Longs' Prescription for Success

Is the regional Longs Drug Stores (NYSE: LDG  ) chain a hidden treasure among the big, nationwide retail pharmacies?

Longs Drug operates primarily on the West Coast, so Foolish readers may not be as familiar with the company as with national brethren Walgreen (NYSE: WAG  ) , CVS Caremark (NYSE: CVS  ) , or Rite Aid (NYSE: RAD  ) . But there's always room for regional players that know their geographic area well. We see it happen in the retail field, where Hibbett Sports (Nasdaq: HIBB  ) , mainly concentrated in the mid-Atlantic and Southeastern states, has succeeded against Wal-Mart's (NYSE: WMT  ) nationwide sporting-goods department.

The second quarter suggests that Longs is doing pretty well indeed in its regional niche. Income from continuing operations rose 33%, to $0.67 a share. Margins continued expanding, too, thanks in part to a distribution facility, opened last year, that lets the company self-distribute more front-end merchandise and operate more efficiently overall. Gross margins improved 100 basis points to 26.3%, as the company sells goods with higher profitability, including generic drugs.

Longs does have work to do to improve its top line, which increased by just 3%. Same- store sales climbed 1%, with pharmacy same-store sales increasing 1.8% and front-end same-store sales rising by a tiny 0.3%. The company is disposing of underperforming stores and remodeling others, so it might not be long before we see the results of the facelift. Management expects total revenue to increase 5% to 7% for the year.

Through better merchandising and continued inventory management improvements, margins should continue to expand. And if these steps improve sales, we could really see earnings take off from this little guy flying under the radar. It will be a bitter pill to swallow if you're on the short side of things.

Wal-Mart is a Motley Fool Inside Value recommendation.

Find the diamonds in the rough before the market catches on! Try out our market-beating small-cap service, Motley Fool Hidden Gems, free for 30 days.

Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 534075, ~/Articles/ArticleHandler.aspx, 10/24/2014 7:18:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement