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Longs Drug Scores a Winner

There's a lot to be said for solid execution in the retail business. Amid the ups and downs of gyrating comparable-store sales and the hype of hedge-fund buyouts, I like a regional player that delivers the goods the old-fashioned way, like Longs Drug Stores (NYSE: LDG  ) .

The company reported winning first-quarter results. Total sales growth was 5.6%, with comps growth of 2% (2.9% from the pharmacy and 1.1% from the front end). The big win was a 50-basis-point expansion in gross margin, driven by higher utilization of generic drugs, improved inventory management, and more self-distribution.

Longs opened a new distribution facility last year, through which the company expects to self-distribute up to 80% of its front-end merchandise by the end of this year, compared to 40% previously. Distribution efficiencies can be a big driver of margin growth.

Pre-tax income from continuing operations grew by more than 30%. EPS from continuing operations was $0.56, compared to $0.43 in the prior year. Both these results exclude unusual charges for a store closure program (at 31 sites) announced in February. Analysts were expecting $0.50 a stub. The stock surged almost 3% on the results.

Most Foolish investors probably aren't familiar with the company. Walgreen (NYSE: WAG  ) and CVS (NYSE: CVS  ) are far more popular names in the retail drug space. But Longs has built a very successful brand on the West Coast over the past 50 years. There's not a lot of individual-investor float in the stock; over 75% is owned by institutions, with another 20% owned by insiders.

What's to like about the company? Given an operating margin that's only about half that of the big drug players', some observers may think that the company lacks the scale to compete. On the other hand, I see an opportunity for Longs to continue expanding margins as it improves efficiency (as it did this past quarter).

Being a national player gets more headlines, but there remains room for regional retail players to execute the basics and compete effectively. For other examples, you need look no further than H-E-B, a private grocery-store company that "owns" south Texas. On a regional basis, H-E-B is one of Wal-Mart's (NYSE: WMT  ) most pesky grocery competitors.

Longs' stock price has grown 50% faster than the S&P 500 over the past 12 months. For the current year, the company expects modest 5%-7% revenue growth, but double-digit EPS growth from continuing operations. It also doesn't hurt that the company has exceeded analyst expectations for each of the past five quarters. I get a warm fuzzy feeling from any management that underpromises and overdelivers.

Wal-Mart is an Inside Value recommendation. To find out more about why value investing is intelligent investing, simply sign up today for your free 30-day guest pass to our market-beating newsletter.

Drugstores are on a pretty good run:

Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares of Wal-Mart, but none of the other companies mentioned in this article. The Fool has a disclosure policy.

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