Why You Should Expect Strong Walgreen Earnings

Walgreen (WBA -1.18%) will release its quarterly report on Tuesday, and the drugstore chain has seen its shares set all-time record highs lately. With its comeback firmly in place and its competitive position against rivals CVS Caremark (CVS -0.65%) and Rite Aid (RAD -51.21%) restored, the next question is whether Walgreen earnings can produce the growth for investors to ride the stock even higher in the months and years to come.

Walgreen has seen vast improvement from last year, when a misstep in negotiations with pharmacy-benefit manager Express Scripts resulted in a huge loss of business as customers fled to CVS and Rite Aid. Having resolved that dispute, Walgreen has paid the price for what appears to be a successful campaign to reclaim those customers. Now can the company sustain its competitive advantage and avoid similar mistakes in the future? Let's take an early look at what's been happening with Walgreen over the past quarter and what we're likely to see in its report.

Stats on Walgreen

Source: Yahoo! Finance.

How will Walgreen earnings fare this quarter?
In recent months, analysts have been a bit downbeat about the prospects for Walgreen earnings, cutting $0.03 per share from estimates for the quarter that ended in August and $0.04 per share from their fiscal 2014 projections. The stock, though, has continued to climb, rising 22% since late June.

Walgreen actually opened the quarter with a bad start, as its prior-quarter earnings came in below expectations. Despite an 18% jump in adjusted earnings per share on a 3.2% rise in revenue, profit margins failed to live up to investors' hopes. A 7% increase in comparable-store prescription counts was a sign that the company was taking business back from Rite Aid, whose comps fell 0.1%. Yet front-end nonprescription sales only managed a 0.4% increase.

One area where drugstores are squaring off is with loyalty programs. CVS raised some controversy recently by offering $5 through its ExtraCare loyalty program for each prescription filled as long as customers were willing to sign a HIPAA information release. Walgreen might have scored some points with its Balance Rewards program, which has no such requirement. Yet Walgreen, CVS, and Rite Aid all have their respective programs that are aimed at boosting customer retention.

Moreover, Walgreen continues to be aggressive with strategic moves. Earlier this month, the company announced it would buy North Carolina-centered drugstore chain Kerr Drug. With 76 retail stores and a specialty pharmacy business, Kerr will help Walgreen expand its regional presence in North Carolina. Meanwhile, a partnership with Theranos will allow Walgreen to offer low-cost laboratory testing at its stores, helping to speed up response times.

The big wild card in the industry is what will happen with Rite Aid. Some analysts have speculated that Walgreen or CVS would buy out the No. 3 chain, but once some favorable trends like increased generic-drug availability start to play out, Rite Aid's weakness could reassert itself and leave Walgreen in an even stronger position.

In the Walgreen earnings report, watch to see how the company plans to position itself against CVS in the U.S. while also taking advantage of its international presence. With so many growth avenues available, Walgreen needs to avoid losing focus and build a cohesive strategy that makes the most of all of its opportunities.

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