Recently, we reiterated our Neutral recommendation on Walgreen (WAG) with a target price of $45.00.
Walgreen reported EPS of 65 cents in the third quarter of fiscal 2011, beating the Zacks Consensus Estimate of 62 cents and 38.3% higher than the year-ago quarter EPS of 47 cents.
Total sales were $18.4 billion in the third quarter, marginally ahead of the Zacks Consensus Estimate of $18.3 billion. Total sales increased 6.8% from $17.2 billion reported in the year-ago period. Comparable store sales (those open for more than a year) during the quarter increased 4.1%, while front-end comparable drugstore sales spiked 3.9%.
During the quarter Walgreen continued with Customer Centric Retailing conversions and in June 2011, touched the milestone of 4,000 CCR stores. The company expects to convert 5,500 stores to CCR by the end of fiscal 2011. The successful completion of CCR store conversion will bolster Walgreen’s front-end store sales.
Additionally, Walgreen opened/acquired 41 new drugstores (a net gain of 25 after relocations and closings) in the third quarter compared with 361, including 258 Duane Reade drugstores (or a net gain of 342) in the year-ago quarter. Walgreen expects organic store growth in the range of 2.5%-3% in fiscal 2011.
Over the past several years, Walgreen has been adopting several core strategies to realign its assets. These include the acquisition of Cardinal Specialty Pharmacy Business and an agreement with Omnicare to divest its long-term care pharmacy business in exchange of the latter’s home infusion business. Thereafter, during the third quarter of fiscal 2011, Walgreen completed the sale of its Pharmacy Benefit Management business Walgreens Health Initiatives (WHI) to Catalyst Health (CAH) for $525 million in cash. By divesting its non-core assets, Walgreen will be able to better focus on its 7,700 drug stores.
On the other hand, the company acquired online retailer drugstore.com in a cash transaction totaling $421 million including the assumption of $17 million in debt. Through this deal, Walgreen will gain a strong foothold in the online arena as it will be able to access more than 3 million online customers.
In addition, the company has retained its Specialty Pharmacy and Mail Service business and expects to grow it as it is an integral part of its full-service pharmacy offering. The divestiture of the PBM business will allow Walgreen to target its customers, employers and government agencies. Leveraging on its strong cash balance, the company has rewarded its shareholders and is also well equipped to pursue suitable acquisitions going forward.
However, Walgreen has been impacted over the past few quarters by high unemployment levels and lower discretionary spending. Moreover, we are concerned about the company’s recent decision of not renewing its contract with pharmacy benefit manager Express Scripts. We believe this decision will affect the company’s future growth.
CARDINAL HEALTH (CAH): Free Stock Analysis Report
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