This morning drugstore giant and sector leader Walgreen Co. (NYSE:WAG) reported what investors have long since grown accustomed to: growth in sales, earnings, and big plans for expansion. The latest results were for the fiscal fourth quarter ended August 31.
The company continues to grow as it battles furiously for dominance with hard-charging CVS (NYSE:CVS). A quick glance at Walgreen's cash flow statement shows huge capital investments year after year -- and another $1 billion is budgeted for store openings and a new distribution center in the upcoming fiscal year.
Besides the company's expansion plans, Walgreen's chairman and CEO David Bernauer acknowledged that "the absence of price increases amplifies the challenge for retailers to grow earnings." (Well, it probably wasn't the most painful admission, since Walgreen's did just that last year.) A closer look at this statement reveals much about the business.
For all the discussion of sales mix (prescriptions, non-pharmaceuticals, food, etc.) that peppers these reports, there's generally little variance in gross margins from quarter to quarter. Based on recent income statements, Walgreen's, CVS, and the like seemingly scrape for little more than a few basis points here and there.
This, in essence, means companies must grow earnings using a two-step process: 1) Open stores in strong and growing markets, and 2) expand profits by reducing selling, general, and administrative expenses without sacrificing the convenience, selection, and service customers demand.
But that's no simple task. The growth in 24-hour service and the idea that better-trained and compensated staff will help business both present challenges. As does competition -- Rex Moore takes a look at another player, Rite-Aid (NYSE:RAD) -- which extends to convenience, grocery, and big-box retail chains.
Add it all up, and that's a lot of pressure on management to perform.
