Psst! Hey, buddy! Wanna buy some drugstore stock? I've got just the one for you: Walgreen (NYSE:WAG), and it's reporting earnings Monday.

Wall Street Wisdom:

  • General consensus. Twenty-one analysts follow Walgreen, voting the stock a buy rather than a hold by a two-to-one margin.
  • Revenues. Tomorrow's report will cover the company's fiscal Q2 2006 results. Analysts expect to see 11% sales growth compared with fiscal Q2 2005, to $12.2 billion.
  • Earnings. Profits are expected to rise 13% to $0.52 per share. Incidentally, the same rate of growth is being predicted for Walgreen in its third and fourth fiscal quarters this year as well.

Margin watch:
There's been little to report on the margin front at Walgreen over the past year or so. Rolling gross margins are up a tad, operating margins down a skosh, and net margins right back where they started 18 months ago.

Margins %

8/04

11/04

2/05

5/05

8/05

11/05

Gross

27.2

27.4

27.7

27.9

27.9

28

Op.

5.7

5.8

5.9

5.9

5.7

5.6

Net

3.6

3.7

3.7

3.8

3.7

3.6
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

Foolish forensics:
Non-operating factors haven't had much of an effect on Walgreen's numbers over the past year and a half. For example, over the past four quarters, one-time items (legal settlements and asset writedowns) had the net effect of adding just $11.8 million to pre-tax earnings -- less than 0.5% of the total. So when operating margins fall, so do net margins. Over the past three quarters, they've both been sliding, but only incrementally.

But one thing does concern me about Walgreen. Over the past two quarters, sales rose 10% and 11% (in fiscal Q4 2005 and Q1 2006, respectively), yet inventories grew 17% and 12%. While I'm no expert on the pharmacy business, I do buy my fair share of medicines, at least during cold and flu season. As a shopper, I'm very aware that these inventories all have expiration dates.

Unlike a retailer of hard goods, therefore, it seems logical that a pharmacy like Walgreen would need to keep a close eye on inventory growth to make sure it doesn't outpace sales. Otherwise, those inventories might need to be marked down, or even pitched in the dumpster one day. Personally, I'll feel a lot better if tomorrow's news shows that inventories didn't keep on growing faster than sales at Walgreen.

Competitors:
No surprises here. You all know these names: CVS (NYSE:CVS), Rite-Aid (NYSE:RAD), Target (NYSE:TGT), and Wal-Mart (NYSE:WMT).

Fool contributor Rich Smith has no interest, short or long, in any company named above.