Why Walgreen Missed on Earnings

After reporting results for the quarter that failed to live up to expectations, shares of Walgreen slipped. Is this a sign that CVS and Rite Aid are better prospects or does Walgreen still have what it takes to do well in the long run?

Jun 25, 2014 at 2:30PM

Images

Source: Wikimedia Commons

After reporting revenue and earnings for the third quarter of its 2014 fiscal year on Jun. 24, shares of Walgreen (NASDAQ:WBA) fell nearly 2%. Despite the fact that management reported top line and bottom line results that fell short of analyst estimates, Mr. Market's decision to send shares of the drugstore chain down modestly suggests that it's still optimistic about the company's prospects. Moving forward, will Walgreen prove that it has what it takes to deliver attractive returns, or will CVS Caremark (NYSE:CVS) or Rite Aid (NYSE:RAD) make better long-term plays?

Walgreen couldn't please analysts
For the quarter, Walgreen reported revenue of $19.4 billion. Although this represents a 6% gain over the $18.3 billion management reported the same quarter a year earlier, it missed the $19.5 billion forecasted by analysts. This growth was due, in part, to a 1.5% rise in drugstore count from 8,097 locations last year to 8,217 this year, but the biggest contributor was the company's comparable store sales, which jumped 4.8%.

In its press release, the company attributed this rise in comparable store sales to a 6.3% jump in comparable store sales in its prescription category, while total prescription sales rose 8.4%. Front-end comparable store sales also increased, up 2.2% year-over-year.

  Actual (adj.) Forecasted (adj.) Last Year's
Revenue $19.4 billion $19.5 billion $18.3 billion
Earnings per Share $0.91 $0.94 $0.85

Source: Yahoo! Finance

From a profitability perspective, Walgreen's results were even better, but the company still fell short. For the quarter, the company reported earnings per share of $0.75, 15% above the $0.65 reported last year. After accounting for various adjustments, such as a change in its LIFO provision and store closure costs, earnings came in at $0.91, 7% above last year's adjusted earnings of $0.85 but shy of the $0.94 Mr. Market anticipated.

In addition to benefiting from a rise in revenue, Walgreen saw its bottom line grow because of reduced costs, primarily in the form of its selling, general and administrative expenses, which fell from 23.8% of sales to 23.5%. These cost improvements were, however, partially offset by rising costs in its cost of goods sold category, which rose from 71.5% of sales to 71.9% as generic drug inflation and fewer brand-to-generic introductions took their toll on profits.

But Walgreen still appears to have the engine for success
Although Walgreen's performance this quarter wasn't superb, the company's strategic advantages appear to be in place better now than ever. In 2012, Walgreen purchased a 45% stake in Alliance Boots for $6.5 billion with the agreement that it could acquire the 55% of the business it doesn't already own during a six-month window in 2015 for $9.5 billion.

After completion of the deal, Walgreen will have a strong footprint in Europe and the consolidated company's revenue is expected to rise from $72.2 billion to $110 billion. While this isn't as high as the $126.8 billion reported by CVS in 2013, it's significantly greater than the $25.5 billion on Rite Aid's financial statements.

Picture

Source: Walgreen

Even better than revenue growth is what the acquisition of Alliance Boots will mean for Walgreen's profitability if Walgreen goes for the deal. The tax savings associated with reincorporating to Switzerland where the acquiree is based would be substantial, which would give Walgreen a solid profitability edge over CVS and Rite Aid.

Another good edge that Walgreen has over the competition is its Walgreen Balance Rewards loyalty program. By signing up, customers can receive discounts and other perks that makes shopping at the company as rewarding as possible. As of this past quarter, the company boasted 81 million active members under the program. This is larger than the 70 million members listed on CVS' website for its ExtraCare program and far bigger than the 25 million members who use Rite Aid's wellness+ program.

Foolish takeaway
Based on Walgreen's earnings release, Mr. Market was disappointed but not horrified about the company's results. What this suggests is that the company isn't growing as rapidly as investors might like to see, but the fact that it is growing at all and that it has some things that could play to its advantage in the years to come, means that Mr. Market hasn't lost hope in the pharmacy. Moving forward, there is no guarantee that Walgreen can continue to do well, but given its considerable size and profitability, it makes for an interesting prospect for the Foolish investor to analyze deeper.

Top dividend stocks for the next decade
Although Walgreen does provide investors with a dividend, its yield is small in comparison to other companies out there!  By investing in these other businesses, investors stand to gain not just by share price appreciation, but also by a nice, steady stream of income for years to come!

The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers