Like Rodney Dangerfield, regional drugstore chain Longs
Regardless of the reason, the company continues to exploit a successful West Coast niche. Its fourth quarter continued the company's streak of exceeding analyst expectations by a wide margin.
Sales growth was modest, increasing 11%, helped by an additional week compared to 2006. Without that benefit, total sales advanced just 3%. That was 2% in the stores but a handy 26% in the pharmacy benefits management business.
Gross margin improvement was where Longs buttered its bread this quarter. Margins on a rate basis expanded 70 basis points at store level thanks to a more favorable mix of generic-drug business. The company has also been enjoying cost synergies from a distribution center opened last year to handle front-end merchandise.
Earnings per share of $1.00 for the quarter were 25% better than the prior year, though $0.05 was earned in the extra week. This trounced analyst estimates by $0.03.
Guidance for 2008 was cautious, with management suggesting EPS of $3.02-$3.12 on same-store sales growth of 1% to 3%. But this looks more like fine-tuning the top end than reduced expectations. The range still indicates 15% to 20% EPS growth, which most retailers would kill for these days.
I haven't been a cheerleader for Longs in the past. I've wondered whether the company can keep the growth engine running, and I worry that a West Coast niche makes it more susceptible to regional economic conditions than CVS or Walgreen, with their national footprints.
But after several quarters of better-than-expected results, I'm (slowly) gaining confidence in management's ability to deliver double-digit EPS growth on a slow-moving top line. Not the most exciting stock story I've heard recently, but certainly a solid play.
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