Walgreen Company Earnings: What to Expect Tuesday

Walgreen (WBA -2.22%) will release its quarterly report on Tuesday, and investors have been optimistic about the drugstore chain operator's ability to continue posting solid growth. Yet as rivals CVS Caremark (CVS -0.69%) and Rite Aid (RAD -24.92%) aim to grab their shares of an expanding market, Walgreen needs to demonstrate its ability to take advantage of new opportunities like Obamacare and Medicaid expansion in a way that emphasizes its own competitive advantages.

Walgreen has been a leader in the drugstore space for years, having expanded its reach not only throughout the U.S. but also internationally through major strategic moves in Europe. Yet as drugstores become a potential focal point for delivering health care services locally, Walgreen, CVS, and Rite Aid are all looking for innovative ways to transform their U.S. stores to grab new opportunities. After recovering from a strategic mistake that caused extensive customer defections, can Walgreen move forward and capture its share of growth? Let's take an early look at what's been happening with Walgreen over the past quarter and what we're likely to see in its report.

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Stats on Walgreen

Source: Yahoo! Finance.

What's next for Walgreen earnings?
In recent months, analysts have had mixed views on Walgreen earnings, cutting February-quarter estimates by 7% and reducing full-year fiscal 2014 projections slightly but raising their outlook for fiscal 2015. The stock has moved higher, rising 14% since mid-December.

Walgreen had a strong November quarter that built positive momentum for the stock. Total revenue climbed nearly 6%, sending adjusted net income up by almost 25%. Of particular value to Walgreen was a 5.8% jump in the number of prescriptions filled, indicating that customers have come back to the chain even after its near-disastrous spat with Express Scripts caused widespread customer defections. Cost-cutting measures also helped support earnings growth. Much of that good news has continued into the February quarter, with sales gains of 7% in December, 4% in January, and 5% in February.

But analysts aren't convinced that Walgreen stock hasn't outpaced its true potential. Just last week, Cantor Fitzgerald downgraded the stock, arguing that Walgreen hasn't produced enough growth to justify the jump in its share price over the past two years. That's consistent with actual sales-growth rates in the industry, where CVS has crushed both Rite Aid and Walgreen by taking a lower-margin approach to grabbing up business.

Still, Walgreen is working hard to find that growth. In January, Walgreen started offering free prescriptions to those who enrolled in insurance plans under the Affordable Care Act, even if they hadn't yet received their insurance ID cards. By doing so, Walgreen took advantage of some of Obamacare's growing pains, beating not only Rite Aid and CVS but also pharmacy rivals Costco and Wal-Mart in making a play for new Obamacare enrollees. In addition, the partnership with Alliance Boots and its newer collaboration with AmerisourceBergen has helped add to both sales and earnings.

One new angle that Walgreen faces comes from CVS' recent decision to stop selling cigarettes in its stores. CVS gave up billions in sales with the decision, but now Walgreen and Rite Aid are under pressure from dozens of state attorneys general who want the drugstores and other cigarette retailers to follow suit. It's unclear whether CVS will build up enough goodwill among its customer base to offset the lost sales or whether Walgreen and Rite Aid have an opportunity to poach customers due to the CVS decision.

In the Walgreen earnings report, watch to see whether the company talks about any further developments with respect to maximizing its Obamacare opportunity. With so much at stake from newly insured Americans, Walgreen needs to jump at the chance to grab new customers as they establish their loyalty to particular drugstore chains.

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