As had been predicted by the great Aristotle (he of The Motley Fool variety), Walgreen (NYSE:WAG) recently posted solid quarterly earnings nearly worthy of its own philosophical discussion. However, I'll spare you from the philosophy for now and get right down to Walgreen's business, and why it's facing some serious headwinds.

Recently, Walgreen reported fiscal 2010 first quarter earnings of $0.49 a share, a 19.5% increase from the year-ago period. Also impressive was the sales increase of 9.5%. This performance was aided by the 5.4 million flu shots the company administered during the flu season. After all that, the company now trades hands at 17.5 times earnings.

Look past the quarterly numbers, however, and you'll see a hoard of marauders just chomping at the bit to take away market share from Walgreen's pharmacies. Besides competing with drugstore chains CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD), there is continued competition from big-box retailers Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT). Walgreen also has to jockey for position with pharmacy benefit managers (PBMs) such as Express Scripts (NASDAQ:ESRX) and MedcoHealth Solutions (NYSE:MHS). Long term, this does not bode well for Walgreen, as PBMs are expanding their prescription drug offerings, and behemoth retailers offer a larger variety of complementary goods at bargain prices.

In order to differentiate itself from its competition, Walgreen has been offering a more comprehensive health-care experience for its customers through its Take Care Clinic. Instead of just providing drugs and convenience items, select Walgreen locations now offer a package of health-care services. So far, the results are encouraging, as evidenced by the 5.4 million flu shots administered last quarter. Unfortunately for Walgreen, Wal-Mart and Target have added similar clinics to some of their stores and will likely add more in the future if they prove to be profitable. All this competition will cut prices to the, um, bone.

Despite Walgreen's recent success, investors should be wary of its long-term outlook. Competition will continue to be fierce and will likely only intensify. As a buy-and-hold investor, I'm worried enough about the competitive landscape to vaccinate myself against drugstore chains like Walgreen.

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