Is the regional Longs Drug Stores (NYSE:LDG) chain a hidden treasure among the big, nationwide retail pharmacies?

Longs Drug operates primarily on the West Coast, so Foolish readers may not be as familiar with the company as with national brethren Walgreen (NYSE:WAG), CVS Caremark (NYSE:CVS), or Rite Aid (NYSE:RAD). But there's always room for regional players that know their geographic area well. We see it happen in the retail field, where Hibbett Sports (NASDAQ:HIBB), mainly concentrated in the mid-Atlantic and Southeastern states, has succeeded against Wal-Mart's (NYSE:WMT) nationwide sporting-goods department.

The second quarter suggests that Longs is doing pretty well indeed in its regional niche. Income from continuing operations rose 33%, to $0.67 a share. Margins continued expanding, too, thanks in part to a distribution facility, opened last year, that lets the company self-distribute more front-end merchandise and operate more efficiently overall. Gross margins improved 100 basis points to 26.3%, as the company sells goods with higher profitability, including generic drugs.

Longs does have work to do to improve its top line, which increased by just 3%. Same- store sales climbed 1%, with pharmacy same-store sales increasing 1.8% and front-end same-store sales rising by a tiny 0.3%. The company is disposing of underperforming stores and remodeling others, so it might not be long before we see the results of the facelift. Management expects total revenue to increase 5% to 7% for the year.

Through better merchandising and continued inventory management improvements, margins should continue to expand. And if these steps improve sales, we could really see earnings take off from this little guy flying under the radar. It will be a bitter pill to swallow if you're on the short side of things.

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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at He doesn't have any positions in the companies mentioned.