shots and filling fewer flu-related prescriptions.
Walgreen reported better sales results for December, as it has been retaking share from rivals fairly consistently since late 2012. However, it too saw a drop in flu-related sales, which reduced its prescription count growth by 1.2 percentage points.
In January, which is typically peak flu season, the impact was even bigger. Rite Aid's front-end (i.e., nonprescription) comparable-store sales declined 1.3% last month, a drop that was wholly attributable to lower sales of over-the-counter flu medication. The comparable-store prescription count declined 2.2%, also entirely caused by fewer people coming into stores for flu shots and flu-related prescriptions.
At Walgreen's locations, the comparable-store prescription count declined 0.8% last month. It would have risen but for a 2.2-percentage-point dampening effect caused by lower demand for flu shots and flu-related prescriptions.
Rite Aid and Walgreen are both on track to report earnings declines for this quarter, according to most Wall Street analysts. Both drugstores (and top competitor CVS Caremark (NYSE: CVS)) are facing other pressures, such as declining drug reimbursement rates from health insurers and pricing pressure on "front-end" items. However, weak flu-related sales are amplifying the impact of these issues.
Investors shouldn't panic if earnings decline for a single quarter. Over the long haul, drugstores are likely to benefit from the aging of the American baby boomer population. The rollout of Obamacare will also increase the insured population, potentially leading to higher prescription drug sales.
Nevertheless, the lower incidence of flu this year highlights a potential paradox in the big drugstore chains' business strategies. All three (Walgreen, CVS, and Rite Aid) are looking to become more involved in providing medical care beyond drugs. With their broad retail networks, they are particularly well positioned to provide basic preventive care.
Providing better access to preventive care is a great public service for the U.S. population. However, it risks "disrupting" the drugstores' main prescription-drug business. Walgreen and Rite Aid administered significantly more flu shots last fall than in the fall of 2012, and that may have contributed to fewer people coming down with the flu this year.
More broadly, one of the leading arguments for expanding access to preventive care is that it lowers long-term medical costs by catching small problems before they become big ones and avoiding other problems entirely. That's great news for all Americans -- but it might not be good news for companies that in essence depend on us getting sick.
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