Walgreen Company Earnings: Can the Drugstore Giant Outpace Rite Aid?

On Tuesday, Walgreen (WBA -0.93%) will release its quarterly report, and investors have been pleased about how well the drugstore chain has been able to sustain growth. Even amid stronger competition from Rite Aid (RAD -20.53%) and CVS Caremark (CVS -1.62%), Walgreen has bounced back from a strategic mistake a couple years ago and is moving to take advantage of key positive trends in the industry, including favorable demographics and the recent reforms to the U.S. health-care system.

Walgreen has been aggressive about asserting its leadership role in the drugstore industry, with strategic moves aimed not just at seeking dominance over the U.S. market but also at building a more forward-looking, geographically diverse international business. Yet renewed strength from Rite Aid has once more made the U.S. drugstore-chain industry a three-horse race, and Walgreen can't afford to neglect the advances that Rite Aid and CVS Caremark have made to take advantage of a potentially lucrative environment for drugstores. 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.

Source: Walgreen.

Stats on Walgreen

Source: Yahoo! Finance.

Can Walgreen earnings avoid disappointing investors?
Investors have had slightly mixed views of Walgreen earnings in recent months, cutting current fiscal-year estimates by a penny per share but boosting next year's projections by the same amount. The stock has kept climbing, though, with gains of more than 12% since mid-March.

Walgreen's fiscal second-quarter earnings report made investors happy even though the numbers fell short of expectations in some respects. Same-store sales growth came in at 4.3%, with larger per-person sales outweighing a drop in customer traffic. Although the drugstore company saw similar strength in prescription sales as Rite Aid reported last week, Walgreen managed to grow sales in the front end of its stores as well, posting 2% comps. But earnings were a slight disappointment, as Walgreen suffered from the winter weather and also had to deal with margin pressure due to promotional activity. Walgreen also said it would close some poorer-performing stores in favor of adding stores in locations with better profit opportunities.

Source: Wikimedia Commons.

Investors have confidence in Walgreen and its long-term efforts to maintain its competitive position in the industry. Along with CVS and Rite Aid, Walgreen has worked hard at expanding its available services, opening hundreds of clinics to provide basic health care and get more customers through its doors. In addition, Walgreen's push into Europe through its acquisition of a stake in U.K. pharmacy giant Alliance Boots has gone well, and some now believe that Walgreen might take over Alliance Boots entirely, building a global powerhouse in the industry.

The international push that Walgreen has made also opens the door for a controversial tax move that its peers can't do as easily. Some investors want Walgreen to follow in the footsteps of some other players in the broader health-care field by moving its tax home to Europe. With its Alliance Boots stake, Walgreen could make a reasonable case for the move, but it also risks the ire of lawmakers and regulators on which Walgreen relies for much of its past success.

Even though Rite Aid has gotten most of the attention of investors lately because of its huge share-price recovery, Walgreen's bigger threat remains CVS. CVS has managed to grow its revenue at a faster pace than Walgreen, with success both on the same-store sales front and with expansions that have boosted store count. Walgreen remains the largest chain by store count, but it can't afford to ignore CVS Caremark's long-range plans to try to supplant Walgreen as the industry leader.

In the Walgreen earnings report, compare the growth that Walgreen has enjoyed with what Rite Aid reported last week. Walgreen has an enviable position in the industry right now, but it can't afford to coast on its past success if it wants to keep Rite Aid and CVS in the rearview mirror.

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