Ouch. Shares of the country's biggest drugstore chain, Walgreen Co.
For its fourth quarter, earnings per share were $0.24, a penny shy of the consensus number and ahead of the year-ago number by $0.03. Sales were up in the quarter 15% to $7.2 billion. Net income improved 14.2%.
The issue with Walgreens can be boiled down to a single word: competition. And we're not talking about rival drugstore chain CVS
To counter, it has spent the last year heavily promoting its so-called front-end items. They're the snacks, makeup, and other goodies it hopes customers will grab when they buzz in to get a prescription filled. Its front-end merchandise accounts for 40% of its sales, but the key is that they're much higher-margin sales than are prescriptions.
Same-store front-end sales for the year only grew an anemic 1.7%, though, in contrast to 16.3% comps growth in prescriptions. Can we get an iron pill over here? Walgreens is obviously having a difficult time convincing customers to shop for anything other than prescriptions in its stores.
It is also trying to bolster its competitive edge by opening lots of new stores. Many of the new, convenient locations operate 24 hours a day. The company has no debt and is financing its expansion through cash from operations, so that's a plus.
It's not going to get any easier for Walgreens to compete against one-stop shops and grocery stores, though. Given the choice, wouldn't you rather stop once than multiple times? It has to figure out a way to make sure customers feel stopping in its stores is not an added pain but a bonus.
But, hey, the company did manage to increase its sales for the year by 16.5%, no small feat in the current retail environment. Can they keep it up? With a stock priced at roughly double its earnings growth, uncertain investors should applaud from the sidelines.