Has Walgreen Outperformed CVS Caremark?

Shares of Walgreen (NASDAQ: WBA  ) have started off the year on a positive note, but the company's recovery has slowed. Walgreen beat analysts' expectations in its second-quarter earnings report for fiscal 2014. But how has the company performed compared to the industry average and its leading competitor CVS Caremark (NYSE: CVS  ) ? Has Walgreen started to cash in on the implementation of the Affordable Care Act, also known as Obamacare? Let's further explore these issues. 

According to the latest U.S retail sales report, during the first couple of months of the year, sales in health and personal-care stores grew by 4.4% year over year. This could serve as a benchmark for Walgreen's sales growth. According to the company's latest quarterly earnings report, its sales reached $19.6 billion -- roughly 5.1% higher than a year ago. Analysts expected Walgreen to reach $19.5 billion. Therefore, Walgreen has slightly outperformed the health and personal-care market in terms of sales growth. But after controlling for a rise in the company's number of stores, Walgreen's sales growth is a bit less impressive. The table below demonstrates these issues. 

Source: Google Finance and Walgreen.  

In the fiscal second quarter, Walgreen's number of stores grew by 1.7%. Moreover, after controlling for this gain in new stores, the company's sales per store rose by only 3.4%, which is slightly lower than the market average. In other words, nearly one-third of Walgreen's sales growth was due to new stores. Specifically, the company added 144 stores during the year and 28 stores during the past quarter. These sales gains aren't much higher than anticipated and are mostly attributed to the rise in Walgreen's retail-prescription market share by 1 percentage point to 20% as of late February. Therefore, the slow rollout of Obamacare has yet to have a substantial effect on Walgreen's revenue. 

How do these numbers measure up to those of Walgreen's top competitor, CVS Caremark? 

During the final quarter of 2013, the company also did well, as its revenue increased by 4.6%. But most of this growth was related to the 192 stores it added during the year. CVS Caremark's total number of stores reached 7,717 by the end of the fourth quarter. This means the company's organic growth was only 2%. Therefore, CVS Caremark has underperformed Walgreen in terms of organic growth. The table below summarizes CVS Caremark's performance in the last quarter of 2013. 

Source: Google Finance and CVS Caremark. 

Bottom line
Walgreen is performing well versus CVS Caremark and even compared to the industry average. The company's higher sales were due to more new stores opened and an increase in market share. Obamacare didn't seem to have a significant effect on the retailer's sales in the past quarter.

Perhaps as the Affordable Care Act becomes more ubiquitous, it will also have a positive effect on Walgreen's revenue. Until then, in the coming quarters, I suspect the company will find it hard to maintain such sales growth mainly by increasing its market share.

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Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

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